OST-98-3616 / Petition of ATA for Rulemaking on Policy Regarding Airport Rates and Charges / March 12, 1998

Pursuant to 49 C.F.R. § 5.11, the Air Transport Association of America ("ATA") on behalf of its member and associate airlines. /1 hereby petitions the Department of Transportation and the Federal Aviation Administration (collectively, "DOT") to make certain revisions to DOT's Policy Regarding Airport Rates and Charges (the "Policy") in light of the decision of the United States Court of Appeals for the District of Columbia Circuit in Air Transport Association of America v. DOT, 119 F.3d 38. as amended by 129 F.3d 62a (D.C. Cir. 1997). Now that the Court of Appeals has vacated and remanded certain portions of the Policy for further consideration and explanation, ATA urges DOT to promptly issue a notice of proposed rulemaking that addresses certain of the Court's concerns and will provide for more effective oversight over airport rates and charges, as Congress has mandated. /2

1/ ATA's member airlines are Alaska Airlines, Aloha Airlines, America West Airlines, American Airlines, American Trans Air. Continental Airlines, Delta Air Lines, DHL Airways' Emery Worldwide, Evergreen International, Federal Express, Hawaiian Airlines, Kiwi International Airlines. Midwest Express Airlines, Northwest Airlines, Polar Air Cargo. Reeve Aleutian Airways, Southwest Airlines, Trans World Airlines, United Airlines, United Parcel Service, and USAir. ATA's associate members are Aerovias de Mexico. Air Canada, Canadian Airlines International, KLM-Royal Dutch Airlines, and Mexicana de Aviacion.

2/ This petition addresses only the issues of valuing assets at historic cost, overall cost limitations, and imputed interest. and does not address whether other changes need to be made in the Policy to ensure that it fully reflects Congressional intent as reflected in 49 U.S.C. § 40116.

As explained below, ATA believes that the proposed Policy should incorporate two fundamental guidelines: that all aeronautical assets should be valued at historic cost and that total aeronautical revenues (both airfield and non airfield) should not exceed total aeronautical costs. Such guidelines would address both the Court s requirement that airfield and non-airfield fees be treated consistently, and its concern that airports not be permitted to use their monopoly powers to impose charges unrelated to actual costs. As DOT has recognized in the past, public airports are not private. profit-making entities and should not be treated as such. Airports should be allowed to recover their actual cost of providing necessary services to the public but should not be permitted to earn unnecessary surpluses at the expense of the Nation s air transportation system and the traveling public.

Any new Policy must. of course. conform to the dictates of the Court of Appeals decision. As an initial matter, the Court upheld DOT's authority to issue substantive guidelines governing airport rates and charges, holding that the governing statute authorized the Secretary to require a particular methodology for all airports—-so long as that methodology is itself reasonable." 119 F.3d at 41 (emphasis in original). Indeed, the Court suggested that the statute "may actually require the Secretary to set forth a full quasi-legislative standard rather than developing those standards through a case-by-case approach." Id. at 43. Thus, it is now settled that DOT has the authority to require particular fee methodologies where appropriate, and the statute may in fact mandate that the agency do so.

Although the Court upheld DOT s authority to issue substantive guidelines. it faulted the Policy s approach in three general respects. First, the Court agreed with ATA that the agency had improperly failed to exercise its

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oversight over non-airfield fees and had drawn untenable distinctions between the airfield and the rest of the airport. Pointing to the agency's failure to ensure the reasonableness of non-airfield fees, the Court remarked that "[t]he Secretary's 'guideline' seems to be missing a line." Id. at 41. Similarly, the Court held that the Policy's distinctions between airfield and non-airfield fees were internally inconsistent and therefore arbitrary and capricious. Id. at 41-43.

The Court rejected DOT's attempt to rely on its lack of experience adjudicating disputes over non-airfield fees, noting that this past experience was Not a particularly reliable guide since airports may well have thought that the statutory limitation (reasonableness) on all airport fees prior to 1994 implied some sort of cost-based methodology." Id. at 42. .As the Court noted, it was not until the Policy was revised in 1996 that airports had full assurance that they could charge non-airfield fees greater than costs. Id. In light of the Policy's lack of effective oversight over such fees, the Court found "little reason to expect [airports] will not" assess such flees, whether by "negotiated" agreement or by fiat. Id. As a result, the Court held that the Policy on non-airfield fees "provide[d] no real guidance as to how the Secretary will determine reasonableness." Id. at 43. Finally, the Court held that even if DOT could identify with greater precision how purported restraints on airports' monopoly power affected their ability to impose non-airfield fees (which the Court appeared to doubt), the Policy was nevertheless "internally inconsistent" because the market power of airports is clearly the same with respect to both airfield and non-airfield fees. Id. In sum. the Court made clear that all of the agency's asserted rationales for exempting non-airfield fees from scrutiny were untenable.

Second, the Court held that DOT had not adequately explained its requirement that airports using compensatory methodologies must value their land at its historic costs. The Court concluded that the Secretary did not "make the

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same mistake that caused [the Court] to reject his prior determination that Los Angeles was obliged to use historic cost as the basis for airfield fees" - i.e. that the statute itself required historic cost valuation. Id. at 44. Nevertheless, the Court faulted the agency for having failed to provide an adequate explanation of why administrative difficulties favored historic cost for airfield fees but not for non-airfield fees. Id. at 43-44.

Third, the Court vacated those portions of the Policy dealing with imputed interest, on the ground that DOT had not adequately explained why imputed interest should be allowed on funds received from non-airfield fees, but not on funds received from airfield fees. The Court recognized that

Id. at 44-45.

Accordingly, the Court (as subsequently clarified in its order on rehearing) vacated the affected provisions of the Policy, and remanded the proceeding to DOT for further consideration of the issues raised by the Court. ATA now requests that the Secretary of Transportation and the Administrator of the Federal Aviation Administration revise the Policy in light of the Court's ruling to implement the general principles outlined below.

As the above summary makes clear, the central concerns underlying the Court's ruling were that the revised Policy did not adequately prevent airports from using their monopoly power to generate unnecessary excess revenues from

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non-airfield fees, and was internally inconsistent in its treatment of airfield and non-airfield fees. ATA believes that DOT could address both of these concerns by (1) requiring an airport electing a compensatory fee methodology to assess overall aeronautical fees (both airfield and non-airfield) not exceeding the actual operating and capital costs of the airport (including reasonable reserves) with all capital assets valued at historic cost: and (2) allowing imputed interest. at most. only on those funds derived from non-aeronautical sources. In short, ATA advocates a substantial reinstatement of the Policy initially promulgated by DOT on February 3, 1990, albeit with additional elaboration to address the Court's concerns. Otherwise, DOT will fail to address the twin goals of curbing airports' ability to use their natural monopoly power to generate unnecessary revenues, and maintaining a consistent approach toward airfield and non-airfield fees.

This petition seeks to address only certain issues raised by the Court's remand, as well as to respond briefly to other issues improperly raised by the airport; industry in its petition for rulemaking, which are not implicated in any way in the Court's decision or order. The petition is not intended to summarize all of ATA's members' concerns with the Policy or the manner in which it has been applied. Even if DOT were to adopt a Policy that restores the revenue cap and historic cost limitations, ATA would continue to have serious concerns as to whether DOT has ensured the effective oversight over airport fees that Congress mandated, or has applied its Policy in a clear or consistent manner. At a bare minimum, however, the agency should restore the level of oversight that existed when the Policy was first promulgated. /3

3/ In this initial petition, ATA will not attempt to explicate fully all of the arguments in favor of the approach it advocates. most of which have been presented to the agency either in prior comments on the Policy or in the LAX proceedings. ATA believes, however, that any initial notice of proposed rulemaking should adopt

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When this cost principle is applied to the entire aeronautical operations of the airport, as is required by the Court's ruling, it becomes apparent that the agency's previous "revenue cap"—which required that overall aeronautical fees not exceed overall costs measured according to historic cost—meets all of the Court's criteria, while the alternative proposed by the Airports Council International-North America ("ACI") and the American Association of Airport Executives ("AAAE") in their petition for rulemaking plainly does not. See ACI/AAAE Petition for Rulemaking ("ACI/NE Petition") (filed Nov. 25, 1997)

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the principles set forth in this petition, particularly since the agency has previously endorsed all of those principles.

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Such a guideline, if applied vigorously and consistently. would provide more effective oversight of airport charges.

As DOT itself held in its recent decision on remand in the LAX proceeding, neither the Court of Appeals! ruling in that case nor its decision on the Policy precludes a valuation standard requiring the use of historic costs. See Order 97-12-31 at 12-29. Rather. the Court merely held that the agency had not adequately explained its conclusion that such a rule was supported by issues of administrative convenience. Thus, ACI and AAAE are wrong when they state in their petition that under the Court of Appeals' ruling "the Department cannot limit airport valuation of assets to historic cost ...." ACI/AAAE Petition at 9. The Department properly did just that in the LAX case.

In that case, DOT held that that airport did not have any "opportunity costs" that could justify the market-based fees it sought, because "the City has no other opportunity for use of the airfield land" as a result of its grant agreements requiring it to maintain the land" as an airport and the lack of any realistic possibility that the airport could be moved. The agency further held that the City had no other economic justification for seeking revenues in excess of its actual costs, in light of the benefits bestowed on the City by the airport and the airport's overall profitability. See Order 97-12-31 at 12, 14. Moreover, the decision reaffirmed that every other airport values airfield land at historic cost and that this "universal practice" was "entitled to considerable weight in determining whether the contrary practice adopted by LAX is reasonable." Id. at 23.

The decision also noted that even if the City were deemed to have opportunity costs, it would be unreasonable to allow the fair market valuation it sought, because the airport generated large profits from unregulated, non-aeronautical operations and because the City had voluntarily agreed to use its property as an airport in exchange for large federal subsidies. Id. at; 13 n.7. The

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agency also rejected the City's contentions that fair market valuation was necessary to prevent overuse or unfair subsidization of airlines, to offset inflation, or to fund capital projects. Id. at 20, 22, 25. Finally, the decision recognized that, particularly given the expedited procedures of 49 U.S.C. 47129. there are numerous practical difficulties with allowing airports to use market valuation methods, including the inability to determine a true fair market value and the necessity of repeated and time-consuming reappraisals and the resultant burdensome litigation. Id. at 26-29.

While DOT has made clear that the Lax decision will not necessarily dictate the result in this rulemaking proceeding (id. at 8), ATA believes the same logic is applicable to airports in general and is supported by the agency's determinations in prior rulemakings and by the Court of Appeals' opinion. The Court's ruling on non-airfield fees, which emphasized the need for effective regulation to prevent airports from applying their monopoly power to generate unnecessary surpluses, affirmatively supports the historic cost limitation. /4 And the LAX decision simply confirmed what the agency had already made clear in promulgating the revised Policy: public airports do not have the same "opportunity costs" as private, profit-making entities which are not subject to the same regulatory restrictions and do not have the ability—as airports do with respect to non-aeronautical facilities—to earn monopoly returns on a substantial portion of their assets.

4/ In their petition for rulemaking, ACI AAAE attempt to argue that airports are not in fact locational monopolies, and posit that DOT should be more concerned about the purported monopoly power of airlines. See ACI/AAAE Petition at 10-14. Both DOT and the Court of Appeals have held that airports are locational monopolies requiring some form of cost-based regulation, see 60 Fed. Reg. 47013; Transcript of 9/20/95 Public Hearing at 51: 119 F.3d at 41-42, and there is no cause to revisit that question now. If DOT decides to do so. however, ATA is prepared to demonstrate that airlines (unlike airports) are fiercely competitive, and have no market power whatsoever over the fees that are set by the airports they serve.

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ATA believes that the decision in Lax cannot properly be limited to that airport alone. Indeed, some of the rationales employed in that case necessarily apply nationwide: both the "universal practice" that the agency found persuasive in declaring the practices at LAX unreasonable and the practical difficulties of market valuation methodologies are applicable to all airports. Moreover, ATA believes that all public airports in the Nation share the same fundamental characteristics that led DOT to reject fair market valuation on the facts of the LAX case: such airports have no opportunity costs in light of their grant agreements and the practical inability to relocate; they have no economic justification for generating surplus revenues: they are permitted to generate profits from unregulated, non-aeronautical operations: they will not be unfairly subsidizing airlines or encouraging misallocation of resources; and they will always be permitted under the Policy to levy sufficient charges to cover necessary capital costs.

Accordingly, just as in LAX, if other airports were permitted to assess fees in excess of those required to meet operating and capital costs (including reasonable reserves), the result would simply be the accumulation of unnecessary surpluses, contrary to well-established federal policy, and an increased opportunity and incentive for diversion. contrary to federal law. As the Court noted, moreover, accumulation of unnecessary surplus revenues would tempt airports to use resources in a manner that ordinarily they would not contemplate. See 119 F.3d at 43 (DOT's approach "could lead to competition to build the Taj Mahal of airports"). As Congress recognized when it first regulated aeronautical fees, allowing local airports to assess such unnecessary charges on the traveling and shipping public will threaten the Nation's air transportation system. Airports are governmental monopolies dedicated to the public interest of ensuring the free flow of air commerce, and they cannot be allowed to operate as if they were private enterprises intent on accumulating as much profit as possible.

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As noted above, this petition is not the place to present all of the arguments and evidence in favor of retaining the agency's longstanding historic cost valuation standard, many of which are set forth in ATA's comments on the proposals for the initial and revised Policy, and in its briefs in the LAX proceedings. Particularly in light of the LAX decision, however. it would clearly be contrary to agency policy for DOT to issue the notice of proposed rulemaking advocated by ACI and AAAE. That proposal would render it "conclusively reasonable" for an airport to value its assets at their "economic value," defined as "the current market value of the asset in a competitive market," and "presumptively reasonable" for an airport to employ any other methodology. ACI/AAAE Petition at 4-5. In LAX. and in its prior rulemakings, DOT has rejected all of the rationales that ACI and WE now advance in favor of their complex market valuation proposal. While it is true that the LAX decision was based on the facts of that case, given the close similarity between the relevant circumstances at LAX and those prevailing at other airports, there could be no justification whatsoever for proposing a nationwide regulation that is so fundamentally at odds with the holding in LAX.

Rather, DOT should propose the standard that it once found reasonable—historic cost valuation and a revenue cap for all aeronautical fees. See Initial Policy §§ 2.3, 2.4.1, 60 Fed. Reg. 6916, 6917 (199,-i). Given LAX's persuasive rationale for rejecting market valuations in favor of historic cost and the Court of Appeals' requirement that both airfield and non-airfield fees be treated consistently, ATA believes the only viable alternative is to apply the historic cost limitation across-the-board. in the form of a revenue cap. Such a standard, as the agency found in 199.i, will serve to effectuate Congress intent to curtail the market power of airports yet also preserve airports' flexibility in adopting fee methodologies, provided overall revenues do not exceed costs and provided all costs are fairly arid consistently allocated among all users.

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ATA is aware of no other standard that would effectively implement the mandate of the Court of Appeals while still achieving the longstanding objectives sought by the agency. The Court's rulings do not in any way preclude a historic cost limitation; indeed. as the agency held in LM3i, such a standard is entirely consistent with those rulings. Moreover. it does not appear that there is any other acceptable way to comply with the Court's decisions except to apply whatever cost principle is chosen to all airport fees through a revenue cap that prevents total aeronautical revenues from exceeding total aeronautical costs. And regardless how the agency may ultimately resolve the issue after receiving comments from all interested parties, given the recent decision to apply historic costs in LAX and the fact that the standards now advocated by ATA are largely the same as those that DOT once found to be necessary. those standards should constitute the proposal upon which further comments are received.

ATA believes that these same principles should also be applied to the provisions relating to imputed interest. While .NTA continues to oppose any allowance for imputed interest? any new Policy should allow the charging of imputed interest, at most, only on those funds derived from non-aeronautical users. Indeed, such an outcome would follow from the Court of Appeals' ruling and from a decision to reinstate the revenue cap. The Court of Appeals has effectively foreclosed any distinctions between airfield and non-airfield funds, and under the proposed revenue cap there would be no surplus aeronautical funds upon which imputed interest could be charged. In fact, the Court of Appeals has all but held that where there are no true opportunity costs (which applies to all public airports) there is cause for prohibiting imputed interest. See supra at 4.

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The Court of Appeals has remanded, for limited purposes, the provision of the Policy prohibiting charges for facilities not vet in use (Section 2.a.3). Because no party to the court proceedings challenged the general prohibition on such charges. the Court could not have. and did not. disturb that determination. Rather, it is plain that the Court vacated Section ).a.3 only because that provision had been limited solely to airfield assets. a determination that could not stand given the Court's disapproval of such distinctions. See 61 Fed. Reg. 32002 (1996). Accordingly! in any new Policy, the agency should retain the unchallenged prohibition on charges for facilities not in use. making clear that the prohibition applies to both airfield and non-airfield facilities and that any permissible charges for land and capital assets are limited to historic cost.

ACI and AAAE, however, have improperly attempted to use the Court of Appeals' limited remand on this provision as an invitation to reargue issues relating to the general prohibition on charges for facilities not in use. See ACI/AAAE Petition at 14-16. The agency should decline to do so. The Court of Appeals has remanded this proceeding for purposes relating to the issues that were before the Court, including the historic cost limitation and the regulation of cost recovery for non-airfield facilities and services. It was not asked to. and did not, consider the other issues that ACI and AAAE now raise. In its recent LAX decision, DOT rejected the contention that the airport could attempt to reargue, on remand, an issue that; it had not raised before the Court of Appeals. See Order 97-12-31 at 9-10. For the same reason, DOT should decline to entertain rearguments in this proceeding regarding charges for facilities not in use. Like the airports, ATA and its members have many objections to various aspects of the Policy that were not directly implicated by the Court's remand, and NTA would certainly seek to raise

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those objections if the entire Policy were reopened for reconsideration. For example, ATA continues to have serious concerns that the agency has not been applying its Policy fairly, effectively or consistently in proceedings brought before it.

ACI and AAAE have put forward no persuasive reason why DOT should reconsider the prohibition on charges for facilities not yet in use. Thus, the agency's rationale for that policy remains as true today as it was when first promulgated. The "traditional approach of limiting recovery of costs to facilities in use is clear, easy to administer, widely accepted, and supported by judicial decisions." 60 Fed. Reg. 6910 (1995). As DOT has further explained, "[w]hen fees are based on costs, it is generally unreasonable to charge users for facilities they do not benefit from or use." 61 Fed. Reg. 32002 (1996). And the 1996 revisions to the Policy, which allow (under certain circumstances) current charges for land needed for future uses, make it clear that the Policy will "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." Id. Where it is in airlines' financial interest to pre-fund projects, they can agree with the airport to do so. But absent such an agreement, it is unreasonable for the airport to require users to pay for facilities not yet in use. There is no cause to revisit these sound determinations, particularly since no party sought judicial review of them. /5

5/ To the extent DOT is inclined to consider this issue again, ACI and AAAE's objections regarding the propriety of decisions whether to capitalize interest, and purported legal restrictions on doing so, see ACI/AAAE Petition at 15-16, are baseless. Under the Policy, airports can employ whatever accounting methodologies they wish regarding the treatment of interest; they are simply prohibited from charging aeronautical users for that interest. without their consent, until the facilities are operational. If, as ACI and AAAE suggest, it is beneficial to airlines not to capitalize the interest (id. at 15), then one would assume that the airlines would agree to current charges. As to the purported legal restrictions preventing

[Footnote continued]

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The same is true of the other issues that have been raised by ACI and BARE but were not encompassed by the Court of Appeals' remand. For example, ACI and AWE contend that DOT should now adopt a standard of review under which an airport's rates and charges would be considered presumptively reasonable and subject only to an arbitrary and capricious standard. See ACI/AAAE Petition at 17-18. Little needs to be said on this point. given the recent decision in LAX. There, DOT held that this very issue was not a proper subject for consideration on remand, given the airport's failure to pursue it on appeal, and that even if it were, there was no cause to alter the agency's longstanding position that airport charges are not subject to any type of deference. See Order 97-12-31 at 9-10. Both of these holdings are plainly applicable here. /6

Because DOT has not indicated a willingness to reopen issues outside the scope of the issues fairly raised by the Court of Appeals' decision, and because ACI and AAAE have provided no persuasive reasons for reopening matters DOT has previously considered and rejected, ATA need not comment here on every new issue

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some airports from capitalizing interest, DOT noted in promulgating the revised Policy that no party has identified any such restrictions (see 61 Fed. Reg. 32002 (1996)), and the ACI/AAAE petition certainly does not. However, if such restrictions relate to treatment of costs for accounting purposes, the Policy does not affect an airport's accounting practices, only its fee methodologies.

6/ Even if DOT were inclined to reconsider this issue, the analogy that ACI and WE attempt to draw to the statutory scheme at issue in United States v. City of Fulton, 475 U.S. 657 (1986), is entirely inapt. See ACI/AAAE Petition at 18. That case involved rates set by the U.S. Department of Energy for federally-owned power facilities, which were then subject to internal review by the Federal Energy Regulatory Commission. Here, by contrast, DOT must review rates set by independent localities for compliance with a federal law whose purpose is to prevent these local entities from abusing their market power at the expense of national air commerce.

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that ACI and AAAE have attempted to raise in their petition. In the event that the agency is inclined to consider reopening other issues. it should make that intention clear and invite ATA and other members of the public to express their views on those issues, and others that may be of concern, before issuing any notice of proposed rulemaking addressing them.

For the foregoing reasons, and those reasons set forth in ATA's previous comments on the Policy as initially promulgated and as revised, DOT should promulgate for public comment new guidelines requiring that an airport's total aeronautical revenues may not exceed total aeronautical costs, with all assets valued at historic costs.

Respectfully submitted,

Alien R. Snyder

Jonathan S. Franklin

HOGAN & HARTSON, L.L.P.

555 Thirteenth Street, N.W.

Washington, D.C. 20004

(202) 637-5741

Counsel for Air Transport Association of America

Dated: March 12, 1998