[Federal Register Volume 61, Number 121 (Friday, June 21, 1996)]
[Notices]
[Pages 31993-32022]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15687]
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[[Page 31994]]
DEPARTMENT OF TRANSPORTATION
Office of the Secretary
Federal Aviation Administration
[Docket No. 27782]
RIN 2120-AF90
Policy Regarding Airport Rates and Charges
AGENCY: Department of Transportation, Office of the Secretary and
Federal Aviation Administration.
ACTION: Policy statement.
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SUMMARY: This document announces Department of Transportation
(``Department'') policy on the fees charged by Federally-assisted
airports to air carriers and other aeronautical users. The statement of
policy (``Final Policy'') was required by the Federal Aviation
Administration Authorization Act of 1994, Public Law 103-305 (August
23, 1994). This statement of policy replaces in its entirety the
statement of policy published in the Federal Register on February 3,
1995 (``Interim Policy''). This statement of policy incorporates a
substantial modification in the approach of the Interim Policy to
determining the reasonableness of fees for facilities other than the
airfield and public use roadways. In other respects, the approaches of
the two policies are similar. The Department proposed the referenced
modification in a notice published in the Federal Register on September
8, 1995 (``Supplemental Proposed Policy''). The Final Policy is not
significantly revised from that proposed in the September 8 notice.
DATES: This policy is effective June 19, 1996. This agency action is a
statement of policy that relaxes restrictions imposed on airport
proprietors by the Interim Policy. The Final Policy does not itself
impose additional burdens on airlines and other airport users and does
not require airport proprietors to impose such burdens.
FOR FURTHER INFORMATION CONTACT: David L. Bennett, Director, Office of
Airport Safety and Standards, Federal Aviation Administration, 800
Independence Ave. SW., Washington, DC 20591, telephone (202) 267-3053;
Barry L. Molar, Manager, Airports Law Branch, Office of the Chief
Counsel, Federal Aviation Administration, 800 Independence Avenue, SW.,
Washington, DC 20591, telephone (202) 267-3473.
SUPPLEMENTARY INFORMATION:
Summary of Policy Statement
The Final Policy requires that fees for the use of the airfield and
public-use roadways be established on the basis of costs, and it
provides detailed guidance on how costs are to be determined and
applied to establish fees. Airfield assets must be valued at their
historic cost to the original airport proprietor (``HCA value''). The
cost-of-service approach is comparable to common practice in setting
fees for regulated public utilities. This approach also reflects the
nearly universal practice of establishing fees for the use of the
airfield at commercial service airports. Even when airfield fees are
set by agreement, the agreement usually reflects a cost-of-service
approach. The terms of such agreements generally govern how costs will
be calculated.
In formulating the Final Policy, the Department has considered and
recognized as reasonable practices that have generally been accepted by
industry participants as producing reasonable results. The Final Policy
does not seek to disturb those practices. In the case of the airfield
and public use roadways, industry practice--HCA-based fees--is the
approach supported by aeronautical users as most beneficial to them.
For other facilities and services, the Final Policy adopts a different
approach.
For those other aeronautical facilities, the Final Policy permits
fees to be set by any reasonable method. Fees for such facilities and
services are generally established through direct negotiations with
individual users. In these negotiations, cost, as defined for
reasonable airfield fees, is usually but one of a number of
considerations affecting the fees. In the Department's experience, this
negotiating process has in almost all cases produced reasonable and
non-controversial results. The Department expects that these
negotiations will continue to produce reasonable results in all but
exceptional situations. The Department has, therefore, adopted a more
flexible approach to nonairfield fees to preserve the discretion of
airport proprietors and aeronautical users to negotiate the terms for
using nonairfield facilities.
The Final Policy also reflects the Department's preference for
direct negotiation of fee issues between airport proprietors and
airport users. Accordingly, the first of the five fundamental
principles listed in the Final Policy states the Department's
preference for direct negotiation and resolution. In addition, most of
the detailed guidance on establishment of airfield fees need not be
followed if airfield users have agreed to a different practice.
The Final Policy retains the structure of the Supplemental Proposed
Policy and the Interim Policy. The Final Policy begins with a statement
of applicability, and is then organized into five general principles
with supporting guidance for each.
As noted above, the first principle states the Department's
preference for direct local negotiation between airport proprietors and
aeronautical users.
The second principle restates the legal requirement that rates,
fees and charges to aeronautical users must be fair and reasonable,
with more detailed guidance on the practices and restrictions that
define ``fair and reasonable.'' The detailed guidance applies for the
most part to fees charged to aeronautical users for airfield facilities
and public-use roadways. For other aeronautical facilities, the policy
permits fees to be established using any reasonable methodology.
Department oversight of these fees focuses on monitoring for
progressive accumulation of surplus aeronautical revenue. For the
airfield and public-use roadways, the policy incorporates, among other
things, the following: flexibility to deviate from the policy guidance
based on agreement with airfield users; recognition that both
compensatory and residual pricing approaches are legitimate; standards
for the valuation of airfield property; prescription of the kinds of
costs that can be reflected in the airfield rate base; and guidance on
subsidization of other airports. The Final Policy makes certain
distinctions in the reasonable accommodation of air carriers versus
other aeronautical users. The Final Policy does not establish standards
for fees paid by nonaeronautical users or limit the amount of revenues
generated by nonaeronautical fees.
The third principle restates the legal prohibition on unjustly
discriminatory rates and charges. Guidance identifies some practices
that are required to avoid unjust discrimination and some practices
that not considered to be unjustly discriminatory.
The fourth principle restates the legal obligation to maintain a
fee and rental structure that makes the airport as self-sustaining as
possible under the circumstances existing at the airport. Supplemental
guidance encourages the sponsor of an airport that is not currently
self-sustaining to establish long-term goals and targets to make the
airport financially self-sustaining. The self-sustainability
requirement must be included in each sponsor's grant assurances
pursuant to statute and is
[[Page 31995]]
subject to enforcement by the FAA in accordance with its grant
compliance procedures. However, the Department will not consider on the
merits a complaint as to the reasonableness of an airport fee based
solely on alleged non-compliance with the self-sustainability
requirement. A complaint about compliance with the self-sustainability
requirement would be considered by the FAA under its administrative
complaint procedures.
The guidance under this principle provides that the Department may
investigate the reasonableness of aeronautical fees in a case of
progressive accumulation of surplus aeronautical revenue.
The fifth principle restates the basic legal requirements for the
application and use of airport revenues. Supplemental guidance has been
proposed in the Notice of Proposed Policy and Procedures Concerning the
Use of Airport Revenue published at 61 FR 7134 (February 26, 1995).
Finally, the Department is willing to consider arguments that
specific provisions of the policy should not apply to a particular
airport fee due to unusual circumstances in the context of a proceeding
to review that fee. See Los Angeles International Rates Proceeding
(``LAX I''), Order 95-6-36, at 16 (June 30, 1995); Second Los Angeles
International Airport Rates Proceeding (``LAX II''), Order 95-12-33, at
15 (December 22, 1995).
Background
Two federal statutes have long imposed a reasonableness requirement
on the fees charged aeronautical users by airports. When an airport
accepts Federal grant money for an airport improvement, it must give
certain assurances, including the assurance that the airport will be
available for public use on fair and reasonable terms without unjust
discrimination. Section 511 of the Airports and Airways Improvement Act
of 1982, (``AAIA''), recodified as 49 USC Sec. 47107. This assurance
includes an obligation to charge aeronautical users of the airport only
reasonable fees. Similarly, section 113(b) of the Federal Aviation Act,
the Anti-Head Tax Act, recodified as 49 USC Sec. 40116, allows a
publicly-owned airport authority to collect only reasonable landing
fees and charges from airlines using airport facilities. See Northwest
Airlines v. County of Kent (``Kent County''), 114 S.Ct. 855 (1994).
These statutes, however, do not authorize the Department to regulate
the reasonableness of fees charged non-aeronautical users.
Airport fees and revenues are subject to other legal requirements
as well. Section 511 of the AAIA also bars airports, except for certain
grandfathered airports, from diverting airport revenue to nonairport
purposes. 49 USC Sec. 47107(b). Section 511 also requires each airport
to provide assurances that the airport will maintain a fee schedule
that will make the airport as self-sustaining as possible under the
circumstances existing at the airport. 49 USC Sec. 47107(a)(13). In
addition, the Chicago Convention and many of the United States'
bilateral air services agreements obligate the United States to ensure
that airports charge foreign airlines the same fees as the U.S.
airlines that operate similar services.
On June 9, 1994, the Office of the Secretary of Transportation
(``OST'') and the Federal Aviation Administration (``FAA'') issued two
related notices on the subject of Federal requirements for airport
rates and charges. The Department took this action largely in order to
better implement its responsibility to enforce the reasonable fee
requirements. A notice of proposed policy entitled ``Proposed Policy
Regarding Airport Rates and Charges'' listed and explained the
principles that the Department believes define Federal policy on the
rates and fees that an airport proprietor can charge to aeronautical
users of the airport. Docket No. 27782 (59 FR 29874, June 9, 1994).
Notice 94-18, a notice of proposed rulemaking entitled ``Rules of
Practice for Federally Assisted Airports,'' proposed detailed
procedures for the filing, investigation, and adjudication of
complaints against airports for alleged violation of Federal
requirements involving fees and other airport-related requirements.
Docket No. 27783 (59 FR 29880, June 9, 1994).
The FAA Authorization Act of 1994, Public Law 103-305 (``1994
Authorization Act'') was signed into law on August 23, 1994. Section
113 of that legislation, 49 U.S.C. Sec. 47129, specifically addresses
airport fees. Section 47129 directs the Secretary of Transportation
(``Secretary'') to determine whether an airport fee imposed on an air
carrier is reasonable, upon written request by the airport proprietor
or upon complaint filed by an affected carrier within 60 days after the
carrier receives written notice of the establishment or increase of the
fee. 49 USC Sec. 47129(a)(1). An airport fee subject to section 47129
``may be calculated pursuant to either a compensatory or residual fee
methodology'' or a combination thereof. 49 U.S.C. Sec. 47129(a)(2).
Further, in determining the reasonableness of a fee, the Department
``may only determine whether the fee is reasonable or unreasonable and
shall not set the level of the fee.'' 49 USC Sec. 47129(a)(3).
Section 47129 also directs the Secretary to publish in the Federal
Register final regulations, policy statements or guidelines
establishing (1) procedures for acting on written requests or
complaints; and (2) ``the standards or guidelines that shall be used *
* * in determining under [section 47129] whether an airport fee is
reasonable.'' 49 USC Sec. 47129(b)(1),(2).
Pursuant to 49 USC 47129(e), the section does not apply to : (1) a
fee imposed pursuant to a written agreement with air carriers; (2) a
fee imposed ``pursuant to a financing agreement or covenant entered
into prior to the date of enactment of [section 47129];'' or (3) any
other existing fee not in dispute on the date of enactment. In
addition, nothing in section 47129 shall adversely affect: (1) the
rights of any party under an existing written agreement between an air
carrier and the airport proprietor; or (2) the ability of the airport
to meet its obligations under a financing agreement, or covenant that
is in force on the date of enactment. 49 USC Sec. 47129(f).
In response to provisions in the 1994 Authorization Act, the
Department issued a supplemental notice of proposed policy with
revisions to reflect relevant provisions of that legislation. Docket
No. 27782 (59 FR 51835, October 12, 1994).
After reviewing all comments received in response to the notices,
the OST and the FAA, on January 30, 1995, issued a ``Policy Regarding
Airport Rates and Charges,'' the Interim Policy, and requested further
public comment. Docket No. 27782 (60 FR 6906, February 3, 1995). Two
airport owners are seeking judicial review of the Interim Policy. City
of Los Angeles et al. v. U.S. Department of Transportation et al., D.C.
Cir. Nos. 95-1188 and 95-1190 (argued March 4, 1996).
After reviewing the comments received in response to the February 3
request for comments, the OST and the FAA published on September 8,
1995 a supplemental notice of proposed policy, the Supplemental
Proposed Policy. Docket No. 27782 (60 FR 47012).
The procedural rules required by section 47129(b)(1) were published
in the Federal Register on the same date as the Interim Policy. Docket
No. 49830 (60 FR 6919, February 3, 1995). The 1994 Authorization Act
also required that the Secretary issue a statement of policies and
procedures for the enforcement of Federal restrictions on the use of
airport revenue. On February 20, 1996, the FAA
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issued a Notice of Proposed Policy and Procedures Concerning the Use of
Airport Revenue. Docket No. 28472 (61 FR 7134, February 26, 1996).
Comments on the Supplemental Proposed Policy
The Department received more than 50 comments on the Supplemental
Proposed Policy. Comments were received from almost all segments of the
aviation community, including: airport operators and representative
organizations; associations representing U.S. and foreign air carriers
and commuter airlines; representatives of other aeronautical businesses
at airports; general aviation representatives; a representative of
airport concessionaires; individuals with experience in airport
operations; and a law firm. In addition, the Department held two public
meetings to solicit public input on the Supplemental Proposed Policy.
Verbatim transcripts of the meetings have been included in the docket
of this proceeding.
The two major US representative organizations for airport
operators--Airport Operators Council International/ North America
(``ACI'') and American Association of Airport Executives (``AAAE'')--
filed joint comments. Many individual airport operators endorsed the
joint comments of their representative organizations, but some larger
airport operators commented independently. Many airport operators'
comments were similar, and all of the comments tended to focus on a
common group of issues.
On the airline side, the Air Transport Association of America
(``ATA'') and Regional Airline Association (``RAA'') filed joint
comments. These comments and those of the International Air Transport
Association (``IATA'') also tended to focus on the same issues and
generally took the same position.
Accordingly, the following discussion of comments is organized by
issue, not by commenter. Issues are discussed in the order they arise
in the Final Policy. Airport proprietors and their representatives who
took the same position on an issue are collectively referred to as
``airport proprietors.'' ATA/RAA and IATA are referred to as
``carriers'' when the organizations took common positions. The summary
of comments is intended to represent the general divergence or
correspondence in industry views on various issues. It is not intended
to be an exhaustive restatement of the comments received. All comments
received were considered by the Department, even if not specifically
identified in this summary.
After the comment period closed, ACI/AAAE filed reply comments to
the comments filed by ATA/RAA. ATA/RAA in turn objected to the reply
comments. ATA/RAA requested that the Department reopen the comment
period to allow for the filing of reply comments generally, if we
accepted the ACI/AAAE reply. The Department has accepted the reply
comments for the record. However, we determined that reopening the
comment period was not necessary because ACI/AAAE's reply comments were
largely repetitions of arguments presented in earlier comments. In no
case are the reply comments the sole basis for any decision.
In addition to specific changes noted in the discussion of the
issues, the Department has made editorial changes throughout the Final
Policy to enhance readability and clarity.
The Department's Authority to Regulate Aeronautical Fees
As noted above, airports have been required by two Federal
statutes--the AAIA and the Anti-Head Tax Act--to charge only reasonable
fees to aeronautical users. The Department has the responsibility for
enforcing these requirements, and the courts have held that a
Department decision on the reasonableness of an airport fee is entitled
to substantial deference. Kent County, 114 S.Ct. at 864, n. 14; New
England Legal Foundation v. Massachusetts Port Authority, 883 F.2d 157,
169 (1st Cir. 1989). Section 113 of the 1994 Reauthorization Act,
codified as 49 USC Sec. 47129, requires the Department to resolve
significant disputes over the reasonableness of new or increased
airport fees on an expedited basis. In that statute Congress also
required the Secretary to establish standards for determining the
reasonableness of an airport fee. Congress did not limit the
Secretary's discretion in any way, except by stating that the
Department may not actually set an airport fee.
Given the statutory authority vested in the Secretary, we find that
we are empowered both to adopt the guidelines contained in this Final
Policy and, in cases heard under section 47129, to examine the fee
methodology used by an airport. See LAX I, Order 95-6-36 at 14-15.
ACI/AAAE argue that we must give an airport's fee judgments a
presumption of validity, since the decisions of state and local
governments are normally entitled to such a presumption. The Final
Policy, however, gives airport proprietors substantial discretion in
establishing a fee structure. In addition, the airlines challenging an
airport fee have the burden of proof. LAX I, Order 95-6-36 at 17-18. We
do not agree that we should include an additional presumption in favor
of airport judgments on fees in the final Policy. There is a
substantial Federal interest in ensuring that aeronautical users pay
only reasonable fees, as shown by Congress' directive that we determine
on an expedited basis whether such fees are reasonable when carriers
file complaints against new or increased airport fees that meet the
jurisdictional requirements of section 47129. Congress' requirements
that we publish guidelines for determining the reasonableness of
airport fees further indicates that we should carefully examine an
airport's fee methodology without presuming that the airport's judgment
is likely to be correct.
We also note that we did not use such a presumption in the two LAX
cases or in our earlier investigation of fees charged by the
Massachusetts Port Authority (``Massport'') under its PACE program.
Investigation into Massport's Landing Fees, FAA Docket 13-88-2, Opinion
and Order (December 22, 1988) (``Massport Order''), aff'd New England
Legal Foundation v. Massachusetts Port Authority, 883 F.2d 157 (1st
Cir. 1989).
1. Applicability to General Aviation and Foreign Air Carriers
The Supplemental Proposed Policy would apply to aeronautical uses
of any airport, including a general aviation airport. However, the
Department proposed to take into account differences in methodologies
and mechanisms that airport proprietors may use to charge for different
facilities and for different category of users. Proposed Applicability
of Policy, section A. The Department also proposed that, at airports
where fees high enough to achieve self-sustainability would be too high
to permit viable commercial operations, the Department would not object
to lower fees to assure that the public had access to commercial
aeronautical services. Proposed para. 4.1.2. In the explanatory
statement, the Department proposed to add language clarifying that in
situations not covered by section 47129, the FAA would apply the policy
in its role as administrator of grants under the Airport Improvement
Program (``AIP''), assuring that an AIP grant applicant is in
compliance with its grant assurances. The FAA would not provide a forum
for resolving private disputes.
Airport proprietors: Airport proprietors generally oppose
application of the policy to general aviation airports and to general
aviation facilities. ACI/AAAE consider the Supplemental
[[Page 31997]]
Proposed Policy to be an improvement over the interim policy. However,
a policy is not needed for general aviation airports and facilities
because section 47129 was enacted to respond to airline concerns. If
the Department disagrees, ACI/AAAE prefer a separate policy.
Some individual airport proprietors argue that the terms of section
47129 preclude adoption of a policy applicable to any fees except those
charged to air carriers and not otherwise excluded by the terms of
section 47129. The provisions of section 47129 indicate a belief by
Congress that, to minimize the adverse effects of Departmental
involvement, certain aeronautical fees should be completely exempt from
challenge. Others argue only that such an extension is unwise, based on
the differences between commercial service and general aviation
airports.
In addition, some airport proprietors object to the application of
the policy and the expedited procedures to complaints brought by
foreign air carriers on the same grounds.
General aviation: The Aircraft Owners and Pilots Association
(``AOPA'') explicitly objects to exclusion of general aviation airports
from the scope of the policy, and the National Air Transportation
Association (``NATA'') supports applying at least some elements of the
policy to general aviation airports.
Other commenters: One individual commenter observed that at many
compensatory airports, general aviation pays less than its allocated
costs and is subsidized by airlines and their passengers, who suffer
congestion caused by these below-cost fees.
The Final Policy: The Final Policy statement applies to general
aviation airports and fees charged to general aviation users. However,
in response to the comments, we have exercised our discretion to
further limit the circumstances in which we will consider a complaint
about the reasonableness of fees imposed at a general aviation airport.
In addition, the Department reaffirms its earlier decision that foreign
air carriers have the same rights as U.S. air carriers under section
47129.
As noted in the preamble to the Supplemental Proposed Policy, the
Department has ample authority under other provisions of the Airport
and Airway Improvement Act of 1982, as amended (``AAIA'')--49 USC
Secs. 47107(a), 47122--to adopt policies and guidance defining
reasonable fees to be charged by general aviation airports and for
general aviation use of commercial service airports. We find nothing in
the statute that exempts fees imposed for general aviation uses of any
airport from the requirement that airport proprietors charge all
aeronautical users reasonable and not unjustly discriminatory fees. The
commenters have not provided any other persuasive reason for using one
set of standards to judge the reasonableness of landing fees charged to
air carriers and a different set of standards to judge the
reasonableness of landing fees charged to other users.
However, as noted previously, the Department recognizes that
airport proprietors, especially proprietors of general aviation
airports, may use different methods for setting fees for general
aviation users than those commonly used for setting fees paid by
airlines. The Department reiterates its commitment to apply the policy
flexibly in evaluating general aviation fees. The narrowing of the
detailed guidance on establishing fees to the airfield and public-use
roadways should itself provide increased flexibility to general
aviation airports over the Interim Policy.
Even as to the airfield, the Department does not anticipate that
application of the policy will be unduly burdensome. The Department
understands that many general aviation airports operate at a loss,
calculated according to generally accepted accounting principles. By
definition, such airports are not generating excessive surpluses. The
Department would not expect such airports to increase their losses by
paying for sophisticated cost allocation and accounting systems to
prove that they are losing money. Similarly, the Department understands
that many airport proprietors apply a single charge, e.g., a fuel
flowage fee, to general aviation users for their use of all
aeronautical facilities. The Department does not intend to disturb this
practice. Further, a charge that covers the cost of providing
nonairfield facilities would be evaluated under paragraph 2.6 of the
Final Policy, as discussed below.
The Department notes the concern that general aviation users are
being subsidized by other users at many airports. The Department
emphasizes that an airport proprietor generally may not charge any
aeronautical user or user group more than its allocated costs based on
a reasonable, transparent and not unjustly discriminatory cost
allocation methodology. Our general approach in this policy is to
refrain from disturbing common and non-controversial industry practice.
Therefore, the Department will not object when an airport proprietor
charges particular user groups less than their allocated costs, if
other aeronautical users are not required to finance the shortfall. The
applicable Federal requirements do not compel airport proprietors to
set fees so high that they become a financial bar to the use of the
airport.
The Department is making three modifications to the Final Policy in
response to concerns raised in the comments. First, we will strengthen
the language of the applicability section that distinguishes the FAA's
role in processing complaints about general aviation fees from the
Department's role in processing complaints under section 47129. Second,
because the threat of unreasonably high fees is remote at most general
aviation airports, the Final Policy provides that the FAA will not
ordinarily undertake an investigation of the reasonableness of a
general aviation airport's fees absent evidence of a progressive
accumulation of surplus aeronautical revenues. The general aviation
airport segment of the industry should not be burdened with the cost of
developing sophisticated accounting systems to address a problem that
will occur, rarely, if at all. An allegation of unjust discrimination
would be considered by the FAA in accordance with the Final Policy.
Third, proposed par. 3.4.1 would require common costs to be allocated
``according to a reasonable, transparent and not unjustly
discriminatory cost allocation formula'' that meets the conditions
specified in that paragraph. Because many smaller airports cannot
afford to develop sophisticated cost allocation formulae, the reference
to ``cost allocation formula'' is being modified to ``cost allocation
methodology.'' If the airport proprietor elects to develop a cost
allocation formula, the formula must meet the conditions specified in
that paragraph.
As to the application of the policy to foreign airlines, the
relevant statutes make it clear that the policy must apply equally to
U.S. and foreign airlines. First, we are adopting the Final Policy
primarily because Congress directed us in 49 USC Sec. 47129 to
establish guidelines or standards for determining the reasonableness of
a new or increased airport fee in cases heard under that statute. The
Department analyzed the statute's applicability and determined in LAX I
that 49 USC Sec. 47129 must be read as giving foreign airlines the same
right as U.S. airlines to file complaints and obtain relief. Order 95-
6-36 at 53-56. We reaffirmed that determination in LAX II. Order 95-12-
33 at 52. Since section 47129 is the principal basis for the adoption
of the Final Policy, the Final Policy must apply to foreign airlines.
Even if Section 47129 did not cover foreign airlines, the Final
Policy would
[[Page 31998]]
have to govern the assessment of the reasonableness of fees charged to
foreign airlines. The airport grant statute specifically requires the
Department to obtain assurances from each airport sponsor obtaining
federal funds that the airport will not unjustly discriminate against
any aeronautical user. 49 USC Sec. 47107(a)(1). This provision requires
an airport to charge foreign airlines the same fees as similarly
situated U.S. airlines. In addition, the United States' obligation
under many international agreements to ensure that foreign airlines are
treated the same as U.S. airlines would require us to adopt the same
standards for determining the reasonableness of airport fees, whether
the fees are paid by U.S. airlines or foreign airlines, even if
Congress had not enacted 49 USC Sec. 47129.
Several airport parties now object to the Department's adoption of
procedural rules allowing foreign airlines to obtain an expedited
investigation under section 47129. However, only the City of Los
Angeles objected to the inclusion of foreign airlines during the
rulemaking proceeding that led to adoption of the Rules of Practice for
airport rates and charges cases. 59 FR 53380, 53383 (October 24, 1994);
60 FR 6919 (February 3, 1995). At that time, the Department determined
as a matter of discretion that foreign airlines should have the ability
to request an expedited investigation, even though it assumed that they
did not have such rights under section 47129. The Department's later
decision that foreign airlines are covered by 49 USC Sec. 47129 means
that foreign airlines by statute have the same procedural rights as
U.S. airlines.
2. Applicability to Fees Set by Agreement
Section 47129(e), 49 USC Sec. 47129(e), provides that the section
does not apply, inter alia, to fees imposed pursuant to a written
agreement with air carriers. Section 47129(f), 49 USC Sec. 47129(f),
provides , inter alia, that the section shall not adversely affect the
rights of parties to an existing agreement between an air carrier and
airport proprietor.
In the applicability section of the Supplemental Proposed Policy,
the Department stated that section 47129 did not repeal or narrow the
scope of the reasonableness requirement for airport fees. The
Department proposed to apply the policy in the case of a dispute over
the reasonableness of any aeronautical fee. However, disputes over
matters described in sections 47129 (e) and (f) would not be processed
under the procedures mandated by section 47129. In the explanatory
statement, the Department proposed to take into account the existence
of any agreement between U.S. and foreign air carriers and the airport
proprietor in making its determination of reasonableness.
The comments: Airport proprietors generally argue that the policy
should not apply to fees set by agreements with carriers. ACI/AAAE
argue that application of the policy to such fees would frustrate the
direction given by Congress and would adversely affect airports that
rely on agreements that produce steady and predictable revenue flows.
ACI/AAAE and individual airport commenters also argue that the
Department is legally barred from applying the policy to fees set by
agreement because sections 47129(e) and (f) limit the application of
all section 47129, not just the provisions governing the expedited
procedures. ACI/AAAE refer to numerous court decisions overturning
agency actions that have not properly adhered to statutory exceptions.
Other commenters did not address this issue.
The Final Policy: The Final Policy applies to fees set by
agreement, to the extent discussed below. We do not interpret section
47129 to preclude an investigation of fees set by agreement or the
application of the policy in such an investigation. However, in keeping
with our policy of encouraging direct negotiation of fees, the
Department does not expect to investigate routinely fees set by
agreement. Moreover, the Department has decided not to consider
complaints about the reasonableness of fees set by agreement if filed
by parties to the agreement. The Final Policy is modified to reflect
this decision.
However, we do not believe that Congress intended to deprive non-
party carriers of the opportunity to have their airport fees reviewed
by the FAA, solely because the fees are included in an agreement
between the airport proprietor and other airlines. While section 47129
directed the Secretary to establish a policy on reasonable fees, the
Secretary already had authority to publish such a policy. Section 47129
did not repeal this authority or the underlying requirement of
reasonableness. The existence of an agreement may be a critical factor
in evaluating the reasonableness of a fee, but section 47129 does not,
by its terms, exempt fees set by agreement from the requirement of
reasonableness.
However, the Department agrees that section 47129(e) was enacted to
preclude carriers from improving on their bargain by bringing an
administrative complaint after they have reached agreement with an
airport proprietor. That outcome would be unfair to airport proprietors
who bargain in good faith. The threat of a complaint could discourage
airport proprietors from putting forward their best offers in
negotiations. The Department is reluctant to interpret section 47129(e)
in a way that would discourage effective negotiations.
Complaints about fees charged to non-parties to the agreement
brought by non-parties to the agreement would be considered under
provisions of the policy applicable to non-signatory carriers, if
significant, as discussed below under the heading ``Charges to Non-
Signatory Carriers.'' By giving notice that non-parties may challenge
fees imposed on them by agreement, the Department expects that airport
proprietors and airport users will be able to achieve reasonable
results in their negotiations and obviate a full investigation and
determination of reasonableness by the Department.
3. Applicability to Fees Imposed Pursuant to Financing Agreements
Section 47129(e)(2), 49 USC Sec. 47129(e)(2), provides that the
section does not apply to fees imposed pursuant to a financing
agreement or covenant entered into before the date of enactment of the
statute (August 23, 1994). Section 47129(f)(2), 49 USC
Sec. 47129(f)(2), provides that the section shall not adversely affect
the ability of an airport proprietor to meet its obligations under a
financing agreement or covenant in effect on August 23, 1994.
In the applicability section of the Supplemental Proposed Policy,
the Department stated that section 47129 did not repeal or narrow the
scope of the reasonableness requirement for airport fees. The
Department proposed to apply the policy in the case of a dispute over
the reasonableness of any aeronautical fee. However, disputes over
matters described in sections 47129 (e) and (f) would not be processed
under the procedures mandated by section 47129. The treatment of
financing agreements was not otherwise discussed in the Supplemental
Proposed Policy.
However, in its order setting for hearing under section 47129,
carrier complaints against fees imposed by the Puerto Rico Port
Authority, the Department further interpreted the financing agreement
exceptions. Puerto Rico Ports Authority Rates Proceeding, Order 95-4-6
(April 3, 1995). The Department stated that:
[I]n order to successfully invoke the exception in subsection
(e)(2), the airport must show more than generalized language in a
financing
[[Page 31999]]
agreement as the source of the imposition of the fee upon the air
carrier. The airport must demonstrate that the agreement specifically
required the airport to increase directly the fees to air carriers or
that it so circumscribed other alternatives that the airport had to
impose a new fee or to increase an existing fee. Order 95-4-6 at 13.
The Department explained that this interpretation of section
47129(e)(2) was necessary so that the provision would not make the
statute a nullity. Id. at 12.
The comments: Airport proprietors urge the Department to revise its
interpretation of section 47129(e) to recognize generalized rate
covenant language. The airport proprietors argue that Congress was well
aware of the broad terms of typical rate covenants and drafted section
47129(e)(2) to cover the typical situation. They further argue that the
legislative history makes clear that section 47129(e)(2) was enacted to
avoid disrupting existing financing agreements.
The airport proprietors also argue that their preferred
interpretation will not render section 47129 a nullity. They assert
that airport proprietors do not routinely invoke a rate covenant as a
justification for a fee increase. Doing so would signal dire financial
circumstances. Further, if an airport proprietor must raise fees to
comply with a rate covenant, it will not single out airlines or other
aeronautical users, but will raise the fees for all airport users.
Other commenters did not address this issue.
The Final Policy: The Department will not modify the interpretation
of the financing agreement exceptions. As noted in Order 95-4-6, the
airport proprietors' preferred interpretation could turn section
47129(e)(2) into the proverbial exception that swallows the rule.
Moreover, the Department's interpretation does not threaten to
disrupt existing financing agreements. Under the Final Policy, debt-
service expenses, including reasonable amounts for debt-service
coverage, may be included in the rate-base. In an investigation into
the reasonableness of a fee, the airport proprietor is free to show
that a challenged fee is needed to meet debt-service expenses
associated with a general rate covenant. However, the airport
proprietor may not rely on a general rate covenant to invoke section
47129(f)(2) as a procedural bar to an investigation of the
reasonableness of the disputed fee. See, Order 95-4-6 at 13.
4. Definition of Exclusive/Nonexclusive use Aprons for HCA Valuation
The Supplemental Proposed Policy proposed that airfield assets
would be valued using the HCA valuation methodology. Proposed par.
2.5.1. Airfield assets would include ramps or aprons not leased on an
exclusive use basis and associated land. Proposed Applicability,
Section D.
The comments: The State of Alaska, which operates most public
airports in Alaska, expressed concern that the HCA valuation
requirement for aprons might adversely affect its charging practices.
The State's lease lots typically abut the side of a public-use apron
and include a portion of the apron for exclusive aircraft parking.
Treating the lease lots as a non-exclusively leased apron subject to
the HCA valuation requirement would devastate the airport system's
revenue situation.
The Department did not receive any other comments on this issue.
The Final Policy: No modification to the Supplemental Proposed
Policy is required to address the concerns of the commenter. As
described in the comments, the portion of the apron included in each
lease lot is available for exclusive use. Accordingly, this portion of
the apron and the remainder of the lease lot would be considered
exclusively leased, even though the remainder of the apron is a public-
use facility.
The Department has, however, decided to modify the definition to
avoid potential confusion. We are modifying the provision to exclude
from the definition of airfield assets an apron or ramp which is the
subject of a preferential, as well as an exclusive lease or use
agreement.
Aprons or ramps that are treated as airfield assets are subject to
the general HCA valuation requirement. In contrast, the airport
proprietor may use any reasonable method to establish the fee for any
other apron or ramp. The Department originally proposed this disparate
treatment because exclusively leased facilities have more in common
with terminals and other aeronautical facilities than with runways and
taxiways. In particular, their use and the fees for their use are
ordinarily the subject of individual negotiations.
On further consideration of the issue, the Department has concluded
that the preferential use agreements are as likely as exclusive use
agreements to be the result of individual negotiations and to give rise
to the characteristics that make a ramp or apron more like a terminal
than a runway. Many lease and use agreements may provide for only
preferential use. The Department is therefore modifying the Final
Policy to exclude from the definition of airfield assets, aprons and
ramps that are subject to a preferential or exclusive lease or use
agreement.
5. Cross Crediting Aeronautical Users With Nonaeronautical Revenues
The Supplemental Proposed Policy proposed that aeronautical users
be entitled to a cross-credit of nonaeronautical revenues only if the
airport proprietor agrees, and that the airport proprietor could agree
to a cross-credit even if aeronautical users do not agree to cover
nonaeronautical losses. Proposed para. 2.1.1. The Supplemental Proposed
Policy also proposed that the airport proprietor could not require
aeronautical users to cover nonaeronautical losses, except by
agreement. Id.
Airport proprietors: Airport proprietors did not address this
issue.
Carriers: IATA argues that cross-crediting should be required based
on the policy on airport fees set forth by the International Civil
Aviation Organization (``ICAO''), laid down in the Statements by the
Council to Contracting States on Charges for Airports and Air
Navigation Services (ICAO Doc. 9082/4). IATA argues that cross-
crediting satisfies the ICAO principle of cost-relatedness, because
airport users bring customers to the airport through their operations.
General aviation: AOPA supports mandatory cross-crediting because
nonaeronautical businesses thrive due to the ready-made market for
their services. AOPA also argues that the Supreme Court's decision in
Kent County does not preclude the Department from requiring cross-
crediting.
Other commenters: One law firm involved in public finance objects
to the proposed requirement that aeronautical users agree to cover
nonaeronautical losses. This commenter argues that the proposal is
inconsistent with the airport proprietor's right to set fees
unilaterally by ordinance or regulation established elsewhere in the
policy. The proposal is also inconsistent with the airport proprietor's
unconditional right to employ a residual methodology established by 49
USC Sec. 47129(a)(2), according to this commenter.
The Final Policy: The Department is adopting Paragraph 2.1.1, as
proposed.
The Department will not require cross crediting of nonaeronautical
revenues to aeronautical users, because section 47129 does not permit
us to do so. Section 47129(a)(2) preserves the discretion of airport
proprietors to use
[[Page 32000]]
the compensatory methodology. The essence of the compensatory
methodology is that fees to aeronautical users reflect the costs of
serving them with no cross-crediting of nonaeronautical profits or
losses.
Moreover, it would be unfair to require airport proprietors to
share nonaeronautical profits with aeronautical users, if we did not
also require aeronautical users to share nonaeronautical losses with
airport proprietors. The aeronautical users requesting cross-crediting
have not indicated that they are willing to accept such a requirement.
More importantly, they have not identified a legal basis for imposing
cross-crediting.
By authorizing the residual methodology, section 47129(a)(2) does
not authorize unilateral increases in aeronautical charges to cover
nonaeronautical losses. The Department is not aware of any airport
proprietor who, at the time of enactment, charged aeronautical users to
cover aeronautical losses without the aeronautical users' agreement to
do so. No airport proprietor has asserted a unilateral right to do so
in this proceeding docket.
Moreover, one of the fundamental concepts of reasonableness is that
users should not, without their consent, be burdened with paying for
facilities they do not benefit from or use. The law firm's proposal
clearly conflicts with this concept.
6. Rate of Return
The Supplemental Proposed Policy did not propose a separate rate of
return to be earned by public entities for airfield facilities and
public-use roadways. However, the Department recognized that permitting
airport proprietors to use any reasonable methodology to determine the
fees for other facilities (proposed para 2.6) might allow an airport
proprietor to earn a reasonable rate of return for those facilities.
The Department also proposed to allow private equity owners of airports
to earn a reasonable return on investment in airfield facilities and
public-use roadways. Proposed para. 2.4.
Airport proprietors: Airport proprietors argue that they are
entitled to earn a rate of return on investment in all facilities,
including the airfield. ACI/AAAE point out that public utilities are
compensated for forgoing the opportunity to charge market prices by
including a rate of return in their rates. The City of Los Angeles and
the Port Authority of New York and New Jersey (``PANYNJ'') argue that
the denial of a rate of return amounts to an unconstitutional taking of
property. The PANYNJ also argues that a rate of return is needed to
provide for accumulation of cash reserves for investment, to compensate
for the risks of those investments, and to meet cash-flow tests of bond
indentures.
Carriers: ATA/RAA did not specifically address this issue. IATA
prefers allowing airport proprietors a reasonable return on investment,
in lieu of an allowance for imputed interest and reasonable reserves.
General aviation: General aviation commenters did not address this
issue.
Other commenters: One individual argues that imputed interest is
the functional equivalent of a return on investment. This commenter
asks the Department to clarify whether a privately-owned airport may
include both imputed interest and a return on investment in the
airfield rate base.
The Final Policy: The Final Policy does not authorize a separate
rate of return for public airport owners. In addition, a new paragraph
2.4.1(a), prohibiting a private equity owner of an airport from
charging for both imputed interest and a rate of return on its equity
investment in the airfield, is added to the Final Policy.
The Final Policy allows public airport proprietors to include an
imputed interest charge in fees for the airfield and public-use
roadways. Therefore, a separate return on investment is not justified,
and would run counter to traditional concepts of reasonableness. As
discussed below under ``Application of HCA Requirement to Airfield and
Public Use Roadways,'' the imputed interest charge compensates the
airport proprietor for the opportunity costs of its investment in the
airfield. The imputed interest charge, therefore, serves the function
of a return on investment. In addition, as discussed below, a state or
municipal airport proprietor does not have the same entitlement to a
return on investment under the Constitution as a private investor.
The Final Policy follows the approach of the Supplemental Proposed
Policy for publicly-owned airports. Proprietors of publicly-owned
airports may charge imputed interest on their airfield investments in
accordance with the Final Policy. However, allowing an airport
proprietor to include an imputed interest charge and a return on
investment in its rates could allow for a double recovery of the
airport proprietor's capital costs. Therefore, proprietors of publicly-
owned airports may not charge an additional rate of return on
investment.
Private equity owners may include a reasonable return on equity
investment. Para 2.4. However, under new paragraph 2.4.1, they may not
include an imputed interest charge on this investment as well. This new
provision is intended to avoid possible double recovery of capital
costs by a private equity owner.
In light of other provisions in the Final Policy, the Department
does not agree with the PANYNJ's claim that a separate allowance for a
return on investment is needed to provide for accumulation of reserves
to fund capital projects or to meet cash-flow requirements in financing
agreements. The imputed interest charge will provide cash flow for
these purposes, and the Final Policy allows the airport proprietor to
impose reasonable charges to met cash-flow requirements in financing
agreements. Para. 2.4.4.
7. Imputed Interest
The Supplemental Proposed Policy proposed to allow the airport
proprietor to charge imputed interest, at a reasonable rate, on funds
invested in the airfield, with two exceptions. First, imputed interest
could not be charged on funds obtained by debt-financing, if the debt-
service costs are included in the rate base. Second, imputed interest
could not be charged on funds generated by fees charged for the use of
airfield assets and airfield services. The Supplemental Proposed Policy
did not propose a specific imputed interest rate. Proposed para. 2.4.1.
Airport proprietors: With one exception, airport proprietors argued
that imputed interest should be allowed on all internally generated
funds invested in the airfield, including funds derived from airfield
revenues. ACI/AAAE and many individual airports argue that the proposed
limitation will encourage airport proprietors to borrow funds for
airfield investment, rather than use internally generated funds.
Borrowing may be the most expensive way to obtain financing. One
airport proprietor asserts that the Supplemental Proposed Policy is
inconsistent with its own long-standing practice, and it argues that
the distinction is arbitrary.
In addition, one airport proprietor noted that the Department's
approach could be troublesome due to the difficulty of tracing the
source of internal funds invested in the airfield. This airport
proprietor noted that requiring airport proprietors to trace the source
of funds would make them unable, as a practical matter, to charge
imputed interest whenever funds could not be traced.
Carriers: Carrier commenters generally object to allowing airport
proprietors to charge imputed interest
[[Page 32001]]
on any investment made with surplus aeronautical revenues. ATA/RAA
argue that the imputed interest allowance serves only to permit the
accumulation of excess revenues. According to ATA/RAA and USAir, the
Supplemental Proposed Policy would allow airport proprietors to force
carriers to first invest in the airport (by paying fees in excess of
costs) and then to pay interest on that forced investment through the
imputed interest charge. ATA/RAA argue that the U.S. Government
strenuously objected to this practice when it was attempted at Heathrow
Airport. ATA/RAA further argue that public airport operators (state or
city governments or authorities) do not have the same profit motives as
private businesses. Therefore, they do not need the financial incentive
of imputed interest to trigger investments in the airfield.
IATA also argues that an imputed interest charge serves only to
generate surplus aeronautical revenues. Elsewhere in its comments,
however, IATA supports allowing airport proprietors to earn a
reasonable rate of return on investment.
ATA/RAA and IATA also argue that if imputed interest is allowed,
the Department should provide guidelines for the computation of
interest. ATA supports use of an airport's bond interest investment
rate based on the following reasoning. Interest rates are in part
determined by the risk of the investment, and investments that are
riskier than airport capital projects might generate higher interest
rates. However, by law, public airport proprietors must apply airport
revenue to the capital or operating costs of the airport. Given this
legal limit on the airport proprietor's investment options, the airport
proprietor should not be able to claim a higher imputed interest rate
base on alternative investments that are theoretically available.
General aviation: General aviation commenters did not address this
issue.
Other commenters: One individual commenter suggests that imputed
interest is in practical terms the same as a profit or payment for lost
income. The commenter argues that lost income is not a cost. This
commenter also suggests that the imputed interest charge is a device
for airports to circumvent the prohibition on charging depreciation for
Federally-financed assets.
The Final Policy: The Department is adopting the provision of the
Supplemental Proposed Policy, as proposed. The Department's approach
strikes a reasonable balance between legitimate concerns of airport
users, on the one hand, and airport proprietors, on the other.
Airport proprietors do have discretion to choose where on the
airport to invest surpluses generated by aeronautical fees, as well as
nonaeronautical fees. In choosing between two investment options,
airport proprietors have an incentive to select the option that
provides more revenue for reinvestment in the airport. Barring an
imputed interest charge on all funds invested in the airfield would
encourage airport proprietors to invest elsewhere on the airport, and
would thereby defeat the Department's long-range objective of assuring
adequate investment in airport airfield capacity.
However, the carriers' concerns have some justification. Under the
Final Policy, airfield fees potentially could generate revenues in
excess of an airport proprietor's cash needs. This excess may arise
from various sources: imputed interest charges; allowances for various
reserves; debt-service coverage charges; or simply financial
performance that exceeds the projections on which airfield fees are
based. There is merit to the carrier position that charging imputed
interest on funds derived from airfield revenues could require airfield
users to finance airfield investment twice: once in the form of the
excess revenue that their otherwise reasonable fees generate and once
in the form of the imputed interest charge on the investments made with
that revenue. For this reason, the policy does not permit airport
proprietors to charge imputed interest on funds that are attributable
to airfield operations.
However, the carriers' argument that airport proprietors may not
charge imputed interest on any investment in the airfield goes too far.
This argument would deny the airport proprietor any compensation for
the opportunity costs of its investment in the airfield.
The Department recognizes that disallowing imputed interest on sums
attributable to airfield fees may encourage airport proprietors to
invest elsewhere on the airport. However, the impact on choice of
investments should be less pronounced than disallowing all imputed
interest. The limit on imputed interest could also encourage bond
financing for airfield investment, but the limit would apply only in
the absence of an agreement to the contrary. If an airport proprietor
can persuade airfield users that charging imputed interest is less
costly than borrowing to finance airfield improvements, the airport
proprietor is free to impose an imputed interest charge by agreement.
The Department's approach to imputed interest is consistent with
the position taken by the U.S. government regarding airport fees at
Heathrow. In that dispute, the U.S. government did not object to
landing fees set to provide a reasonable rate of return on investment,
or to the application of that return to new capital projects. Rather,
the U.S. government objected to financing new capital development at
the London airports by: (1) directly including the full capital costs
of projects under construction in the rate base and (2) charging a rate
of return for those projects before they came on-line.
The Department will not provide further guidance on a reasonable
rate for assessing imputed interest at this time. In many cases, a rate
based on the airport proprietor's own interest rate on borrowed funds
may be reasonable. However, the airport proprietor's borrowed-fund rate
may be but one of a number of relevant factors in determining a
reasonable rate of interest. A policy that defines the borrowing rate
as the only reasonable rate would not allow for consideration of these
factors. In the event of a complaint, the Department would expect the
airport proprietor to justify the reasonableness of its imputed
interest rate. The Department would not accept an imputed interest rate
that is justified solely as a device to recover a depreciation charge
for the Federal share of grant-funded facilities.
As we noted in the explanatory statement to the Supplemental
Proposed Policy (60 FR 47013), under the Administrative Procedure Act,
a carrier complaining about charging imputed interest on funds
generated by airfield fees would bear the burden of proving the source
of funds. The airport proprietor need not trace the funds in order to
claim imputed interest. However, if the airport proprietor has data
available that would enable a complainant to trace the funds, that data
should be disclosed during the fee negotiations or during a proceeding
to resolve a fee dispute.
8. Limitation of Airfield Rates to Land and Facilities Currently in Use
The Supplemental Proposed Policy proposed that, absent agreement,
airport proprietors may include in the rate base all capital costs
associated with the provision of airfield facilities and services
currently in use and current costs of planning future aeronautical
facilities and services. Proposed para. 2.4. The Supplemental Proposed
Policy further proposed that the costs of facilities not yet built and
operating could not be included in the rate base. However, debt service
and carrying costs of an asset under construction
[[Page 32002]]
could be capitalized and amortized when the asset is put in service. In
addition the airport proprietor could include in the rate base the
costs of land that facilitates current operations of the airport.
Proposed para. 2.5.3.
Airport proprietors: Airport proprietors consider these provisions
unduly restrictive and inconsistent with the public interest. ACI/AAAE
comment that the prohibition on expensing interest payments during
construction is inconsistent with current practice of some airports. In
addition, ACI/AAAE and individual airport commenters argue that
applying the in-use provision to acquisition of land for future runway
development will encourage airport proprietors to delay land
acquisition as long as possible. This delay could drive up the cost and
reduce the availability of land as development encroaches on the
airport.
The City of Chicago points out that land for future development may
be funded with AIP grants under circumstances outlined in the FAA's
Airport Improvement Program (AIP) Handbook, FAA Order 5100.38A, Para.
603 (October, 1989). According to Chicago, Paragraph 603 demonstrates
that land acquisition for future development is appropriate in certain
circumstances.
The Port of Portland suggests that the currently-in-use language
may not reflect current industry practice for another reason. Portland
notes that at the request of the carriers, it is amortizing a terminal
upgrade at Portland International Airport for longer than the useful
life of the project to lessen the cost impact on carriers. Portland
requests that the policy permit this approach at the discretion of the
airport proprietor. This commenter also requests clarification on how
the term ``currently'' would be applied in different situations.
Airport Users: Airport users did not address this issue.
Other commenters: A law firm specializing in public debt-financing
asserts that many public airport proprietors are precluded by local law
from capitalizing interest during construction. Such entities would be
effectively precluded from financing new facilities, because the policy
would not permit the expensing of construction financing and interest.
This commenter recommends that the policy allow interest during
construction and the cost of land for future development to be included
in the rate base.
The Final Policy: The Department is modifying the Final Policy to
permit an airport proprietor to show, on an individual basis, that it
is reasonable to allow the costs of land acquired for future airfield
development to be included in the rate-base, if the conditions of FAA
Order 5100.38A are met, and if the airfield development is included in
the airport proprietor's currently effective five-year capital
improvement plan. The circumstances listed in FAA Order 5100.38A
include rising land costs, encroachment on available land by
incompatible uses, and the probable unavailability of land for airport
use in the future. The provision on construction interest is adopted
without modification. In addition, the Final Policy does not allow an
airport proprietor unilaterally to depreciate an asset for longer than
its projected useful life.
In addressing this subject, the Department must strike a balance
between conflicting concerns. On the one hand, when fees are based on
cost, it is generally unreasonable to charge users for facilities they
do not benefit from or use. Based on this principle, current users
generally should not be charged, as a cost item, the capital costs of
projects not yet in operation. Of course, this principle does not
preclude assessment of reasonable imputed interest charges just because
the proceeds of those charges might fund future capital projects. On
the other hand, the policy should not work a financial hardship on
airport proprietors or unduly interfere with cost-effective airport
expansion by precluding timely acquisition of property needed for
future airport development.
In addition, the restriction on charging for facilities not yet in
use is effectively limited to airfield facilities. Moreover, the
restriction does not apply in the case of agreements with airfield
users. If the airport proprietor can persuade airfield users that it is
less expensive in the long run to deviate from the Final Policy, the
airport proprietor is free to do so by agreement. Likewise if users
request a depreciation period that is longer than an asset's useful
life, the airport proprietor may agree to it. In these circumstances,
an additional modification to the policy is not warranted.
The comments on charging for future facilities address two distinct
issues. The first is the treatment of construction interest. As to
interest paid during construction, the Department is not modifying the
approach proposed in the Supplemental Proposed Policy. This approach is
commonly used in determining the reasonableness of rates, and permits
the airport proprietor to fully recover all construction interest
costs, once the facility is in use.
The comments have not persuaded us that this approach will cause a
substantial hardship in the industry. ACI/AAAE have not alleged that
the practice of expensing interest is wide-spread. Moreover, landing
fees at most airports are set by agreement. Under the terms of
Paragraph 2.4 of the Final Policy, construction interest may be
expensed if users have agreed. Similarly, the law firm comment
regarding legal restrictions on capitalizing interest does not state
that such local restrictions are wide-spread, and does not explain the
basis for them. It is not clear that local laws that prohibit the
capitalization of interest would permit the direct expensing of
interest, because direct expensing would be more burdensome to users.
Moreover, airport proprietors themselves have not raised legal
restrictions to capitalizing interest as a serious concern.
The second issue is the treatment of land acquired for future
development. On this issue, some modification to the Supplemental
Proposed Policy is in order. As the FAA has recognized in administering
the AIP program, when the factors specified in paragraph 603 of Order
5100.38A are present, it may be prudent to acquire and hold land for
future development. Moreover, there may be circumstances in which such
a land acquisition cannot be carried out if the costs are not included
in the current airfield rate-base. However, based on the standard of
reasonableness, the Department must be careful not to burden unduly
present users with the costs of land acquired for future development.
Therefore, the Department is modifying the final policy to permit an
airport proprietor to show that the inclusion of the costs of land
needed for future airfield development is reasonable, if the factors
specified in FAA Order 5100.38A are present, and if the airfield
development is included in the airport's currently effective five-year
capital investment program. The latter condition is intended to assure
that the land being acquired will actually be used for airfield
development. This condition should also increase the likelihood that
the airport users paying for the land will actually benefit from its
purchase. The Department would decide the reasonableness of charging
for the cost of land for future development on an individual basis. In
reviewing the reasonableness, the Department would consider, among
other factors, the feasibility and costs of alternative means of
financing the land acquisition.
The Department will not permit airport proprietors to depreciate an
[[Page 32003]]
airfield asset for longer than its useful life, absent user agreement.
Such a policy would force airfield users who never used or benefited
from the asset in question to pay for a share of its costs. As noted,
however, the airport proprietor may provide for a longer amortization
period by agreement with airfield users.
In addition, the Department does not consider further guidance on
the meaning of ``currently in use'' to be necessary at this time. The
meaning of the term should in ordinary circumstances be self-evident--
in use during the period when the charge is in effect. See, LAX II,
Order 95-12-33 at 50-51. There may be circumstances in which the
application of the phrase is not straight-forward, and the Department
will address those situations if they arise.
9. Allowance For Environmental Costs
The Supplemental Proposed Policy proposed that an airport
proprietor could include the costs of environmental mitigation and
remediation to the extent it incurs a corresponding actual expense.
Proposed para. 2.4.2. The Supplemental Proposed Policy also proposed
that the airport proprietor could charge for the costs of insuring
against future liability for environmental contamination. However, the
costs of self-insurance could be included in the rate-base only if
incurred pursuant to a self-insurance program that conforms to
applicable standards for self-insurance practices. Proposed para.
2.4.2(d).
The comments: One airport proprietor has requested that the
Department provide additional flexibility to charge for environmental
cleanup costs. It suggests that if an activity is expected to generate
predictable environmental cleanup costs, e.g., operation of a fuel tank
farm, today's airport users may be reasonably charged for those costs,
even if the cleanup occurs in the future.
Other commenters did not address this issue.
The Final Policy: The Department will not modify the provisions on
allowable environmental costs. The commenter's concern is already
addressed by the provision of the Final Policy governing reasonable
reserves.
If the use of the airfield today generates predictable
environmental remediation expenses in the future, the principle of cost
causation would allow, if not encourage, the airport proprietor to
charge today's users for those expenses. The policy need not be
modified to permit this result.
The policy already permits the airport proprietor to include in the
airfield rate base amounts needed to fund debt service and other
reserves and to fund reasonable cash reserves to protect against other
contingencies. Para. 2.4.4. This provision is sufficiently broad to
permit the funding of reserves for predictable costs of environmental
remediation caused by current operations. However, if an airport
proprietor establishes a reserve for this purpose, the Department would
expect the reserve to be separately identified. In reviewing the
reasonableness of the reserve, the Department would consider, inter
alia, whether the reserve applies to activities that industry
experience has shown generate future environmental remediation costs;
and whether the reserve reflects industry experience in costs of
remediation. Arbitrary reserves or reserves to fund unknown future
potential liability would not be acceptable. The latter would be
subject to the provision on self-insurance.
10. Debt-Service Coverage
The Supplemental Proposed Policy proposed that the airport
proprietor could include in the rate base, inter alia, amounts ``needed
to fund debt service and other reserves and to meet cash flow
requirements as specified in financing agreements or covenants (for
facilities in use), including, but not limited to, debt-service
coverage.'' Proposed para. 2.4.4.
In the LAX II proceeding, the parties disputed the meaning of the
term ``needed'' as it appeared in the Interim Policy. Airport parties
argued that the coverage was ``needed'' if financing agreements
included a debt-service coverage requirement and if the airport was
seeking to recover a share of coverage reflecting the airfield's pro
rata share of outstanding debt. Carriers argued that no coverage charge
would be ``needed'' if the airport's net cash revenues from nonairfield
sources were large enough to satisfy the airport's coverage obligation.
Comments on the Supplemental Proposed Policy were due before the
Department addressed this issue in the final decision in the LAX II
proceeding. Order 95-12-33 (December 22, 1995).
The comments: In this proceeding, several airport proprietors, but
no airlines, filed comments on the issue. The Massachusetts Port
Authority (``Massport'') argues that debt-service coverage should be
permitted in the rate base in proportion to the allowable debt service
for the airfield, regardless of whether an agreement governing airfield
fees exists. Massport has adopted compensatory rates by resolution, not
by agreement. Massport, Los Angeles and the City of San Francisco argue
that the carrier position in LAX II--that coverage is not a cost and
therefore cannot be included in the rate base absent agreement--is
inconsistent with the terms of proposed paragraph 2.4.4 and with the
Department's explanatory statement. Massport argues that the Department
clearly signaled its intention that debt-service coverage could be
included in the rate base even though it is not a cost in the
traditional accounting sense.
Massport, Los Angeles and San Francisco also dispute the carrier
position that debt-service coverage is needed only if revenues from
other sources are insufficient to meet coverage requirements. These
commenters argue that this approach amounts to mandatory residual
treatment of debt-service coverage; therefore this approach is
inconsistent with the airport proprietor's right to adopt a
compensatory fee methodology. Massport argues that by using the term
``needed,'' the Department sought to tie the amount of debt-service
coverage allowed in the rate base to the terms of applicable bond
documents.
Massport further argues that compensatory airports should not be
compelled to give a refund or credit to carriers for debt-service
coverage, but should be permitted to use the coverage for any lawful
purpose. Massport argues that under the terms of its Trust Agreement,
Massport devotes the debt-service coverage charge to its Improvement
and Extension fund, which finances the costs of airfield improvements.
Los Angeles also argues that many airports that include debt-
service coverage in the rate base retain the coverage funds for
discretionary purposes.
Other commenters did not address this issue.
The Final Policy: The Department is modifying paragraph 2.4.4 so
that it allows airport proprietors to include amounts reasonably needed
to meet debt-service coverage requirements. We are not changing the
proposed policy on debt-related charges insofar as it allows airports
to include charges for debt-service expense.
We are modifying the provision on debt-service coverage charges to
address the ambiguity created by the provision of the Interim Policy
(which was not resolved in the Supplemental Proposed Policy) and to
clarify the Department's position on such charges. When the Department
considers charges for debt-service coverage, the Department will not
limit its inquiry to determining whether the charge is limited to the
airfield's pro rata share of the airport's
[[Page 32004]]
overall debt-service coverage requirement. The Department instead will
consider a number of factors.
Debt-service coverage is different from debt-service expense, an
airport capital cost. Debt-service expense refers to the payment of
interest and financing charges and the repayment of principal. Debt-
service coverage, in contrast, is a cash flow requirement, not an
expense.
Airport bonds typically require that the airport's net cash
receipts exceed its debt-service expense by 25 to 50 percent, at a
minimum. Many airports include charges for debt-service coverage in
their landing fee calculations. However, as shown by the record in LAX
II, their use of funds generated by debt-service coverage is almost
always subject to substantial restrictions. Typically the airport must
refund (or roll over) the funds obtained under the coverage charge if
they were not needed during the year for which they were paid, or the
airport proprietor must use the funds for capital projects benefiting
the airlines. See, LAX II, Order 95-12-33 at 45. Not all airports
impose such a charge. For example, the landing fees charged at LAX from
July 1993 through June 1995 included no debt-service coverage charge.
See Order 95-12-33 at 42.
Airlines have not objected to charges for debt-service expense, but
the airline complainants in LAX II objected to Los Angeles' charge for
debt-service coverage, as outlined above.
We are modifying the provision on debt-service coverage charges to
permit reasonable amounts needed to meet debt-service coverage
requirements, with due regard to the characteristic of a bond coverage
requirement as a minimum requirement that must be met or exceeded at
all times. In future airport fee cases involving a charge for debt-
service coverage, we will determine whether the charge is permissible
on the basis of the facts in the case. In considering the
reasonableness of such a charge, the Department may consider a number
of factors. For example, in LAX II, the Department found that Los
Angeles' debt-service coverage charge was unreasonable since the record
showed that the airfield's net cash revenues greatly exceeded the
airfield's share of the airport's debt-service coverage obligation.
Given that evidence, the Department did not have to address the
airlines' claim that the charge was unreasonable because the airport's
overall net cash revenues would satisfy the airport's coverage
obligation without the inclusion of an additional charge in the landing
fee rate base.
Another factor likely to be considered will be whether carriers
using the airport receive any benefit from a debt-service coverage
charge. For example, the airport may show that the inclusion of the
charge improves the airport's credit rating and therefore reduces the
airport's overall debt expense. The airport proprietor might show,
instead, that the restrictions on the airport's use of the funds may
ensure that the funds are used only for projects benefiting the
airlines. An airport proprietor's commitment to refund or roll over
unneeded funds in the year following payment also would be relevant to
determining the reasonableness of the charge.
We are unwilling in this proceeding to adopt more specific
standards for determining the reasonableness of a debt-service coverage
charge, in part because the comments do not give us an adequate basis
for resolving the issue. The Department will therefore resolve the
airports' ability to impose a debt-service coverage charge on a case by
case basis. The decision will be governed by whether the particular
charge challenged is reasonable.
11. Allowance For Reasonable Reserves, Definition of Reasonable
The Supplemental Proposed Policy proposed that the airport
proprietor may include in the rate base ``reasonable cash reserves'' to
protect against contingencies other than those listed in the policy.
Proposed para. 2.4.4. The Department did not propose to further define
reasonable reserves.
The comments: ATA/RAA do not object to reasonable reserves for
short term fluctuation in revenues or for other emergencies. They are
concerned that, without more detailed guidance, airport proprietors
will be able to establish reserves well in excess of actual needs. ATA/
RAA suggest that the policy allow reserves of no more than one month's
average revenue, unless the users agree to a higher reserve or the
airport proprietor shows that special circumstances justify one.
IATA opposes the allowance of a reserve as a separate cost item. It
urges the Department to limit fees to the airport's total costs plus
``a reasonable return on assets (before tax and interest charges) to
contribute toward necessary capital improvements,'' based on ICAO Doc.
9082/4, pp. 3-4.
Other commenters did not address this issue.
The Final Policy: The Department is adopting the provision of the
Supplemental Proposed Policy without modification.
The Department is not persuaded that a more specific definition for
reasonable reserves is needed or appropriate for national application.
The requirement that reserves be reasonable is intended to prevent
arbitrary requirements. The Department would expect the airport
proprietor to be able to justify its decision on reserve requirements
if a dispute arose.
However, defining a reasonable reserve requirement for any
particular airport depends largely on the financial and operating
circumstances of the airport at the time the airport proprietor
establishes the reserve. A uniform definition for reasonable reserves
would unduly limit both the airport proprietor's flexibility to tailor
its reserve requirements to meet those circumstances and the
Department's flexibility to consider those circumstances in reviewing a
fee.
12. Allocation of Shared Costs
The Supplemental Proposed Policy proposed that capital costs of
facilities used by aeronautical and nonaeronautical users could be
allocated to those aeronautical users who use the shared facility in a
proportion that reflects the aeronautical purpose and proportionate
aeronautical use. Proposed para. 2.4.5(b). Roadways would also be
subject to the HCA valuation requirement. Proposed Para. 2.5.1(b).
Airport Proprietors: ACI/AAAE request clarification that
notwithstanding the valuation requirement for public-use roadways, the
Department is not mandating a particular cost allocation formula for
determining the aeronautical portion of roadway costs.
The City of Chicago expresses concern that an allocation based
strictly on use could be difficult to implement for some airports and
could be burdensome. The City of Chicago urges the Department to modify
the policy to explicitly provide more flexibility in cost allocation or
to at least interpret the existing provisions of the policy as flexibly
as we did in the LAX I decision.
Airport users: Airport users did not address this issue.
Other commenters: One individual suggested that, to minimize the
risk that airports are improperly allocating costs to the airfield cost
center, the Department should establish criteria for defining cost
centers. This commenter suggests that the Final Policy require that any
facility that generates revenue be defined as a cost center. In
addition, the policy should require that if the facilities generate
substantial revenue by direct charges, the full costs should be
[[Page 32005]]
covered by those charges. Under this approach, roadway costs would be
assigned to a landside access cost center apart from the terminal.
Further, the costs in this cost center would be recovered entirely from
parking garages and lots, rental car companies and commercial
limousine, van and taxi operators.
The Final Policy: The Department is not modifying the provisions of
the Supplemental Proposed Policy in response to the comments. However,
consistent with the decision in LAX II, the Department is modifying the
provision to apply to allocation of costs of shared services as well as
shared facilities.
The Supplemental Proposed Policy did not propose allocation of
shared capital costs based strictly on use. Rather, it proposed
consideration of both purpose and proportionate use of the shared
facility. This provision of the Supplemental Proposed Policy is being
adopted as proposed. The Department determined in LAX II that the
possible difficulty of quantifying purpose is not a reason to allocate
shared costs based solely on use. LAX II, Order 95-12-33 at 24.
Accordingly, no change in the Final Policy is needed to accommodate
Chicago's concern.
In reviewing the reasonableness of an allocation, the Department
would consider, among other things, whether the allocation had a
rational basis and was supported by factual evidence in the record. In
addition, the Department would not preclude an airport proprietor from
using a reasonable method of allocation just because another method
might produce a more precise result. Id. at 33.
We will not adopt the suggestion of the commenter that airport
proprietors be required to adopt a separate landside access cost
center, which is not funded at all by charges to the aeronautical
users. The airport proprietor has discretion in defining cost centers
other than the airfield, so long as its cost allocations are
reasonable, transparent and not unjustly discriminatory.
Furthermore, the Department specifically determined, in LAX I, that
an airport proprietor may allocate a portion of access road costs to
the airfield. Order 95-6-36 at 31. As the Department found in LAX I,
carriers, other aeronautical businesses and their customers use (or
benefit from) terminal area access roadways. Id. Airport proprietors
may reasonably allocate a share of roadway costs to the carriers and
other aeronautical users. The commenter's proposal would not assure
that all passengers who use the roadways are charged for that use--
directly or through the charges they pay to commercial enterprises.
Many passengers are dropped off by private vehicles that pay no charge
for the using the roadways.
In addition, given the Department's reliance on local
decisionmaking, the Department is not prepared to dictate how shared
roadway costs are allocated to the carriers, so long as the basic
requirements of the policy are met. The share allocated to aeronautical
use must reflect the purpose and proportionate use of the facility, and
the allocation methodology must be reasonable, transparent and not
unjustly discriminatory.
Finally, the Supplemental Proposed Policy was silent on the
treatment of the costs of shared services. As a result of the
deliberations in LAX II, the Department has concluded that there is no
reason to treat these costs differently than the costs of shared
facilities. Therefore, the applicable provisions of the Final Policy
are being modified to apply to services and facilities.
13. Asset Valuation, Limiting HCA Valuation to Airfield and Eliminating
the Aeronautical HCA Cost Cap
The Interim Policy required that airport assets included in the
aeronautical rate base be valued at historic cost to the original owner
(``HCA value''), absent agreement to the contrary. Para. 2.4.1.
However, the Interim Policy further provided that, for facilities other
than airfield and all airport land employed in providing aeronautical
use, other reasonable valuation methods could be used, so long as total
aeronautical revenues do not exceed total aeronautical costs, based on
HCA accounting. Para. 2.4.1(a).
The Supplemental Proposed Policy proposed to limit the HCA
requirement to airfield assets and public use roadways, and to
eliminate the HCA cost cap for total aeronautical revenues. Proposed
para. 2.5.1. For other aeronautical assets, the Supplemental Proposed
Policy would permit the airport proprietor to use any reasonable
methodology to establish fees, so long as the methodology is applied on
a consistent basis to comparable facilities and is justified. Proposed
para. 2.6.1. However, the Department proposed that the progressive
accumulation of substantial amounts of surplus aeronautical revenue may
warrant an FAA inquiry into whether aeronautical fees are consistent
with the airport proprietor's obligations to make the airport available
on fair and reasonable terms. Proposed para. 4.2.1.
Airport proprietors: Airport proprietors support the proposed
modifications. Among other reasons, these commenters assert that the
change would eliminate concerns regarding valuation of tenant-built
facilities that revert to the airport proprietor. Further, this
proposed modification will address a number of additional concerns of
ACI/AAAE, including the following: inconsistency between HCA valuation
of nonairfield facilities, on the one hand, and industry practices and
local laws and regulations, on the other; potential windfalls for
airport tenants that sublease aeronautical facilities; higher landing
fees paid by signatory airlines at some residual airports; and
inconsistency of the HCA cost cap with the requirement that airports be
as self-sustaining as possible, as interpreted by the Office of
Inspector General (``OIG'').
Airport proprietors further assert that application of the HCA cap
to general aviation airports would be particularly burdensome, as those
airports as a class have limited nonaeronautical revenue streams.
Airport commenters dispute the carrier claims that terminal
facilities should be treated like the airfield because airport
proprietors possess market power. ACI/AAAE note that they accepted HCA
valuation for airfield facilities reluctantly because the policy would
not disrupt existing practices. Airport proprietors point out that
terminal facilities are typically leased on preferential or exclusive
use basis. They argue that the facilities are, therefore, more
analogous to hangars and cargo facilities than to public use airfields.
They further argue that airports compete with each other for
designation as international gateways and as airline hub locations and
for origin and destination (``O&D'') traffic. The airport proprietors
note that initiation of low-fare service at a given airport can draw
O&D passengers from other airports in the region.
ACI/AAAE assert that recent increases in airport charges to
carriers do not show airport market power and do not show that airport
proprietors lack incentives to manage airports efficiently. Factors
contributing to increases include the following: compliance with
federal mandates and noise mitigation projects; expansion necessitated
by increases in passenger activity and airline hubs; replacement of
passenger terminals constructed 30-45 years ago; and construction and
financing by airport proprietors of airport facilities that had been
financed previously by the airlines directly. As evidence that airports
face real-world pressures to reduce airline costs, one airport
proprietor points to its decision to refinance airport revenue bonds to
[[Page 32006]]
reduce debt-service expense and thereby reduce airline rates and
charges.
Another airport proprietor argues that elimination of the HCA cap
will facilitate using price to allocate scarce resources efficiently.
Finally, one airport proprietor suggests that, if the HCA valuation
requirement is limited to the airfield and public use roadways,
references in paragraphs 2.3, 2.4.1, 2.4.2, 2.4.4, 2.4.5, 2.5, 2.5.1,
2.5.3 and 2.7 should be changed to ``airfield/public use roadway rate
base.''
Carriers: Carriers argue that the Interim Policy's provisions
governing asset valuation are needed to protect against the
exploitation of locational monopoly power by airport proprietors in
pricing ``essential facilities.'' Essential facilities are not limited
to the airfield and include facilities for baggage, cargo and passenger
handling. ATA/RAA contend that airport proprietors exercise monopoly
power in pricing airport facilities in addition to the airfield,
because of the airports' locational advantages and the barriers to
entry of new competitive airports. In addition, ATA/RAA contend that
carriers' investments in airport facilities often preclude them from
relocating when an airport proprietor imposes excessive fees. ATA/RAA
point to dramatic increases in fees at Los Angeles, Orlando, El Paso
and Allentown as evidence of the existing monopoly power of airports.
Carriers argue that, without clear guidelines providing a
foundation for negotiations, the policy will not promote direct
resolution of disputes. In addition, it will be difficult for airport
users to justify the burden of analyzing the airport's cost and revenue
calculation to prepare a legal challenge to nonairfield fees.
The past absence of complaints over fees does not provide a basis
for relying on effective competition, according to ATA/RAA. They argue
that, in the past, negotiations were successful because there was a
balance of power between airport proprietors and airport users. Airport
proprietors needed airport user support for their financial bond
issues. Airport users needed airport proprietors' cooperation to
develop needed airport facilities. That balance has been disturbed at
many airports, which can successfully issue bonds without carrier
support. In addition, the claimed airport monopoly power was
constrained by a number of other factors, including: common use of HCA
valuation and residual agreements; and the expectations of airlines and
airports that fee disputes would be resolved in Federal court.
The carriers argue that the threat of investigation of sustained
accumulation of aeronautical surpluses will not curtail abuse of
monopoly power. Rather, the policy would encourage airports to
overallocate costs to aeronautical cost centers other than the airfield
so as to show break-even in accounting terms. This problem is
compounded by the lack of record-keeping requirements. ATA/RAA are
particularly concerned that airport proprietors will overallocate the
costs of municipal services provided to the airport. IATA argues that
the Department's decision to retain authority to investigate an
accumulation of aeronautical surpluses is an implicit admission that
reliance on negotiation and effective competition is doomed to fail.
The carriers also argue that the Interim Policy properly balances
the interests of airport users and airport proprietors. The carriers
assert that the overall cap on aeronautical revenues based on HCA costs
protects carriers from abuse of monopoly power. Within the overall cap,
the Interim Policy provides ample flexibility to airport proprietors to
price individual facilities.
ATA/RAA also argue that the concerns expressed by ACI/AAAE in their
earlier comments on the Interim Policy are misplaced. ATA/RAA argue
that, if the HCA requirement is inconsistent with a state or local law,
the state or local law is preempted. USAir asserts that airports may
prevent airport tenants from earning windfalls by exercising their
rights to approve subleases. USAir is also prepared to assume the risk,
as a signatory carrier, that, under a residual system, it would be
required to pay higher fees under the Interim Policy than non-
signatories.
ATA/RAA also assert that the Supplemental Proposed Policy will
permit airport proprietors to generate surplus revenues from
aeronautical activities. To the extent that the surpluses are used for
capital investment, current users would be required to pay for future
capital assets, in contravention of the policy and the position of the
U.S. government in the dispute with the United Kingdom over Heathrow
airport user fees. The carriers also argue that the prohibition on
diversion of airport revenue is not sufficient to prevent unjustified
accumulation of surplus airport revenues. ATA/RAA point to the findings
of a Congressional investigation that airport revenue diversion is
wide-spread and that airport proprietors increasingly view financially
successful airports as a potential source of funds to alleviate general
budgetary shortfalls.
IATA also argues that the Supplemental Proposed Policy would be
inconsistent with the ICAO policy that all airport charges are to be
set in relation to the costs of facilities and services provided,
citing ICAO Doc. 9082/4. As IATA points out, the ICAO guidelines permit
the airport proprietor to earn a reasonable return. IATA argues that
the approach of the Supplemental Proposed Policy to pricing of
nonairfield assets will permit airport owners to establish fees
according to arbitrary and unreasonable standards.
General Aviation: While the NATA does not recommend that the
Department establish accepted charging practices for facilities leased
by aviation businesses, the NATA disagrees with the Department's
assertion that disputes over charges for nonairfield assets focus on
unjust discrimination. For the NATA members negotiating leases, the
level of their fees, rather than unjust discrimination, is the area of
disagreement. Therefore, the NATA recommends that proposed paragraph
2.6 be expanded to outline areas for consideration in establishing
fees. The NATA acknowledges that each negotiation presents unique
circumstances. However, the NATA suggests that the Final Policy
identify as relevant the following considerations: physical variables
of the airport and leasehold; functional variables of the airport and
leasehold; and economic variables of the area served by the airport.
The AOPA asserts that the Interim Policy balanced the needs of
airport operators and users. It argues that the approach of the
Supplemental Proposed Policy could lead to unreasonable fees. The AOPA
is not persuaded that effective competition exists for nonairfield
aeronautical assets. Further, neither possible investigation of
accumulation of aeronautical surpluses, nor the limitations on use of
airport revenue adequately protect against excessive fees.
Other commenters: Two individual commenters object to limiting the
HCA requirement to the airfield. They argue that doing so will allow
airports to generate substantial surpluses.
The Final Policy: The Department is following the approach of the
Supplemental Proposed Policy on this issue. However, we are adding a
provision specifying that, if an airport proprietor bases nonairfield
fees on cost, the airport proprietor must follow the policy guidance on
allocation of shared costs (Paragraph 2.4.5). This addition will assure
that, when a cost-based methodology is employed, shared costs will be
treated consistently across all
[[Page 32007]]
cost centers. In addition, we are modifying proposed paragraph 3.1.1
governing allocation of costs among users and user groups to conform to
the Final Policy's approach to nonairfield fees.
The approach of the Final Policy is justified by differences
between airfield assets and public-use roadways, on the one hand, and
other aeronautical assets, including passenger terminals, on the other.
The airfield and the public-use roadways are common use facilities, and
their use is more or less fungible. Generally speaking no single user
derives more or less benefit from a particular use. To the extent that
this general principal does not hold true during peak times at
congested airports, the Final Policy allows for reasonable and not
unjustly discriminatory peak-pricing systems. Otherwise, a detailed,
cost-based definition of reasonableness is appropriate for such
fungible assets and would not disturb industry practices or prevent
airport proprietors from allocating resources efficiently.
In contrast, other facilities are generally leased on an exclusive
or preferential use basis. In addition, such facilities, including
terminals, are much less fungible. For example, carriers typically take
responsibility for outfitting their passenger terminal areas and can
reasonably be expected to view that responsibility as an opportunity
for promotion. The value of gates to carriers may depend in part on
their location in the terminal or the intensity of their use. Other
non-terminal facilities may be perceived by users to have different
values based on a variety of factors, including the following:
proximity to runways and taxiways; source of construction financing;
ownership of improvements at the end of lease terms; and expected use
of facilities, including rights to exclusive or preferential use. A
requirement that revenues from these facilities not exceed an amount
determined by a cost-based formula could prevent these differences from
being fully recognized in establishing fees. A policy that gives
preeminence to the free play of negotiation and exchange of benefits to
assure that fees for nonairfield facilities are reasonable would permit
these differences to be fully recognized and would continue current
industry practices. Accordingly, the latter approach is preferable.
The record contains numerous examples of nonairfield fees set on a
basis other than HCA valuation. For example, in the public meeting on
the Supplemental Proposed Policy held in Washington, DC, all of the
airport proprietors testified that they use methods other than HCA
valuation for at least some nonairfield facilities. Supplemental
Proposed Policy Regarding Airport Rates and Charges, Public Meeting
(October 17, 1995), (``October 17 Public Meeting'') Transcript pp. 31-
33, 36-37, 39, 79-80, 81. Further, in their comments on the Interim
Policy, ACI/AAAE reported that some airports establish fees for leased
property by competitive bid or solicitation, often by operation of
state law. Comments of ACI and AAAE in response to the Policy Regarding
Airport Rates and Charges, Docket No. 27782 (``ACI/AAAE May 4
Comments'') at 6 (May 4, 1995). Their comments also provided other
examples of nonairfield facilities that are priced on some other basis
than HCA valuation. Id. 12-13. The limited evidence to the contrary
offered by the carriers is insufficient to overcome that offered by the
airport proprietors. See, October 17 Public Meeting Tr., pp. 77-78.
Thus the record demonstrates that requiring HCA valuation for all
aeronautical facilities would substantially disrupt current practices
that have not been the subject of complaints.
The Interim Policy was intended to preserve that flexibility for
establishing rates for nonairfield facilities. Our experience under the
Interim Policy, however suggests that the Interim Policy had altered
the status quo. For example, in their comments on the Interim Policy,
ACI/AAAE reported instances in which airlines informed an airport
proprietor that the maximum rental payments it could require must be
based on historic costs. ACI/AAAE May 4 Comments at 24-25. In one case,
a carrier had agreed to a new hangar lease at rates exceeding HCA rates
but then refused to execute the agreement following publication of the
Interim Policy. An airport proprietor also testified to concerns that
HCA valuation would be used as the starting point for all negotiations
under the Interim Policy. Supplemental Proposed Policy Regarding
Airport Rates and Charges, Public Meeting (September 20 1995),
(``September 20 Public Meeting'') Docket No. 27782, Transcript at 23-
25.
The carriers' claims that airport proprietors exercise monopoly
power in pricing essential aeronautical facilities are not supported by
the Department's experience. Many U.S. carriers have benefited from
airports' competition with each other to be the location of
aeronautical facilities, including facilities for passenger and cargo
hubs. Moreover, as ATA/RAA themselves argue, in their objections to the
treatment of imputed interest, publicly-owned airports do not operate
under the same profit motive as private investors. Public airports are
operated, for the most part, as public facilities to serve the public
good by enhancing local access to the national air transportation
system. Airport proprietors generally seek to improve air services for
their communities. This objective would be frustrated by charging
exorbitant fees for aeronautical facilities. There may be isolated
exceptions to this general rule. However, the Department is not
prepared to require the vast majority of airports to change their
methods of doing business to address the extraordinary situation. In
the extraordinary situation, the Department would consider airline
complaints concerning significant disputes through an expedited
administrative procedure (14 CFR Part 302). Other cases would be
processed under the FAA's investigative and enforcement procedures (14
CFR Part 13).
The Supplemental Proposed Policy did not propose to permit every
method for establishing fees for nonairfield assets, but only any
reasonable method. Users are still free to demonstrate that in the
circumstances of a particular airport, a particular method is
unreasonable. For example, users may demonstrate that the method is not
justified in the circumstances or applied on a consistent basis.
As we noted in publishing the Supplemental Proposed Policy, our
decision to take a flexible approach to the pricing of nonairfield
facilities is based in part on the relative lack of disputes between
carriers and airport proprietors over the reasonableness of fees for
such facilities, even those deemed essential by the carriers. The
widespread acceptance of these industry practices indicates their
reasonableness and general fairness. By relying on industry practices
in formulating our policy, the Department is fulfilling the Supreme
Court's expectation that the Department would in large measure base its
standards for reasonable airport fees on the relevant facts and
circumstances of the industry. Kent County, 114 S.Ct. at 863, 864 n.
14. We are not persuaded by carriers' arguments that this experience is
unreliable.
First, while residual agreements have been common in the industry,
so were compensatory agreements. A 1984 Congressional Budget Office
study reported that 42 percent of large hub airports (10 out of 24) and
42 percent of medium hub airports employed a compensatory approach to
rate-setting. Financing U.S. Airports in the 1980s, Congressional
Budget Office (April 1984). The Kent County litigation stemmed in part
from the airport proprietor's decision to continue its
[[Page 32008]]
historic compensatory approach to landing fees.
Second, based on the comments and testimony in this docket, airport
proprietors commonly use methods other than HCA valuation to establish
fees for passenger terminal, cargo handling and other ``essential''
nonairfield facilities, as discussed above.
Third, the examples of airport bond financing cited by the carriers
do not show that airport proprietors are readily able to obtain debt-
financing for nonairfield facilities without carrier agreement. Denver
International Airport involved construction of an entire airport in
conjunction with the closure of Denver's then existing air carrier
airport. Moreover, Denver was unable to maintain investment grade
status for the bonds. The Grand Rapids experience involved bond
financing for a new runway. Under the Final Policy, runways must be
priced based on HCA valuation, absent agreement by the users.
Likewise, the examples of airports that have dramatically raised
fees cited by the carriers (Los Angeles, El Paso and Allentown) do not
support the claim that airport proprietors exercise market power in
establishing fees for nonairfield facilities. First, all three examples
involved landing fees, which remain subject to the HCA valuation
requirement and detailed guidance of the policy. Second, the conversion
from residual to compensatory methodology accounts for much of the
increase at two of the airports (Los Angeles and El Paso). ATA/RAA's
other example, Orlando, has not yet established new fees. ATA/RAA
relies on a projection of what Orlando might do when existing
agreements lapse. Moreover, it assumes that the airport will convert
from a residual to a compensatory methodology. October 17 Public
Meeting Transcript at 38. The selection of either methodology has been
deemed reasonable by Congress through enactment of section 47129(a)(2).
Finally, the Department is not convinced that the threat of
judicial review of fees for nonairfield facilities was a significant
factor in preventing excessive charges. Relatively few airline/airport
disputes over airport fees have been resolved by litigation. Of those
few, only one or two did not involve charges for use of the airfield.
In these circumstances, it is doubtful that the threat of litigation
would have proved a significant deterrent to abuse of monopoly power,
assuming that power existed.
We have also concluded that, on balance, the approach of the
Interim Policy could have additional undesirable results outlined by
ACI/AAAE in their joint comments. For example, if market-based rates
exceed HCA-based rates, the Interim Policy would have allowed airlines
through their subleasing to enjoy the additional revenue, but would
have effectively precluded airport proprietors from earning that
additional revenue. Thus, that additional revenue would have been
unavailable for investment in the national airport system. At a time
when Federal resources for airport infrastructure investment are
severely strained, we are loathe to restrict unduly the ability of
airport proprietors to generate funds for such investment.
The Department agrees that the threat of a Department investigation
of accumulation of surplus aeronautical revenue by itself may not be a
perfect check against unreasonably high fees for nonairfield
facilities. However, we are not relying solely, or even primarily, on
this threat. Rather, in our experience, the market generally functions
to prevent excessive charges, and airport proprietors have not
routinely imposed unreasonably high fees for nonairfield, aeronautical
facilities. Moreover, the limitations on the use of airport revenue,
including the actions mandated by section 112 of the Reauthorization
Act, diminish one possible incentive to generate excessive surplus
aeronautical revenue--use of the surplus to fund general governmental
activities. At this time, we are not prepared to impose rigid industry-
wide pricing criteria for nonairfield facilities to address speculative
concerns about a few airports. In explicitly reserving our right to
investigate, the Department is signaling its intention to act in those
rare situations where intervention would be appropriate. Further, we
are signaling our intent to consider the reasonableness of nonairfield
fees over the long term and not on the basis of a single year's
results. We are, of course, prepared to revisit this issue if
experience shows that our approach is not effective in preventing
contention, controversy, and unreasonable practices in the pricing of
nonairfield aeronautical facilities.
For these reasons, we expect that pricing of nonairfield
aeronautical facilities and services under the Final Policy will
produce results consistent with the policy guidance that aeronautical
charges should not produce unreasonable returns.
The Final Policy merely allows airport proprietors to continue
current pricing practices that have not resulted in excessive charges.
Our policy on this issue is consistent with the position of the
U.S. government in the dispute over landing fees at Heathrow. In that
case, the U.S. government did not argue that the British Airports
Authority and (later) BAA plc were not entitled to earn any surplus.
Rather, the objections stemmed from circumstances that are unlikely to
arise in the United States.
The BAA establishes fees each year following consultation with the
users, but without their agreement. The BAA imposed separate landing
fees, aircraft parking charges and passenger terminal charges. During
the period in dispute, BAA had unilaterally increased its airport user
charges at Heathrow to finance on a pay-as-you-go basis substantial new
capital improvements at London's Heathrow and Gatwick airports. The BAA
had also sought to earn a rate of return on the funds invested in the
new projects during construction. Nothing in the Final Policy precludes
the Department from determining that an airport proprietor that is
financing on a pay-as-you-go basis significant new capital development
through unilaterally imposed terminal rents is charging unreasonably
high terminal fees. Rather, we are relying on the market mechanism and
negotiating process to prevent such an occurrence in the first
instance. Nothing in our experience with the US airport industry
indicates that a U.S. airport would be able to duplicate the BAA's
approach to charging for terminal facilities.
Likewise, the results of our approach to nonairfield assets is
consistent with ICAO guidelines. First, the Final Policy does not
permit fees to be established for these facilities by any method.
Rather, the method must be reasonable. In addition, we rely on market
discipline to assure that these fees, which are largely negotiated, are
reasonable, and do not result in the generation of excessive profits
(or rate of return). As IATA acknowledges elsewhere in its comments,
the ICAO guidelines permit an airport proprietor to earn a reasonable
return on its investment.
We do not agree with carrier arguments that our approach to
enforcing the prohibition on airport revenue diversion will provide
incentives to airport proprietors to charge excessive fees for
nonairfield facilities and services to obtain additional funds for
general municipal purposes. Our approach to nonairfield assets will not
undermine enforcement of the requirements on the use of airport
revenues. The Department is committed to ensuring that airport revenues
are
[[Page 32009]]
used for airport purposes, as required by law under 49 USC
Sec. 47107(b). Moreover, in section 112 of the FAA Authorization Act of
1994, codified at 49 U.S.C Sec. 47107(l), Congress added new
requirements relating to both legal and illegal diversion of airport
revenue in response to carrier concerns, as well as new sanctions for
violations of the revenue diversion prohibition. On February 20, 1996,
the FAA issued a Proposed Policy and Procedures Concerning the Use of
Airport Revenues, Docket 28472 (61, FR 71344, February 26, 1996). In
addition, on March 18, 1996, the FAA published formats for the
preparation and filing of two reports by airport sponsors. One report
would list amounts paid and services provided by the airport to other
units of government, as well as explanations for claims of lawful
diversion. The other report would detail the total revenue and
expenditures at each commercial airport, including revenue surplus.
These reports were required by section 111 of the 1994 Reauthorization
Act.
In addition, the statute prohibiting revenue diversion excludes
from the prohibitions certain arrangements that were in place when the
statute was enacted. Many instances of airport revenue diversion
identified in the Congressional Report cited by the carriers involved
``legal diversion'' under this statutory exception.
To date, our experience does not indicate that the statutory
provisions and FAA's actions in implementing them are ineffective in
assuring that airport revenue is used for lawful purposes. At this
time, concerns about airport revenue diversion do not justify
curtailing airport proprietors' customary flexibility to establish fees
for non airfield facilities.
We are not adopting the NATA's suggestion that additional guidance
be given for lease negotiations. As the NATA acknowledges, each lease
negotiation will involve unique considerations and circumstances. A
factor that is important in one negotiation may have no relevance in a
second. Moreover, the Department is committed to applying the Final
Policy to general aviation fees in a flexible way. By delineating
criteria to be considered in negotiating leases, the policy would
decrease, not increase, flexibility.
Finally, the Department has reviewed the detailed guidance under
Principle 2 and modified the provisions as appropriate to reflect the
narrowing of the requirement for HCA-based fees. Not all of the
paragraphs suggested by the commenter have been modified. In some cases
the unrevised paragraphs implement statutory requirements in addition
to the reasonable fee requirement.
14. Application of HCA Requirement to Airfield and Public Use Roadways
The Supplemental Proposed Policy proposed that airfield facilities,
airfield land and public-use roadways, be valued according to their
historic cost to the original airport proprietor, except by agreement
with users. Proposed para. 2.5.1. In addition, in proposed Paragraph
2.5.1(a), the Department proposed methods for charging for land
dedicated to the airfield and public use roadways (``airfield/roadway
land''). This provision is discussed separately below. The Department
also proposed to allow airport proprietors to charge more than a pro
rata share of airfield costs to particular users to encourage efficient
use of the airfield. Proposed Para. 2.5.1(b). This provision is also
discussed separately below.
Airport Proprietors: ACI/AAAE point out that their earlier
acceptance of HCA valuation for airfields was not based on analogy to
other industries, but based on their conclusion that vast majority of
members would not be greatly disadvantaged. ACI/AAAE do not accept the
carrier position that airports possess market power with respect to any
airport facilities. ACI/AAAE urge the Department to implement the HCA
valuation requirement flexibly, to permit direct resolution of
disputes. ACI/AAAE also argue that, to be effective, peak-pricing
systems must incorporate landing fees that are high enough to balance
supply and demand, regardless of the airfield's historic cost. ACI/AAAE
request the Department to clarify that an airport using an otherwise
acceptable peak-hour pricing system may charge landing fees that are
not based on historic cost.
Massport asserts that in some cases, the HCA valuation requirement
for the airfield is inconsistent with sound economic theory and
efficient allocation of scarce airport resources. Massport suggests
that the policy should define HCA valuation for the airfield as
presumptively reasonable, but permit an airport proprietor to show that
other valuation methods are reasonable.
Los Angeles and San Francisco request that the HCA requirement for
the airfield and public-use roadways be eliminated. Los Angeles argues
that market-based rents are inherently reasonable, as the Department
itself recognized in proposing to narrow the HCA requirement. Market-
based rates also reflect economic reality better. Los Angeles further
argues that the reasonableness of market-based pricing has been
sustained in judicial decisions, including Blum v. Stenson, 465 U.S.
886, 892-95 (1984); Harmon City, Inc. v. United States, 733 F.2d 1381-
1382-84 (10th Cir. 1984); and Telesat Cablevision, Inc. v. City of
Riviera Beach, 773 F.Supp. 383, 407 (S.D. FL 1991).
Los Angeles and the City of San Francisco argue that market-based
pricing for the airfield is most consistent with the requirement that
airport proprietors establish a fee and rental structure that will make
the airport as self-sustaining as possible. Both airport proprietors
rely on the determination of the OIG that airports must receive no less
than fair market value for aeronautical land and improvements in order
to meet this mandate. Los Angeles also argues that its proposed method
of determining FMV, based on the land's next best use, avoids any risk
that the FMV determination will reflect the exercise of market power.
Los Angeles further argues that even though the Supplemental
Proposed Policy would allow the airport proprietor to amortize the
costs of acquired land, the HCA requirement would not allow the airport
proprietor to compensate itself for the opportunity costs of
maintaining its investment in the airfield rather than using the
property for other purposes. Los Angeles asserts that the courts now
recognize opportunity costs as a real cost, citing among other
decisions, Afram Export Corp. v. Metallurgiki Halyps, S.A., 772 F.2d
1358, 1369 (7th Cir. 1985); Duff v. Marathon Petroleum Co., 985 F.2d
339, 340 (7th Cir. 1993). Los Angeles also complains that the HCA
valuation requirement fails to compensate the airport proprietor for
the costs of inflation. At a minimum, the policy should be modified to
permit adjustments to HCA valuation to reflect general inflation.
Los Angeles also argues that the HCA valuation requirement results
in an unconstitutional taking of the airport proprietor's property,
because it precludes the airport proprietor from earning a fair return
on investment. Los Angeles argues that, under Duquesne Light Co. v.
Barasch, 488 U.S. 299, 307, 310 (1989), a rate set at a level that is
confiscatory is unconstitutional. A rate that does not allow for a rate
of return is per se confiscatory, according to Los Angeles, and
therefore, unconstitutional. Los Angeles also suggests that the fair
return must be based on the present value of the assets, citing Smyth
v. Ames, 169 U.S. 466, 547; Denver Union Stockyard Co. v. United
States, 304 U.S. 470, 473 (1938).
[[Page 32010]]
Los Angeles also argues (in its comments on the Interim Policy) that
the property of public as well as private entities is protected by the
takings clause of the Constitution, citing United States v. 50 Acres of
Land, 469 U.S. 24, 31 (1984).
Los Angeles further argues that requiring HCA valuation for
airfield land subsidizes air carriers needlessly by transferring the
value of the airfield assets to the carriers.
In addition, Los Angeles argues that the HCA valuation requirement
would make the charge for airfield land in the rate-base a function of
happenstance--whether land is owned or leased. If land is leased, the
airport proprietor would be able to charge its full rental payments--
reflecting fair market value--to the airfield users.
Finally, the Metropolitan Airport Commission (``MAC'') requests the
Department to modify the policy to permit any reasonable method for
valuing public-use roadways. MAC asserts that off-airport commercial
enterprises may attempt to use the provision to pay no more than the
roadways' historic costs, even though these enterprises are not
aeronautical users. MAC operates the Minneapolis-St. Paul International
Airport.
Carriers: Carriers support retaining the HCA valuation requirement
for the airfield and public-use roadways consistent with their
arguments against elimination of the HCA cost cap for total
aeronautical revenues.
General aviation: AOPA expressed general support for HCA valuation
of airfield assets.
Other commenters: The American Car Rental Association (``ACRA'')
considers the HCA valuation requirement to be inconsistent with fees
based on cost recovery. The HCA valuation requirement would, in ACRA's
view, perpetuate a subsidy to airfield assets from other parts of the
airport.
The Final Policy: The Department is adopting the provisions of the
Supplemental Proposed Policy without substantive change. After
reviewing all comments, the Department has determined that the HCA
valuation requirement for the airfield and public-use roadways should
be retained. The requirement reflects nearly universal industry
practice. See LAX I, Order 95-6-36 at 21. It is acceptable to the
overwhelming majority of airport commenters who addressed the issue and
has the unanimous support of aeronautical users. While we are willing
to allow airports to use other reasonable methods for establishing fees
for non-airfield facilities, the rationale for that decision does not
apply to fees for airfield assets, as outlined in the previous section.
Among other things, airfield fees have resulted in several major
controversies.
Moreover, HCA valuation is recognized as an acceptable method of
valuing assets when determining reasonableness, even if it is not the
only one. In this regard it is simpler than other methods, especially
market valuation techniques. HCA valuation can generally be determined
from accounting records. FMV methodologies would invite disputes over
appraisals for the value of airfield land. Unlike typical commercial
real estate, there is no generally acceptable methodology for
identifying and valuing comparable uses for land dedicated to an
airfield. Permitting FMV valuation for the airfield would turn landing
fee disputes into debates between real estate appraisal experts with
the Department in the role of referee. The Supreme Court has noted that
the difficulties of calculating FMV caused regulatory agencies to
abandon the use of FMV for valuing capital investments by public
utilities. Duquesne Light, supra, 488 U.S. at 308-309.
In addition, the HCA valuation requirement allows airport
proprietors to fully recover their out-of-pocket costs of providing
airfield facilities and services. The policy allows the airport
proprietor to fully recover all of its capital expenditures --through
depreciation and, for land, through amortization or imputed interest
charges. For debt-financed expenditures, the airport proprietor may
fully charge airfield users with the costs of paying principal and
interest. Other provisions of the policy permit recovery of opportunity
costs, and the costs of inflation, to the extent that an airport
proprietor is entitled to such recovery, as discussed below. Thus, the
HCA valuation requirement for the airfield is not inconsistent with the
statutory requirement on self-sustainability. For these same reasons,
the HCA requirement is consistent with the principle of cost recovery
urged by ACRA and does not result in a subsidy to airfield users.
The Department notes that the Inspector General (in numerous audits
of the FAA's monitoring of airport revenue) has recommended that
aeronautical leases must be set at fair market value to comply with the
self-sustainability requirement. This recommendation is not, as Los
Angeles asserts, a basis for eliminating the HCA requirement for the
airfield. The Secretary of Transportation, not the Inspector General,
is responsible for establishing policy and interpreting the
requirements of the AAIA. In promulgating this policy, the Secretary of
Transportation has determined that the requirement of self-
sustainability does not mandate FMV-based valuation of airfield assets
and of other aeronautical assets. The pricing of these assets is also
subject to the standard of reasonableness.
The standard of reasonableness and the standard of self-
sustainability are not identical in application. The requirement of a
fee and rental structure that will make the airport as self-sustaining
as possible does not apply to the setting of a particular fee. Rather,
the requirement applies to managing the airport's revenues and
establishing a schedule of fees that generates sufficient earnings to
meet current expenditures, to offset future deficits, and avoid the
necessity of reliance on taxation. See, e.g., Clifton v. Passaic Valley
Water Commission, 557 A.2d 299 (N.J. 1989).
Even if we interpreted the self-sustainability requirement to apply
to individual fees, that requirement does not override the requirement
of reasonableness. A fee set to maximize revenue (as the OIG assumes
FMV-based fees do) may be consistent with the requirement of self-
sustainability. However, if the fees resulted in surpluses, those fees
might be unreasonable. Congress has declared as a matter of policy that
airport proprietors should not seek to create revenue surpluses that
exceed the amounts to be used for system purposes and other lawful
purposes. 49 USC Sec. 47101(13).
The Department has carefully considered the other objections to the
HCA valuation requirement, particularly those expressed by Los Angeles.
However, Los Angeles has failed to show that the Department's approach
is wrong. While the FMV technique has been sustained in judicial
decisions as meeting the standard of reasonableness, Los Angeles has
cited no authority establishing that the FMV technique is the only
reasonable method for determining rates. Indeed, as Los Angeles
acknowledges, the Supreme Court in Federal Power Commission v. Hope
Natural Gas Co., 320 U.S. 591, 605 (1944), held that HCA valuation is
also a valid basis for determining reasonableness. In that case, the
Court abandoned its earlier preference for present valuation of assets
expressed in the Smyth v. Ames and Denver Union Stock Yard cases cited
by Los Angeles. The courts have recognized that regulatory agencies
normally use historic costs for rate cases. Duquesne Light, supra, 488
U.S. at 309-310; Jersey Central Power & Light Co. v. FERC, 810
[[Page 32011]]
F.2d 1168, 1175 (D.C. Cir. 1987) (en banc).
The Department likewise is not persuaded that FMV-based landing
fees are required to compensate airport proprietors for the opportunity
costs of airfield investments. Los Angeles' claim for opportunity costs
assumes that airport proprietors are free to disinvest in the airfield
and put their capital to other uses. Most airport proprietors subject
to this policy, including Los Angeles, are not. These airport
proprietors have accepted Federal financial assistance or free Federal
land for airport development. Los Angeles has accepted both. In
exchange for this Federal assistance, they have committed to continue
to operate their airports as airports. Los Angeles' compensation for
devoting the LAX airfield for use as an airfield was the Federal
financial assistance and donated Federal land.
In any event, to the extent that the airport proprietor is entitled
to recover any opportunity costs in the airfield rate base, these costs
may be recovered through the imputed interest charge under the Final
Policy. The imputed interest charge is intended to compensate the
airport proprietor for the use of internally generated funds invested
in the airfield and not elsewhere on the airport.
Similarly, an airport proprietor may look to the imputed interest
allowance to be compensated for inflation. The Final Policy permits an
airport proprietor to charge imputed interest at a reasonable rate. The
airport proprietor's adoption of an appropriate and reasonable market-
based rate should compensate the airport for inflation. Investors in
capital markets expect to be compensated for inflation, as well as the
opportunity cost of investment. Therefore, market-based imputed
interest rates ordinarily reflect investors' expectations on the future
rate of inflation.
The HCA valuation requirement will not violate the Constitutional
rights of airport proprietors by denying their right to earn a return
on their investment or by taking their property without just
compensation.
The requirement does not deny airports--whether privately or
publicly-owned--their Constitutional right to a rate of return on their
investment. The Supreme Court, after all, has held that a regulatory
agency's use of HCA valuation in rate-making cases does not violate the
Constitutional principle that regulated firms must be allowed the
opportunity to earn a return on their investment. See, Duquesne Light,
supra, 488 U.S. at 308-310.
In addition, paragraph 2.4 of the Final Policy explicitly allows
private owners of airports to earn a rate of return. Assuming that
state and local government agencies operating airports were entitled to
earn a rate of return, the Final Policy does not deny them that right.
The Final Policy allows an airport proprietor to charge imputed
interest on its investment in the airfield, except to the extent those
investments were made with funds derived from fees paid for the use of
the airfield. This imputed interest represents compensation for the
airport proprietor's capital invested in the airport, as would a return
on investment.
The HCA valuation requirement thus does not violate the takings
clause of the Constitution. The Supreme Court considers three factors
in determining whether government action constitutes a taking: the
action's character, its economic impact, and the extent to which the
action interferes with investment-backed expectations. See Connolly v.
Pension Benefit Guaranty Corp., 475 U.S. 211, 224-225(1986); Concrete
Pipe & Products v. Construction Laborers Pension Trust, 508 U.S. 602;
113 S.Ct. 2264, 2291 (1993). The Final Policy's limits on airfield fees
cannot constitute a taking under these standards.
First, the HCA valuation requirement causes no physical invasion or
permanent appropriation of an airport's property. Instead, as is
typical of many regulatory programs, the HCA valuation requirement
adjusts the benefits and burdens of economic life in order to promote
the common good. That type of regulation is not normally deemed a
taking of property.
Second, the economic impact on airports is not severe. As admitted
by Los Angeles' expert witness in LAX I, every airport in the United
States except LAX has valued airfield land at historic cost in setting
fees. Order 95-6-36 at 21. Even LAX used HCA valuation before 1993,
when it implemented the FMV-based fees found unreasonable, in part, by
the Department in LAX I. Moreover, the HCA valuation requirement
enables airports to recover the actual costs of their investment in
airfield facilities, and airports may also obtain imputed interest on
their investment, unless the invested funds were derived from airfield
fees.
Third, requiring HCA valuation cannot interfere with any airport's
investment expectations, as demonstrated by the Court's analysis in
Connolly, 475 U.S. 226-227. The HCA requirement merely ratifies the
airports' existing practices for pricing airfield assets. In addition,
as both ATA/RAA and ACI/AAAE point out, state and local governments
invest in airports in order to further the well-being and general
welfare of their citizens, not in order to make a profit. Furthermore,
federal statutes have limited airport aeronautical fees for many years
and imposed other restrictions on the use of airport funds and property
by airport owners.
Los Angeles' concern about anomalous treatment between leased and
owned airfield land does not justify abandoning the HCA valuation
requirement for the airfield. First, the situation in which an airport
proprietor leases an airfield from an independent entity, rather than
owns it, is extremely rare. The Department is aware of only two airport
proprietors that lease their airfields--the Port Authority of New York
and New Jersey and the Metropolitan Washington Airports Authority. In
both cases the airport proprietor is leasing from other governmental
entities. Second, even as between two airport proprietors that own
their airfields, the Final Policy may well require one airport to
charge lower fees than the other, because the former has lower costs.
Two airports could have different costs for a number of reasons,
including the following: differences in land costs at the time of
acquisition; differences in the acreage of the respective airfields;
differences in the interest rates payable on bonds used to finance the
airfield;, and even differences in the salary and benefit structure of
the two airport proprietors. Moreover, even with airfield assets valued
at FMV, airfield rates could be determined by a factor that could be
deemed ``happenstance''--the market conditions at the time each
airport's fees are established. However, the Department would consider
each airport proprietor's costs in determining the reasonableness of
its airfield fees because each airport's costs vary. This variation is
not a reason to ignore those costs, or to avoid using HCA valuation.
The Department will not adopt the suggestion that the HCA valuation
requirement be adopted as a rebutable presumption. The practice of
using HCA valuation for the airfield is wide-spread and long-standing.
Therefore, the Department does not see a need to allow airport
proprietors to argue routinely that a different valuation methodology
is reasonable. Such arguments could greatly add to the burden of
processing complaints under section 47129. However, the Department, on
a case-by-case basis, has allowed airport proprietors to argue that the
HCA valuation requirement should not be
[[Page 32012]]
applied to them because of unusual circumstances. See, e.g., LAX I,
Order 95-6-33 at 15-17. We would continue to do so.
In addition, the Department is retaining the HCA valuation
requirement for the public-use roadways. Public-use roadways are more
like the airfield than like terminals. Roadways are common use
facilities, like the airfield. An aeronautical user cannot derive
commercial or competitive benefit vis-a-vis competitors through the use
of the roadways, and aeronautical users do not separately bargain for
the use of the roadways.
MAC acknowledges that the provisions of the Final Policy governing
reasonable fees do not apply to fees paid by nonaeronautical users.
Therefore, nonaeronautical users may not rely on the Final Policy to
claim a right to roadway access charges based on HCA valuation.
Airport proprietor concerns about the relationship between the HCA
valuation requirement and peak pricing are addressed in the disposition
of comments on peak pricing.
15. Airfield Revenue Cap Based on HCA Valuation
The Supplemental Proposed Policy proposed that airfield revenues
may not exceed airfield costs (proposed para. 2.2) and included
detailed guidance on how airfield costs may be determined. Among other
things, airfield assets must be valued based on their historic cost to
the original airport proprietor. Proposed para. 2.5.1. Together, these
provisions would create a cap on total airfield revenue based on HCA
valuation of airfield assets.
The comments: Los Angeles and San Francisco oppose the cap on
airfield revenues based on HCA costs. Both airport proprietors assert
that the cap provision violates section 47129(a)(3), which directs that
the Secretary ``shall not set the level of the fee.'' Los Angeles
argues that the cap deprives the airport proprietor of substantial
latitude to set fees. Los Angeles further argues that the cap is
inconsistent with the airport proprietor's right to use fair market
values for airfield land. In addition, the cap would serve no purpose
but to encourage airport proprietors to tinker with fees to keep them
in sync with costs. San Francisco also argues that the cap amounts to a
subsidy to airfield users.
Carriers and general aviation commenters generally support the HCA
cap for the airfield.
The Final Policy: The Department is adopting the provisions of the
Supplemental Proposed Policy without modification.
The contention that the HCA cap requirement illegally ``sets'' the
fee for airfield use within the meaning of section 47129(a)(3) is
wrong. The Final Policy provides detailed guidance on the total costs
that may be recovered through airfield fees, but it does not establish
a single, comprehensive formula for determining the amount of total
airfield revenues. For example, the policy does not establish a single
methodology to allocate common costs between the airfield and other
cost centers, or to allocate indirect costs. Likewise, the policy does
not establish a single permissible time-frame over which to depreciate
and amortize airfield assets or a single permissible rate for the
imputed interest charge. Each of these decisions is left to the
discretion of the airport proprietor and will affect the total amount
of revenue that the airfield may generate.
Moreover, the Final Policy does not establish a mandatory formula
for charging individual airfield users. Rather, the airport proprietor
also has some latitude in setting individual fees to recover total
airfield revenue. The airport proprietor has some discretion to
allocate costs among airfield users and to establish the basis of the
charge. Airport proprietors can and do establish weight-based charges,
operations-based charges, or charges based on a combination. Each of
these decisions will affect the level of fee that an individual user
pays.
In these circumstances, the HCA revenue cap cannot be said to
``set'' the level of an airfield fee. Furthermore, Congress has
directed the Department to develop reasonableness guidelines. Since the
Department has determined that airfield fees must be based on costs to
assure that fees are reasonable, the required guidelines must set forth
cost standards for those fees.
The Department has concluded that airport proprietors do not have a
right to value airfield land at fair market value. Therefore, the HCA
revenue cap cannot violate that purported right. Assuming, for the sake
of argument, that an airport proprietor has a right to be compensated
for the opportunity costs of its investment in the airfield, the Final
Policy permits an imputed interest charge to be included in the rate-
base. Moreover, as discussed above, the HCA cap does not provide a
subsidy to airfield users, because it permits the airport proprietor to
fully recover the costs of providing airfield services and facilities.
The airfield cost cap merely implements the Department's approach
to pricing the airfield. As noted previously, the fundamental
requirement of reasonableness for airfield fees is that the fees
reflect the costs of providing services and facilities for users. The
Department has chosen to impose a specific requirement to achieve that
result and provide detailed guidance on acceptable methods for
determining costs. The HCA cap follows logically from this approach.
The HCA cap on airfield revenue does not require a constant
tinkering with fees to assure that fees never exceed costs in any
charging period. The Department expects airport proprietors to set fees
prospectively based on their reasonable projections of traffic and of
costs determined in accordance with the policy. The Department also
expects that airport proprietors will periodically review their fees
and adjust them, on a prospective basis, based on projected changes in
costs and traffic. This expectation is based on the standard of
reasonableness; it is reflected in a separate provision of the Final
Policy (paragraph 2.3), which is independent of the HCA cost cap.
Moreover, Los Angeles has chosen to set fees on an interim basis and to
make periodic adjustments based on actual results. This approach
renders its concerns about tinkering moot.
16. Amortization of HCA Value of Airfield Land
The Supplemental Proposed Policy included provisions describing how
the airport proprietor might recover the cost of airfield land through
airfield fees. The Department proposed that, if land was acquired with
debt financing, the airport proprietor may include a charge for all
related debt-service costs, including principal, interest and debt
service coverage. For land acquired with internally generated airport
funds or donated by the sponsor, the Supplemental Proposed Policy
proposed that the airport proprietor could amortize the land. The
Department further proposed that upon completion of the amortization or
retirement of the debt, the land may no longer be included in the rate
base. Proposed para. 2.5.1(a). The Department did not propose to allow
any other treatment.
Airport proprietors: Two individual airport proprietors
specifically endorse the approach of the Supplemental Proposed Policy
on this issue. Other airport proprietors did not comment. In addition,
one airport proprietor argues that the amortization provisions should
apply to facilities as well as land.
Carriers: Carriers object to the amortization of the cost of land
acquired
[[Page 32013]]
by means other than bond financing, because land is not a wasting
asset. Therefore, amortization of land is not permitted by accounting
or tax rules, and there is no reasonable basis for determining an
amortization schedule for land. The carriers argue that if the
Department permits amortization of land, the Department should set
forth clear guidelines for the period of amortization. ATA/RAA argue
that this period should be considerably longer than 39 years, which is
the minimum depreciation period for commercial buildings under the
Internal Revenue Code.
General aviation: Other aeronautical users did not comment on this
issue.
Other commenters: One individual commenter requests the Department
to limit the meaning of the term amortization to recovery of
expenditures for land. This commenter points out that some airport
proprietors define amortization as recovering the costs of land plus
imputed interest.
The Final Policy: The Final Policy adopts the approach of the
Supplemental Proposed Policy on recovering the cost of debt-financed
land without modification. The Final Policy is being modified to permit
an airport proprietor to choose one of two options for recovering the
airport sponsor's cost of other land used for the airfield and public-
use roadways. First, the airport proprietor may impose a reasonable
amortization charge based on the HCA valuation of the land, and remove
the land from the rate base upon completion of the amortization.
Second, the airport proprietor may retain the original HCA value of the
land in the rate-base indefinitely and charge imputed interest, to the
extent permitted by this policy. To avoid overcompensation for this
land, the airport proprietor may not alternate between methodologies.
Amortization is being permitted, in part, because it is used by some
airport proprietors and appears to be a reasonable alternative, as
discussed below.
The ATA/RAA position on land that was not acquired with debt
financing is unreasonable, because ATA/RAA would not permit the airport
proprietor to charge either amortization or imputed interest on amounts
invested in such land. Thus, ATA/RAA would deny any form of
compensation to airport proprietors for their investment in airfield/
roadway land.
However, as the carriers argue, land is not a wasting asset.
Utility regulators do not generally permit a regulated entity to
amortize the cost of land, but permit the regulated industry to include
the value of land in the investment base on which it earns a rate of
return.
For this reason, the Department has concluded that the Policy
should not mandate amortization as the sole means of cost recovery.
However, the Department is not persuaded that amortization should be
precluded.
While objecting to the practice, ATA/RAA did not argue that the
practice is uncommon. Amortization is used at some airports in the
United States and has not generated significant controversy at
individual airports.
Further, over the long run, it is not clear that the two approaches
would produce substantially different results. During the amortization
period, amortization would produce higher annual charges. However,
eventually, the land would be removed from the rate base and charges
would be reduced. In contrast, if the full HCA value of land is
retained in the rate base, airfield fees would include an imputed
interest charge indefinitely. Over the long run, the imputed interest
charges imposed indefinitely may balance out the higher charges imposed
for a fixed period under amortization.
In addition, while the Final Policy may contain some provisions
that favor debt-financing over internal financing, the Department seeks
to avoid providing unnecessary incentives for debt-financing. The
Department is concerned that prohibiting the amortization of airfield
land that is not financed with debt could bias some airport proprietors
toward using debt-financing for land acquisition.
Finally, the Final Policy precludes charging imputed interest on
funds generated by airfield fees that are invested in the airfield. If
funds attributable to airfield fees were invested in airfield land and
the airport proprietor could not amortize the value of that investment,
the airport proprietor would have no means of being compensated for its
investment in the land.
Based on these considerations, the Final Policy permits either
methodology. The airport proprietor may include a reasonable
amortization charge, provided that the land is removed from the rate
base upon completion of the amortization period. Alternatively, the
airport proprietor may retain the HCA value of the land in the rate
base and impose a reasonable imputed interest charge, to the extent
permitted by the Final Policy. The Final Policy also prohibits an
airport proprietor from alternating between methodologies, to obtain
undue compensation.
The Final Policy requires that when an airport proprietor elects to
amortize its investment the charge must be reasonable. One factor in
determining reasonableness is the amortization period. The Final Policy
does not specify a particular period because what is reasonable will
depend on the individual circumstances of a case. In reviewing the
reasonableness of an amortization period, the Department will consider,
among other things, whether the airport proprietor has selected a
period that gives appropriate recognition to land's character as a non-
wasting asset.
The Department will neither permit, nor prohibit, in this policy,
the inclusion of an imputed interest element in the amortization
charge. The Department would consider an airport proprietor's decision
to include an imputed interest element as part of its review of the
reasonableness of the amortization charge.
The Department is not adopting the suggestion to expand the
provision on amortization to capital assets other than land. Other
capital assets are subject to depreciation under generally accepted
accounting principles (``GAAP''), and no specific provision in the
Final Policy is required to permit depreciation charges. The Final
Policy addresses land specifically because land is treated differently
than other capital assets under GAAP.
17. Costs of Airport Systems
The Supplemental Proposed Policy proposed that the rate base of one
airport could include the costs of a second airport currently in use
only if the airport proprietor owns both airports; the second airport
is currently in use; and the costs of the second airport to be included
in the rate base are reasonably related to the benefits that the second
airport provides to the aeronautical users of the first airport.
Proposed Para. 2.5.4. The Department also proposed that the latter
element would be presumed satisfied if the second airport has been
designated as a reliever airport for the first airport by the FAA.
Proposed para. 2.5.4(a).
Airport proprietors: The PANYNJ objects to the common ownership
requirement. The PANYNJ argues that the owner of a commercial service
airport should be able to contribute to the costs of an airport that
serves a critical reliever function, even if the reliever is under
separate ownership. The PANYNJ would make benefits the sole criterion.
The State of Alaska argues that by limiting the multiple airport
system rate base to airports that have a direct traffic
[[Page 32014]]
relationship, the approach of the supplemental notice is more
restrictive than the airport system approach provided in the FAA's
grant assurances, and is excessively restrictive for the operator of a
large system, like Alaska. The State operates 253 airports and seaplane
bases.
Carriers: IATA opposes the approach of the Supplemental Proposed
Policy. IATA argues that pricing must be airport specific to promote
transparency and that carriers should not be required to pay for
airport facilities that they do not or could not use.
General aviation: General aviation users did not comment on this
issue.
Other commenters: One commenter--a law firm involved in bond
financing--argues that the Department's approach does not give adequate
consideration to the obligation of owners of airport systems to operate
their systems in a financially self-sufficient way, as reflected in 49
USC Sec. 47107(a)(13). This commenter stated that some airport
proprietors may operate systems that are financially linked, but that
are operationally distinct.
The Final Policy: The Department is adopting the provision of the
Supplemental Proposed Policy without substantive modification. However,
we are making editorial revisions to clarify that the provisions apply
to systems of more than two airports. In addition, the Department will
permit an airport proprietor to show that its existing practice of
subsidizing an airport from another airport's airfield fees is
reasonable, even if all of the criteria required by the Final Policy
are not met. The Department does not wish to disrupt existing practices
that have not generated controversy.
The approach of the Final Policy is based on the requirement of
reasonableness. Generally speaking, the standard of reasonableness
permits an airport proprietor to charge only for the facilities that it
provides that are used by the rate-payer or that benefit the rate-
payer. If an airport proprietor does not own the other airport, it
cannot be providing those facilities. If the other airport is not
currently in use, airfield users cannot be using the other airport or
benefiting from it. For these reasons, the common ownership and
currently-in-use requirements are retained. The requirement of benefit
will be retained as well. It can be reasonable to charge a rate-payer
for the costs of a facility from which it benefits, even if the rate
payer does not directly use that facility.
This principle may be especially true in the case of a commercial
airport/reliever airport system. The reliever airport's function is to
draw general aviation traffic away from the commercial service airport.
If the airport proprietor had to charge the full cost of the reliever
airport to general aviation users, the increased price might cause
those users to elect the commercial service airport--increasing
congestion and the carriers' costs of operating there.
However, the requirement of benefit does not mean that a direct
traffic relationship is required in all cases. An airport's status as a
designated reliever creates a presumption of benefit. However, an
airport proprietor is free to show a benefit exists even when the
subsidized airport is not a designated reliever.
The State of Alaska's argument regarding the treatment of airport
systems appears to refer to the grant assurance on the use of airport
revenue. The assurance permits airport revenue from any source to be
used for any airport in a local airport system. However, charges to
aeronautical users are subject to a separate and more stringent
standard of reasonableness. Similarly, the comment about airport
financial systems overlooks the reasonableness requirement. Financial
self-sufficiency is also a Federal grant obligation. However, the Final
Policy is clear that this obligation does not justify charging the
users of the airfield more than the costs of operating the airfield to
cover the losses incurred elsewhere at an airport. It follows that this
standard does not independently justify charging the users of the
airfield more than its costs to cover losses incurred at a separate
airport. Moreover, section 47107(a)(13) in fact refers to charges that
will make the airport, not the airport system, self sufficient.
In response to the State of Alaska's concerns about its approach to
financing its airport system, the Department is modifying the Final
Policy to provide for consideration, on a case-by-case basis, of the
reasonableness of an existing practice that does not satisfy all three
criteria listed in the Final Policy. This modification also furthers
another Department goal: minimizing disruption of existing, non-
controversial practices.
In addition, the policy on this issue does not preclude an airport
proprietor from supporting another airport when the conditions
specified in the policy are not met. It only precludes adding the cost
of that support to the airfield rate base. Even this limitation can be
waived by agreement with airfield users. Thus, the airport proprietor
has the opportunity to persuade airfield users that the benefits of the
second airport justify including some of its costs in the landing fee.
The Department's approach to airport systems is not inconsistent
with our policy favoring transparency. An airport proprietor seeking to
charge the users of one airport for the costs of another must justify
the charge. The Department expects that as part of that justification,
the costs of the other airport will be separately identified and the
basis for the cost allocation explained.
18. Charging For Closed Airports
The Supplemental Proposed Policy proposed that, if an airport
proprietor closes an airport as part of an approved plan for the
construction and opening of a new airport, reasonable costs of
disposition of the closed airport could be included in the rate base of
the new airport, to the extent that the costs of disposition exceed the
proceeds. Proposed para. 2.5.4(b).
Airport proprietors: The City of Chicago requests the Department to
clarify that, if an airport is closed and its costs could be included
in the rate-base of another airport, then the environmental remediation
costs of the closed airport can be included in the rate-base. The City
and County of Denver supports the approach of the Supplemental Proposed
Policy, because that approach recognizes that an airport proprietor
cannot dispose of an airport overnight.
The PANYNJ suggests that the policy should not be limited to
airports closed as part of a plan to open a new airport. Rather, the
charges also should be permitted if the FAA decides that continued
operations at the airport being closed interfere with operations at an
existing airport.
Carriers: ATA/RAA urge the Department to delete proposed paragraph
2.5.4(b) from the final policy. ATA/RAA argue that the provision is
inconsistent with the fundamental principle that charges be just and
reasonable and the requirement in proposed paragraph 2.5 that costs be
limited to the capital and operating costs directly and indirectly
associated with facilities currently in use. ATA/RAA also argue that by
permitting airports to fund facilities not in use (the old airport),
the provision is inconsistent with the principle underlying the
prohibition of prefunding facilities not yet built. ATA/RAA also argue
that the Supplemental Proposed Policy would provide a disincentive to
airport proprietors to dispose of airports swiftly and efficiently.
General aviation: General aviation commenters did not address this
issue.
Other commenters: Other commenters did not address this issue.
[[Page 32015]]
The Final Policy: The Department is adopting the provision of the
Supplemental Proposed Policy with one modification. The Final Policy
would permit an airport proprietor to add to the rate base of the new
airport the reasonable costs of maintenance of the old airport while
disposition is pending, so long as proceeds of disposition are applied
first to credit or refund fees previously paid. This provision would
not, however, apply if the terms of the Department's approved plan or
user agreement provide otherwise.
The Department has determined that where an airport closure is part
of an approved plan for a new airport, reasonable disposition costs, in
excess of proceeds, may be included in the rate base of the new
airport.
While ATA/RAA argue that the Department's approach requires airport
users to pay for the costs of a facility they do not use, the
Department considers its approach to be analogous to a situation in
which structures must be acquired and demolished to make way for
construction of new airfield improvements at an operating airport. The
costs of acquiring those structures and demolishing them could be
included in the airfield rate base, once the new facilities are in use,
even though the demolished structures are never used by the carriers.
Where the FAA has determined that an existing airport must be closed in
connection with the opening of a new airport, the FAA has determined
that the new airport, and hence its users, will benefit from that
closure. Because the new airport users will benefit, it is reasonable
to include in the rate base reasonable disposition costs, to the extent
that they exceed the proceeds from disposition.
The requirement of reasonableness is intended to encourage swift
and efficient disposition. While not defining reasonableness in detail,
the Department states that it would not ordinarily consider
redevelopment costs to be reasonable. The Department would also
consider the diligence with which the airport proprietor pursues
disposal.
After reviewing the comments, the Department has determined that
additional clarification is appropriate. The Department recognizes that
in some circumstances disposition expenses may be incurred before an
airport's disposition. A new provision is added to the Final Policy
permitting an airport proprietor to charge reasonable maintenance costs
to airfield users before disposition, only if those costs are credited
or refunded to the users upon receipt of the proceeds from a whole or
partial disposition. In reviewing the reasonableness of a charge in
this circumstance, the Department would also consider the
reasonableness of the airport proprietor's disposal efforts. The
Department would ordinarily consider it unreasonable to continue
charging for maintenance of the closed airport beyond the time the
airport proprietor could have reasonably disposed of that airport. The
Department's approach assures that the airport proprietor is not
burdened with the costs of maintaining the old airport until the
completion of a long disposition process, while also assuring that the
users of the new airport are not burdened with the costs of
disposition, when disposition proceeds ultimately exceed the airport
proprietor's disposition costs.
The Department will not adopt the suggestion that environmental
remediation costs of disposed airports be singled out for special
treatment. The Department confirms that environmental remediation may
qualify as a disposition cost, as discussed above under Issue 9,
``Allowance For Environmental Costs.'' However, the commenter has not
offered any explanation for treating environmental remediation
differently than any other disposition cost.
The PANYNJ suggests that the policy should permit the disposition
costs of a closed airport to be added to the rate-base of an existing
airport when the FAA determines that the closure is required to
accommodate the operations of the existing airport. The Department is
not adopting this suggestion. The PANYNJ's proposed modification would
be a solution in search of a problem. The PANYNJ has not offered any
examples of this problem arising in the past, and the Department is
unaware of any instance in which operations at existing airports have
necessitated the closing of nearby airports. Should the situation arise
in the future, the Department will address the issue in the context of
that specific situation.
19. Charges to Non-Signatory Carriers
The Supplemental Proposed Policy proposed that the prohibition on
unjust discrimination would not prevent an airport proprietor from
establishing reasonable classifications of carriers, such as signatory
and non-signatory carriers, and charging higher fees based on these
distinctions. Proposed para. 3.1.1.
The comments: The City of Chicago argues that the historic cost
requirement for the airfield could lead to some anomalies as applied to
existing arrangements. Some rate agreements provide for signatory
carriers to pay, under a residual system, for facilities in addition to
the airfield. Thus, they are paying more than the HCA-based rates for
the airfield. Non-signatory carriers are required to pay even higher
rates. Chicago argues that non-signatory carriers may claim that they
are entitled to a compensatory HCA-based rate that is lower than the
signatory rate. The City of Chicago requests that the Department
clarify that an airport proprietor may impose a surcharge on non-
signatory carriers, even if the signatory rates exceed HCA-based
compensatory rates.
Other commenters did not address this issue.
The Final Policy: The Department will adopt the provision of the
Supplemental Proposed Policy without modification.
The Department agrees that the Final Policy should not make non-
signatory status more attractive to carriers than signatory status.
Such a result would conflict with the first principle of the Final
Policy, reliance on direct negotiation and agreement to establish
reasonable fees. In addition, it is accepted industry practice to
charge non-signatory carriers higher rates than signatory carriers,
based on the decision of the former not to assume all of the
obligations associated with signatory status. The Airport and Airway
Improvement Act expressly permits the establishment of classifications
based on status as a signatory carrier. See, 49 U.S.C.
Sec. 47107(a)(2)(B)(ii).
The Department has concluded that the provisions of the
Supplemental Proposed Policy on signatory/non-signatory fees provide
adequate flexibility to airport proprietors to charge reasonable
surcharges to non-signatory carriers. No modifications are necessary to
address Chicago's concerns.
The costs of serving a non-signatory carrier would ordinarily be
higher than a compensatory rate reflecting the costs of serving
exclusively signatory carriers. For example, non-signatory carriers may
increase an airport proprietor's risk of revenue fluctuation. The
increased risk in turn would justify higher reserves. In addition, the
administrative costs of dealing with non-signatory carriers would
ordinarily be higher. Further, an airport proprietor might be able to
argue that due to their irregularity, or relative infrequency,
operations by non-signatory carriers cost more to serve than a
corresponding number of operations performed on a regular basis by
signatory carriers. Each of these considerations would provide a
justification for imposing a surcharge, in some amount, on non-
signatory carriers.
[[Page 32016]]
In addition, signatory carriers usually assume obligations or
responsibilities that non-signatory carriers do not undertake. Airport
proprietors receive intangible benefits from having carriers at the
airport undertake these additional responsibilities. A surcharge for
non-signatory carriers may be justifiable, in part, as compensation to
the airport proprietor for the reduction in these intangible benefits
when a carrier elects non-signatory status.
The Department is not prepared at this time to modify the Final
Policy to permit on a routine basis non-signatory charges that cause
total airfield revenues to exceed airfield costs. However, we will
review the reasonableness of such non-signatory charges on a case-by-
case basis in light of the considerations outlined above.
20. Peak Period Charges
The Supplemental Proposed Policy proposed that under certain
conditions, a properly structured peak pricing system would not be
considered unjustly discriminatory. Proposed para. 3.2. The
Supplemental Proposed Policy did not list prerequisites for peak
pricing and did not propose a method for determining peak charges or
peak/off peak differentials.
In addition, the Department proposed to permit airport proprietors
to charge some segments of airfield users more than their pro rata
share of accounting costs based on HCA valuation, to enhance efficient
use of the airfield, if the airport proprietor uses a reasonable and
not unjustly discriminatory methodology. Proposed para. 2.5.1(b).
Airport proprietors: ACI/AAAE and the PANYNJ argue that, to be
effective, peak prices must be set without regard to HCA valuation.
ACI/AAAE request the Department to clarify the meaning of proposed par.
2.5.1 and specify that an otherwise acceptable peak-pricing system may
charge landing fees that are not based on HCA valuation.
Carriers: ATA/RAA argue that the subject of peak-period pricing is
too complicated and potentially injurious to users to be addressed as
one element in the larger policy on airport fees. ATA/RAA urge the
Department to delete all references to peak pricing.
IATA argues that peak pricing cannot enhance the efficient
utilization of airports, especially for international East-West
operations.
General aviation: AOPA expresses concerns that the standard
proposed--enhancing the efficient utilization of the airport--may
provide sufficient latitude to invite abuse. AOPA doubts that many
airports are sufficiently congested to justify peak pricing. AOPA
suggests that the Supplemental Proposed Policy could serve as an excuse
for unreasonable ratesetting.
Other Commenters: Other commenters did not address this issue.
The Final Policy: The Department is adopting the provisions of the
Supplemental Proposed Policy without substantive modification.
The Department's policy regarding peak pricing was established in
its decision in the Massport PACE fee case. Massport Order, supra. In
that decision, the Department concluded that a properly structured peak
pricing system could be found reasonable and not unjustly
discriminatory. Massport Order at 8-9. The Department's purpose in
referring to peak pricing in this policy is not to break new ground or
expand on the Department's earlier decision. Rather, it is to confirm
our support for that decision.
The Department understands the concerns of airport users regarding
abuse. The Department does not intend the policy statement to function
as a blanket authorization for peak pricing. In reviewing a peak
pricing system, the Department would scrutinize it carefully to
determine first whether the airport in fact suffers from congestion,
and whether the peak-pricing system is an appropriate response.
Regarding the linkage between peak pricing and HCA valuation,
Paragraphs 3.2 and 2.5.1(b) each address the allocation of costs among
users or user groups. The purpose of these provisions is to make clear
that if a properly structured and justified congestion pricing system
is in place, the airport proprietors may, during periods of congestion,
charge airfield users more than their allocated share of accounting
costs determined using HCA valuation. These provisions do not exempt
airport proprietors from the requirement that total airfield revenues
not exceed total airfield costs as determined in accordance with the
Final Policy. Of course, the peak charge may also reflect any
additional accounting costs the airport proprietor incurs in serving
traffic during peak periods.
21. Reservation of Authority to Investigate Progressive Accumulation of
Aeronautical Surpluses
In connection with the proposal to eliminate the HCA cost cap for
all aeronautical revenue, the Supplemental Proposed Policy included a
new provision on accumulation of surplus aeronautical revenue. The
Department proposed that the progressive accumulation of substantial
surplus aeronautical revenue may warrant an FAA inquiry into whether
aeronautical fees are consistent with the airport proprietor's
obligation to make the airport available on fair and reasonable terms.
Proposed para. 4.2.1. In discussing the treatment of nonairfield fees,
we explained that the Department expects nonairfield aeronautical fees,
over, time, to reflect aeronautical costs, including the airport's
capital investment needs. 60 FR 47013.
Airport proprietors: Some individual airport proprietors objected
to this provision. They are concerned that this provision combined with
the referenced explanatory statement means that the Department may be
introducing an implicit aeronautical cost cap.
Carriers: Carriers argue that tying the investigation of the
reasonableness of aeronautical fees to the sustained accumulation of
surpluses does not provide adequate protection against the exercise of
market power in pricing nonairfield facilities. The carriers argue that
without clear accounting and cost allocation guidelines, the policy
will encourage airports to overallocate costs to aeronautical users to
mask aeronautical profits. In addition, they contend that the policy
will not provide an adequate mechanism to monitor the accumulation of
surplus revenues. ATA/RAA also object that a Department investigation
would be triggered only after years of surplus accumulation.
General aviation: AOPA also suggests that the protection will be
ineffectual because the investigation would only be triggered after a
long period of accumulation.
Other commenters: ACRA requests the Department to clarify that it
will investigate the disposition of all airport revenues, not just
aeronautical revenues, and that an investigation would be triggered by
the accumulation of surplus airport revenues.
The Final Policy: The Department is adopting the provision of
Supplemental Proposed Policy without modification.
As discussed above, in the Department's experience, the setting of
fees for the use of aeronautical facilities other than the airfield--
whether by negotiation or otherwise--has generally produced reasonable
results. Further, we do not accept the carriers' argument that those
reasonable results were a function of circumstances that are no longer
present. Given the low risk of unreasonable results, the Department
considers its approach to involve an appropriate level of intervention.
We reiterate that the decision to eliminate the HCA cap for all
aeronautical revenue is based in part on our determination that a rigid
HCA cap is not necessary to assure that fees for
[[Page 32017]]
nonairfield aeronautical facilities and services are reasonable.
Furthermore, the Department has recently made available standard
financial reporting formats for airports. Notice of Availability and
Request for Comments on Airport Financial Reports, Docket No. 28495 (61
FR 11077, March 18, 1996). These formats, once in use, should assist in
monitoring nonairfield aeronautical revenues. In addition, to further
enhance the consultation process envisioned by Paragraphs 1.1.1 and
1.1.2, Appendix 1 of the Final Policy is modified to include the
Airport Financial Reports with the information the Department expects
airport proprietors to make available in user-charge consultations.
As to the concerns of airport proprietors, the Department has
recognized that a reasonable charge for nonairfield facilities may
include a reasonable rate of return on the airport proprietor's
invested capital. An airport proprietor would not be entitled to more
under the common understanding of the standard of reasonableness and
the limits imposed by international obligations, regardless of whether
the Department had promulgated a policy statement. In stating the
expectation that, over time, aeronautical revenues would not exceed
reasonable aeronautical costs, including reasonable capital costs, the
Department is not foreclosing the generation of returns--at reasonable
levels.
In addition, the Department emphasizes that an inquiry would be
focused on the progressive accumulation of surpluses. The Department
would not consider a single year's surplus in isolation. Thus, an
airport proprietor need not fear that, over time, losses generated by
nonairfield assets in some years cannot be balanced out against profits
earned in other years.
Further, if the Department determined that nonairfield fees were
unreasonably high, and that airfield fees were reasonable, the
Department would not ordinarily specify corrective action involving
airfield fees. In addition, the corrective action would ordinarily be
prospective in nature.
Finally, with respect to the comment by ACRA, progressive
accumulation of surplus airport revenue from all sources is governed by
Paragraph 5.2 of the Final Policy. In an inquiry conducted pursuant to
Paragraph 5.2, the FAA would not be investigating the reasonableness of
fees charged to nonaeronautical users.
Policy Statement Regarding Airport Fees
For the reasons discussed above, the Department adopts the
following statement of policy for airport fees charged to aeronautical
users:
Policy Regarding the Establishment of Airport Rates and Charges
Introduction
It is the fundamental position of the Department that the issue of
rates and charges is best addressed at the local level by agreement
between users and airports. The Department is adopting this Policy
Statement on the standards applicable to airport fees imposed for
aeronautical use of the airport to provide guidance to airport
proprietors and aeronautical users, to encourage direct negotiation
between these parties, to minimize the need for direct Federal
intervention to resolve differences over airport fees and to establish
the standards which the Department will apply in addressing airport fee
disputes under 49 USC Sec. 47129 and in addressing questions of airport
proprietors' compliance with Federal requirements governing airport
fees.
Applicability of the Policy
A. Scope of Policy
Under the terms of grant agreements administered by the Federal
Aviation Administration (FAA) for airport improvement, all aeronautical
users are entitled to airport access on fair and reasonable terms
without unjust discrimination. Therefore, the Department considers that
the principles and guidance set forth in this policy statement apply to
all aeronautical uses of the airport. The Department recognizes,
however, that airport proprietors may use different mechanisms and
methodologies to establish fees for different facilities, e.g., for the
airfield and terminal area, and for different aeronautical users, e.g.,
air carriers and fixed-base operators. Various elements of the policy
reflect these differences. In addition, the Department will take these
differences into account if we are called upon to resolve a dispute
over aeronautical fees or otherwise consider whether an airport sponsor
is in compliance with its obligation to provide access on fair and
reasonable terms without unjust discrimination.
B. Aeronautical Use and Users
The Department considers the aeronautical use of an airport to be
any activity that involves, makes possible, is required for the safety
of, or is otherwise directly related to, the operation of aircraft.
Aeronautical use includes services provided by air carriers related
directly and substantially to the movement of passengers, baggage, mail
and cargo on the airport. Persons, whether individuals or businesses,
engaged in aeronautical uses involving the operation of aircraft, or
providing flight support directly related to the operation of aircraft,
are considered to be aeronautical users.
Conversely, the Department considers that the operation by U.S. or
foreign air carriers of facilities such as a reservations center,
headquarters office, or flight kitchen on an airport does not
constitute an aeronautical use subject to the principles and guidance
contained in this policy statement with respect to reasonableness and
unjust discrimination. Such facilities need not be located on an
airport. A carrier's decision to locate such facilities is based on the
negotiation of a lease or sale of property. Accordingly, the Department
relies on the normal forces of competition for nonaeronautical
commercial or industrial property to assure that fees for such property
are not excessive.
C. Applicability of Sec. 113 of the FAA Authorization Act of 1994
Section 113 of the Federal Aviation Authorization Act of 1994
(``Authorization Act''), 49 U.S.C. Sec. 47129, directs the Secretary of
Transportation to issue a determination on the reasonableness of
certain fees imposed on air carriers in response to carrier complaints
or a request for determination by an airport proprietor. Section 47129
further directs the Secretary to publish final regulations, policy
statements, or guidelines establishing procedures for deciding cases
under Sec. 47129 and the standards to be used by the Secretary in
determining whether a fee is reasonable. Section 47129 also provides
for the issuance of credits or refunds in the event that the Secretary
determines a fee is unreasonable after a complaint is filed. Section
47129(e) excludes from the applicability of Sec. 47129 a fee imposed
pursuant to a written agreement with air carriers, a fee imposed
pursuant to a financing agreement or covenant entered into before the
date of enactment of the statute (August 23, 1994), and an existing fee
not in dispute on August 23, 1994. Section 47129(f) further provides
that Sec. 47129 shall not adversely affect the rights of any party
under existing air carrier/airport agreements or the ability of an
airport to meet its obligations under a financing agreement or
[[Page 32018]]
covenant that is in effect on August 23, 1994.
The Department interprets Sec. 47129 to apply to fees imposed on
foreign as well as U.S. air carriers.
In addition, the Department does not interpret Sec. 47129 to repeal
or narrow the scope of the basic requirement that fees imposed on all
aeronautical users be reasonable and not unjustly discriminatory or to
narrow the obligation on the Secretary to receive satisfactory
assurances that, inter alia, airport sponsors will provide access on
reasonable terms before approving Airport Improvement Program (``AIP'')
grants. Moreover, the Department does not interpret sections 47129(e)
and (f) to preclude the Department from adopting policy guidance to
carry out the Department's statutory obligation to assure that
aeronautical fees are being imposed at AIP-funded airports in a manner
that is consistent with the obligation to provide airport access on
reasonable terms.
Therefore, the Department will apply the policy guidance in all
cases in which we are called upon to determine if an airport sponsor is
carrying out its obligation to make the airport available on reasonable
terms. However, a dispute that is not subject to processing under the
expedited procedures mandated by Sec. 47129, including a dispute over
matters described by Secs. 47129 (e) and (f), will be processed by the
FAA under procedures applicable to airport compliance matters in
general. In considering such a dispute, the FAA's role is to determine
whether the airport proprietor is in compliance with its grant
obligations and statutory obligations relating to airport fees. The FAA
proceeding is not intended to provide a mechanism for adjudicating the
respective rights of the parties to a fee dispute.
In addition, the Department will not entertain a complaint about
the reasonableness of a fee set by agreement filed by a party to the
agreement setting the disputed fee. In the case of a complaint about
the reasonableness of a fee set by agreement filed by an aeronautical
user who is not a party to the agreement, the Department may take into
account the existence of an agreement between air carriers and the
airport proprietor, in making a determination on the complaint.
Further, the FAA will not ordinarily investigate the reasonableness
of a general aviation airport's fees absent evidence of a progressive
accumulation of surplus aeronautical revenues.
D. Components of Airfield
The Department considers the airfield assets to consist of ramps or
aprons not subject to preferential or exclusive lease or use
agreements, runways, taxiways, and land associated with these
facilities. The Department also considers the airfield to include land
acquired for the purpose of assuring land-use compatibility with the
airfield, if the land is included in the rate base associated with the
airfield under the provisions of this policy.
Principles Applicable to Airport Rates and Charges
1. In general, the Department relies upon airport proprietors,
aeronautical users, and the market and institutional arrangements
within which they operate, to ensure compliance with applicable legal
requirements. Direct Federal intervention will be available, however,
where needed.
2. Rates, fees, rentals, landing fees, and other service charges
(``fees'') imposed on aeronautical users for aeronautical use of
airport facilities (``aeronautical fees'') must be fair and reasonable.
3. Aeronautical fees may not unjustly discriminate against
aeronautical users or user groups.
4. Airport proprietors must maintain a fee and rental structure
that in the circumstances of the airport makes the airport as
financially self-sustaining as possible.
5. In accordance with relevant Federal statutory provisions
governing the use of airport revenue, airport proprietors may expend
revenue generated by the airport only for statutorily allowable
purposes.
Local Negotiation and Resolution
1. In general, the Department relies upon airport proprietors,
aeronautical users, and the market and institutional arrangements
within which they operate, to ensure compliance with applicable legal
requirements. Direct Federal intervention will be available, however,
where needed.
1.1 The Department encourages direct resolution of differences at
the local level between aeronautical users and the airport proprietor.
Such resolution is best achieved through adequate and timely
consultation between the airport proprietor and the aeronautical users
about airport fees.
1.1.1 Airport proprietors should consult with aeronautical users
well in advance, if practical, of introducing significant changes in
charging systems and procedures or in the level of charges. The
proprietor should provide adequate information to permit aeronautical
users to evaluate the airport proprietor's justification for the change
and to assess the reasonableness of the proposal. For consultations to
be effective, airport proprietors should give due regard to the views
of aeronautical users and to the effect upon them of changes in fees.
Likewise, aeronautical users should give due regard to the views of the
airport proprietor and the financial needs of the airport.
1.1.2 To further the goal of effective consultation, Appendix 1 of
this policy statement contains a description of information that the
Department considers would be useful to the U.S. and foreign air
carriers and other aeronautical users to permit meaningful consultation
and evaluation of a proposal to modify fees.
1.1.3 Airport proprietors should consider the public interest in
establishing airport fees, and aeronautical users should consider the
public interest in consulting with airports on setting such fees.
1.1.4 Airport proprietors and aeronautical users should consult
and make a good-faith effort to reach agreement. Absent agreement,
airport proprietors are free to act in accordance with their proposals,
subject to review by the Secretary or the Administrator on complaint by
the user or, in the case of fees subject to 49 U.S.C. Sec. 47129, upon
request by the airport operator, or, in unusual circumstances, on the
Department's initiative.
1.1.5 To facilitate local resolution and reduce the need for
direct Federal intervention to resolve differences over aeronautical
fees, the Department encourages airport proprietors and aeronautical
users to include alternative dispute resolution procedures in their
lease and use agreements.
1.1.6 Any newly established fee or fee increase that is the
subject of a complaint under 49 U.S.C. Sec. 47129 that is not dismissed
by the Secretary must be paid to the airport proprietor under protest
by the complainant. Unless the airport proprietor and complainant agree
otherwise, the airport proprietor will obtain a letter of credit, or
surety bond, or other suitable credit instrument in accordance with the
provisions of 49 U.S.C. Sec. 47129(d). Pending issuance of a final
order determining reasonableness, an airport proprietor may not deny a
complainant currently providing air service at the airport reasonable
access to airport facilities or services, or otherwise interfere with
that complainant's prices, routes, or services, as a means of enforcing
the fee, if the complainant has complied with the requirements for
payment under protest.
[[Page 32019]]
1.2 Where airport proprietors and aeronautical users have been
unable, despite all reasonable efforts, to resolve disputes between
them, the Department will act to resolve the issues raised in the
dispute.
1.2.1 In the case of a fee imposed on one or more U.S. air
carriers or foreign air carriers, the Department will issue a
determination on the reasonableness of the fee upon the filing of a
written request for a determination by the airport proprietor or, if
the Department determines that a significant dispute exists, upon the
filing of a complaint by one or more U.S. air carriers or foreign air
carriers, in accordance with 49 U.S.C. Sec. 47129 and implementing
regulations. Pursuant to the provisions of 49 U.S.C. Sec. 47129, the
Department may only determine whether a fee is reasonable or
unreasonable, and may not set the level of the fee.
1.2.2 The Department will first offer its good offices to help
parties reach a mutually satisfactory outcome in a timely manner.
Prompt resolution of these disputes is always desirable since extensive
delay can lead to uncertainty for the public and a hardening of the
parties' positions. U.S. air carriers and foreign air carriers may
request the assistance of the Department in advance of or in lieu of
the formal complaint procedure described in 1.2.1.; however, the 60-day
period for filing a complaint under Sec. 47129 shall not be extended or
tolled by such a request.
1.2.3 In the case of fees imposed on other aeronautical users,
where negotiations between the parties are unsuccessful and a complaint
is filed alleging that airport fees violate an airport proprietor's
federal grant obligations, the Department will, where warranted,
exercise the agency's broad statutory authority to review the legality
of those fees and to issue such determinations and take such actions as
are appropriate based on that review. Other aeronautical users may also
request the assistance of the Department in advance of, or in lieu of,
the filing of a formal complaint with the FAA.
1.3 Airport proprietors must retain the ability to respond to
local conditions with flexibility and innovation. An airport proprietor
is encouraged to achieve consensus and agreement with its aeronautical
users before implementing a practice that would represent a major
departure from this guidance. However, the requirements of any law,
including the requirements for the use of airport revenue, may not be
waived, even by agreement with the aeronautical users.
Fair and Reasonable Fees
2. Rates, fees, rentals, landing fees, and other service charges
(``fees'') imposed on aeronautical users for the aeronautical use of
the airport (``aeronautical fees'') must be fair and reasonable.
2.1 Federal law does not require a single approach to airport
rate-setting. Fees may be set according to a ``residual'' or
``compensatory'' rate-setting methodology, or any combination of the
two, or according to another rate-setting methodology, as long as the
methodology used is applied consistently to similarly situated
aeronautical users and conforms with the requirements of this policy.
Airport proprietors may set fees for aeronautical use of airport
facilities by ordinance, statute or resolution, regulation, or
agreement.
2.1.1 Aeronautical users may receive a cross-credit of
nonaeronautical revenues only if the airport proprietor agrees.
Agreements providing for such cross-crediting are commonly referred to
as ``residual agreements'' and generally provide a sharing of
nonaeronautical revenues with aeronautical users. The aeronautical
users may in turn agree to assume part or all of the liability for non-
aeronautical costs. An airport proprietor may cross-credit
nonaeronautical revenues to aeronautical users even in the absence of
such an agreement, but an airport proprietor may not require
aeronautical users to cover losses generated by nonaeronautical
facilities except by agreement.
2.1.2 In other situations, an airport proprietor assumes all
liability for airport costs and retains all airport revenues for its
own use in accordance with Federal requirements. This approach to
airport rate-setting is generally referred to as the compensatory
approach.
2.1.3 Airports frequently adopt rate-setting systems that employ
elements of both approaches.
2.2 Revenues from fees imposed for use of the airfield (``airfield
revenues'') may not exceed the costs to the airport proprietor of
providing airfield services and airfield assets currently in
aeronautical use unless otherwise agreed to by the affected
aeronautical users.
2.3 The ``rate base'' is the total of all costs of providing
airfield facilities and services to aeronautical users (which may
include a share of public-use roadway costs allocated to the airfield
in accordance with this policy) that may be recovered from aeronautical
users through fees charged for providing airfield aeronautical services
and facilities (``airfield fees''). Airport proprietors must employ a
reasonable, consistent, and ``transparent'' (i.e., clear and fully
justified) method of establishing the rate base and adjusting the rate
base on a timely and predictable schedule.
2.4 Except as provided in paragraph 2.5.3(a) below or by agreement
with aeronautical users, costs properly included in the rate base are
limited to all operating and maintenance expenses directly and
indirectly associated with the provision of airfield aeronautical
facilities and services, including environmental costs, as set forth
below, (and may include a share of public-use roadway costs allocated
to the airfield in accordance with this policy); all capital costs
associated with the provision of airfield aeronautical facilities and
services currently in use, as set forth below; and current costs of
planning future aeronautical airfield facilities and services. In
addition, a private equity owner of an airport can include a reasonable
return on investment in the airfield.
2.4.1 The airport proprietor may include in the rate base, at a
reasonable rate, imputed interest on funds used to finance airfield
capital investments for aeronautical use or lands acquired for airfield
use, as provided below, except to the extent that the funds are
generated by airfield fees. However, the airport proprietor may not
include in the rate base imputed interest on funds obtained by debt-
financing if the debt-service costs of those funds are also included in
the rate base.
(a) A private equity owner of an airport who has included a
reasonable rate of return element in the rate base may not include an
imputed interest charge as well.
2.4.2 Airport proprietors may include reasonable environmental
costs in the rate base to the extent that the airport proprietor incurs
a corresponding actual expense. All revenues received based on the
inclusion of these costs in the rate base are subject to Federal
requirements on the use of airport revenue. Reasonable environmental
costs include, but are not necessarily limited to, the following:
(a) the costs of investigating and remediating environmental
contamination caused by airfield operations at the airport at least
to the extent that such investigation or remediation is required by
or consistent with local, state or federal environmental law, and to
the extent such requirements are applied to other similarly situated
enterprises.
(b) the cost of mitigating the environmental impact of an
airport development project (if the development project is one for
which
[[Page 32020]]
costs may be included in the rate base), at least to the extent that
these costs are incurred in order to secure necessary approvals for
such projects, including but not limited to approvals under the
National Environmental Policy Act and similar state statutes;
(c) the costs of aircraft noise abatement and mitigation
measures, both on and off the airport, including but not limited to
land acquisition and acoustical insulation expenses, to the extent
that such measures are undertaken as part of a comprehensive and
publicly-disclosed airport noise compatibility program; and
(d) the costs of insuring against future liability for
environmental contamination caused by current airfield activities.
Under this provision, the costs of self-insurance may be included in
the rate base only to the extent that they are incurred pursuant to
a self-insurance program that conforms to applicable standards for
self-insurance practices.
2.4.3 Airport proprietors are encouraged to establish fees with
due regard for economy and efficiency.
2.4.4 The airport proprietor may include in the rate base amounts
needed to fund debt service and other reserves and to meet cash flow
requirements as specified in financing agreements or covenants (for
facilities in use), including, but not limited to, reasonable amounts
to meet debt-service coverage requirements; to fund cash reserves to
protect against the risks of cash-flow fluctuations associated with
normal airfield operations; and to fund reasonable cash reserves to
protect against other contingencies.
2.4.5 Unless otherwise agreed by aeronautical users, the airport
proprietor must allocate capital and operating costs among cost centers
in accordance with the following guidance, which is based on the
principle of cost causation:
(a) Costs of airfield facilities and services directly used by
the aeronautical users may be fully included in the rate base, in a
manner consistent with this policy. For example, the capital cost of
a runway may be included in the rate base used to establish landing
fees.
(b) Costs of airport facilities and services used for both
aeronautical and non-aeronautical uses (shared costs) may be
included in the rate base if the facility or service in question
supports the airfield activity reflected in that rate base. The
portion of shared costs allocated to aeronautical users and among
aeronautical uses should not exceed an amount that reflects the
respective aeronautical purposes and proportionate aeronautical uses
of the facility in relation to each other and in relation to the
nonaeronautical use of the facility, and must be allocated by a
reasonable, ``transparent'' and not unjustly discriminatory
methodology. Aeronautical users may not be allocated all costs of
facilities or services that are used by both aeronautical and
nonaeronautical users unless they agree to that allocation.
Likewise, the airfield may not be allocated all of the aeronautical
share of commonly-used facilities or services, unless the airfield
is the only aeronautical use the facility or service supports.
2.5 Airport proprietors must comply with the following practices
in establishing the rate base, provided, however, that one or more
aeronautical users may agree to a rate base that deviates from these
practices in the establishment of those users' fees.
2.5.1 In determining the total costs that may be recovered from
fees for the use of airfield assets and public-use roadways in the rate
base, the airport proprietor must value them according to their
historic cost to the original airport proprietor (HCA). Subsequent
airport proprietors generally shall acquire the cost basis of such
assets at the original airport proprietor's historic cost, adjusted for
subsequent improvements.
(a) Where the land associated with airfield facilities and
public use roadways was acquired with debt-financing, the airport
proprietor may include such land in the rate base by charging all
debt service expenditures incurred by the airport proprietor,
including principal, interest and reasonable amounts to meet debt-
service coverage requirements.
(b) If such land was acquired with internally generated funds or
donated by the airport sponsor (the entity that executes grant
agreements with the FAA for airport improvements), the airport
proprietor may elect to either include a reasonable amortization
charge in the rate base or to retain the full value of the land in
the rate base and charge imputed interest in accordance with this
policy. The Department considers it unreasonable to alternate
between methodologies to obtain undue compensation.
(c) In determining whether an amortization charge is reasonable
under paragraph (b), the Department will consider, among other
factors, whether the airport proprietor selected an amortization
period that gives appropriate recognition to the non-wasting nature
of land.
(d) Upon retirement of the debt or completion of the
amortization (when the airport proprietor has elected amortization),
the land may no longer be included in the rate base.
(e) The airport proprietor may use a reasonable and not unjustly
discriminatory methodology to allocate the total airfield costs
among individual components of the airfield to enhance the efficient
use of the airfield, even if that methodology results in fees
charged for a particular segment that exceed that segment's pro rata
share of costs based on HCA valuation.
2.5.2 When assets in the rate-base have different costs, the
airport proprietor may combine the costs of comparable assets to
develop a single cost basis for those assets.
2.5.3 Except as provided below or as otherwise agreed by airfield
users, the costs of facilities not yet built and operating may not be
included in the rate base. However, the debt-service and other carrying
costs incurred by the airport proprietor during construction may be
capitalized and amortized once the facility is put in service. The
airport proprietor may include in the rate base the cost of land that
facilitates the current operations of the airfield.
(a) The Department will consider an airport proprietor's claim
that inclusion of the costs of land acquired for future airport
development is reasonable if (i) costs of land surrounding the
airport are rising;
(ii) incompatible uses and development are encroaching on
available land;
(iii) land probably will not be available for airport use in the
future; and
(iv) the development for which the land is being acquired is
contained in the airport proprietor's currently effective five-year
capital improvement plan for the airport.
2.5.4 The rate base of an airport may include costs associated
with another airport currently in use only if: (1) The proprietor of
the first airport is also the proprietor of the other airport; (2) the
other airport is currently in use; and (3) the costs of the other
airport to be included in the first airport's rate base are reasonably
related to the aviation benefits that the other airport provides or is
expected to provide to the aeronautical users of the first airport.
(a) Element no. 3 above will be presumed to be satisfied if the
other airport is designated as a reliever airport for the first
airport in the FAA's National Plan of Integrated Airport Systems
(``NPIAS'').
(b) In the case of a methodology of charging for a system of
airports that is in place on the effective date of this policy, the
Department will consider an airport proprietor's claim that the
methodology is reasonable, even if all three elements are not
satisfied.
(c) If an airport proprietor closes an operating airport as part
of an approved plan for the construction and opening of a new
airport, reasonable costs of disposition of the closed airport
facility may be included in the rate base of the new airport, to the
extent that such costs exceed the proceeds from the disposition. The
Department would not ordinarily consider redevelopment costs to be a
reasonable cost of disposition.
(d) Pending reasonable disposition of the closed airport, the
airport proprietor may charge airfield users at the new airport for
reasonable maintenance costs of the old airport, provided that those
costs are refunded or credited-back to those users upon the receipt
of the proceeds from a whole or partial disposition.
2.6 For other facilities and land not covered by Paragraph 2.2,
the airport proprietor may use any reasonable methodology to determine
fees, so long as the methodology is justified and
[[Page 32021]]
applied on a consistent basis to comparable facilities, subject to the
provisions of paragraphs 2.7 and 4.2.1 below.
2.6.1 Reasonable methodologies may include, but are not limited
to, historic cost valuation, direct negotiation with aeronautical
users, or objective determinations of fair market value.
2.6.2 If an airport proprietor determines fees for such other
facilities on the basis of HCA costs, the airport proprietor must
follow the guidance set forth in paragraph 2.4.5 for the allocation of
shared costs.
2.7 At all times, airport proprietors must comply with the
following practices:
2.7.1 Indirect costs may not be included in the fees charged for
aeronautical use of the airport unless they are based on a reasonable,
``transparent'' cost allocation formula calculated consistently for
other units or cost centers within the control of the airport sponsor.
2.7.2 The costs of airport development or planning projects paid
for with federal government grants and contributions or passenger
facility charges (PFCs) may not be included in the fees charged for
aeronautical use of the airport.
(a) In the case of a PFC-funded project for terminal
development, for gates and related areas, or for a facility that is
occupied by one or more carriers on an exclusive or preferential use
basis, the fees paid to use those facilities shall be no less than
the fees charged for similar facilities that were not financed with
PFC revenue.
Prohibition on Unjust Discrimination
3. Aeronautical fees may not unjustly discriminate against
aeronautical users or user groups.
3.1 The airport proprietor must apply a consistent methodology in
establishing fees for comparable aeronautical users of the airport.
When the airport proprietor uses a cost-based methodology, aeronautical
fees imposed on any aeronautical user or group of aeronautical users
may not exceed the costs allocated to that user or user group under a
cost allocation methodology adopted by the airport proprietor that is
consistent with this guidance, unless aeronautical users otherwise
agree.
3.1.1 The prohibition on unjust discrimination does not prevent an
airport proprietor from making reasonable distinctions among
aeronautical users (such as signatory and non-signatory carriers) and
assessing higher fees on certain categories of aeronautical users based
on those distinctions (such as higher fees for non-signatory carriers,
as compared to signatory carriers).
3.2 A properly structured peak pricing system that allocates
limited resources using price during periods of congestion will not be
considered to be unjustly discriminatory. An airport proprietor may,
consistent with the policies expressed in this policy statement,
establish fees that enhance the efficient utilization of the airport.
3.3 Relevant provisions of the Convention on International Civil
Aviation (Chicago Convention) and many bilateral aviation agreements
specify, inter alia, that charges imposed on foreign airlines must not
be unjustly discriminatory, must not be higher than those imposed on
domestic airlines engaged in similar international air services and
must be equitably apportioned among categories of users. Charges to
foreign air carriers for aeronautical use that are inconsistent with
these principles will be considered unjustly discriminatory or unfair
and unreasonable.
3.4 Allowable costs--costs properly included in the rate base--
must be allocated to aeronautical users by a transparent, reasonable,
and not unjustly discriminatory rate-setting methodology. The
methodology must be applied consistently and cost differences must be
determined quantitatively, when practical.
3.4.1 Common costs (costs not directly attributable to a specific
user group or cost center) must be allocated according to a reasonable,
transparent and not unjustly discriminatory cost allocation methodology
that is applied consistently, and does not require any aeronautical
user or user group to pay costs properly allocable to other users or
user groups.
Requirement To Be Financially Self-Sustaining
4. Airport proprietors must maintain a fee and rental structure
that in the circumstances of the airport makes the airport as
financially self-sustaining as possible.
4.1 If market conditions or demand for air service do not permit
the airport to be financially self-sustaining, the airport proprietor
should establish long-term goals and targets to make the airport as
financially self-sustaining as possible.
4.1.1 Airport proprietors are encouraged, when entering into new
or revised agreements or otherwise establishing rates, charges, and
fees, to undertake reasonable efforts to make their particular airports
as self sustaining as possible in the circumstances existing at such
airports.
(a) Absent agreement with aeronautical users, the obligation to
make the airport as self-sustaining as possible does not permit the
airport proprietor to establish fees for the use of the airfield
that exceed the airport proprietor's airfield costs.
(b) For those facilities for which this policy permits the use
of fair market value, the Department does not construe the
obligation on self-sustainability to compel the use of fair market
value to establish fees.
4.1.2 At some airports, market conditions may not permit an
airport proprietor to establish fees that are sufficiently high to
recover aeronautical costs and sufficiently low to attract and retain
commercial aeronautical services. In such circumstances, an airport
proprietor's decision to charge rates that are below those needed to
achieve self-sustainability in order to assure that services are
provided to the public is not inherently inconsistent with the
obligation to make the airport as self-sustaining as possible in the
circumstances.
4.2 In establishing new fees, and generating revenues from all
sources, airport owners and operators should not seek to create revenue
surpluses that exceed the amounts to be used for airport system
purposes and for other purposes for which airport revenues may be spent
under 49 U.S.C. Sec. 47107(b)(1), including reasonable reserves and
other funds to facilitate financing and to cover contingencies. While
fees charged to nonaeronautical users may exceed the costs of service
to those users, the surplus funds accumulated from those fees must be
used in accordance with Sec. 47107(b).
4.2.1 The Department assumes that the limitation on the use of
airport revenue and effective market discipline for aeronautical
services and facilities other than the airfield will be effective in
holding aeronautical revenues, over time, to the airport proprietor's
costs of providing aeronautical services and facilities, including
reasonable capital costs. However, the progressive accumulation of
substantial amounts of surplus aeronautical revenue may warrant an FAA
inquiry into whether aeronautical fees are consistent with the airport
proprietor's obligations to make the airport available on fair and
reasonable terms.
Requirements Governing Revenue Application and Use
5. In accordance with relevant Federal statutory provisions
governing the use of airport revenue, airport proprietors may expend
revenue generated by the airport only for statutorily allowable
purposes.
5.1 Additional information on the statutorily allowed uses of
airport revenue is contained in separate
[[Page 32022]]
guidance published by the FAA pursuant to Sec. 112 of the FAA
Authorization Act of 1994, which is codified at 49 U.S.C.
Sec. 47107(l).
5.2. The progressive accumulation of substantial amounts of airport
revenues may warrant an FAA inquiry into the airport proprietor's
application of revenues to the local airport system.
Issued in Washington, DC, on June 14, 1996.
Federico Pena,
Secretary of Transportation.
David R. Hinson,
Administrator, Federal Aviation Administration.
Appendix 1--Information for Aeronautical User Charges Consultations
The Department of Transportation ordinarily expects the
following information to be available to aeronautical users in
connection with consultations over changes in airport rates and
charges:
1. Historic Financial Information covering two fiscal years
prior to the current year including, at minimum, a profit and loss
statement, balance sheet and cash flow statement for the airport
implementing the charges, and any financial reports prepared by the
airport proprietor to satisfy the provisions of 49 USC
Secs. 47107(a)(19) and 47107(k).
2. Justification. Economic, financial and/or legal justification
for changes in the charging methodology or in the level of
aeronautical rates and charges at the airport. Airports should
provide information on the aeronautical costs they are including in
the rate base.
3. Traffic Information. Annual numbers of terminal passengers
and aircraft movements for each of the two preceding years.
4. Planning and Forecasting Information.
(a) To the extent applicable to current or proposed fees, the
long-term airport strategy setting out long-term financial and
traffic forecasts, major capital projects and capital expenditure,
and particular areas requiring strategic action. This material
should include any material provided for public or government
reviews of major airport developments, including analyses of demand
and capacity and expenditure estimates.
(b) Accurate, complete information specific to the airport for
the current and the forecast year, including the current and
proposed budgets, forecasts of airport charges revenue, the
projected number of landings and passengers, expected operating and
capital expenditures, debt service payments, contributions to
restricted funds, or other required accounts or reserves.
(c) To the extent the airport uses a residual or hybrid charging
methodology, a description of key factors expected to affect
commercial or other nonaeronautical revenues and operating costs in
the current and following years.
[FR Doc. 96-15687 Filed 6-19-96; 8:45 am]
BILLING CODE 4910-13-P
