Petition for Writ of Certiorari — City of Los Angeles v. Department of Transportation
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In The
Supreme Court of the United States
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CITY OF LOS ANGELES, et al.,
Petitioners,
UNITED STATES DEPARTMENT
OF TRANSPORTATION, et al.,
Respondents.
.
On Petition For A Writ Of Certiorari
To The United States Court Of Appeals
For The District Of Columbia Circuit
*
PETITION FOR A WRIT OF CERTIORARI
+
STEVEN S. ROSENTHAL*
James K. HAHN
BRETON K. LoBNER
TimotHy A. HoGan
City Attorney
City of Los Angeles
One World Way
Los Angeles, CA 90045
JerrFery A. TOMASEVICH
Cooper, CARVIN &
ROSENTHAL, PLLC
1500 K Street, N.W.,
Suite 200
Washington, DC 20005
(202) 220-9600
Scott P. Lewis
KENNETH W. SALINGER
PALMER & DODGE LLP
One Beacon Street
Boston, MA 02108
*Counsel of Record
COCKLE LAW
BRIEF PRINTING CO., (800) 225-6964
OR CALL COLLECT (402) 342-2831
20% 7
QUESTIONS PRESENTED
Whether interpreting federal airport grant conditions
to impose a previously unstated condition requiring
governmental airport proprietors to use historic cost,
rather than fair market value, in valuing airfield land
violates the requirement of Pennhurst State School &
Hospital v. Halderman, 451 U.S. 1 (1981), that Congress
must impose conditions on the grant of federal
monies clearly and unambiguously.
Whether the proper standard of judicial review of an
agency’s interpretation of a grant condition is one
derived from Pennhurst, under which the grant recip-
ient must have received clear and unambiguous
notice of the grant condition as interpreted by the
agency, or one derived from Chevron U.S.A., Inc. v.
Natural Resources Defense Council, Inc., 467 U.S. 837
(1984), under which any reasonable agency inter-
pretation is entitled to deference, thus resolving a
conflict in the circuits.
Whether consideration of non-airfield revenues and
municipal benefits generated by the airport in deter-
mining the reasonableness of airfield charges violates
Northwest Airlines, Inc. v. County of Kent, Michigan, 510
U.S. 355 (1994) and 49 U.S.C. § 47129, both of which
permit airports to use a compensatory rate methodol-
ogy to set airfield charges on the basis of airfield
costs.
ii
PARTIES TO THE PROCEEDING
The petitioners are the City of Los Angeles, the City
of Los Angeles Department of Airports and the Los
Angeles Board of Airport Commissioners. The Airports
Council International-North America intervened in sup-
port of petitioners both before the U.S. Department of
Transportation and the court of appeals.
The respondents are the United States Department of
Transportation, Rodney E. Slater, Secretary of Transporta-
tion, and Patrick V. Murphy, Deputy Assistant Secretary
for Aviation and International Affairs. The Air Transport
Association of America intervened in support of respon-
dents both before the U.S. Department of Transportation
and the court of appeals.
OE ie AT tt Se
TABLE OF CONTENTS
Page
QUESTIONS PRESENTED ......................... i
PARTIES TO THE PROCEEDING .................. ii
TABLE OF CONTENTS............................ iii
TABLE OF AUTHORITIES......................... vi
PETITION FOR A WRIT OF CERTIORARI ......... 1
a 1
NN ao oreo. 0505 censcbccesceceeses....... 3
PERTINENT STATUTORY PROVISIONS........._.. 3
STATEMENT OF THE CASE....................... 4
A. The City Adopts Landing Fees At LAX Based
On A Compensatory Methodology........... 8
B. The Established Law Regarding The Rea-
sonableness Of Airport Fees..............__. 9
C. The Federal Aviation Administration Authori-
zation Act Of 1994......... ae hidGees chs cee 10
D. The Relevant Procedural History Of The Liti-
te ES Ee aa 11
REASONS FOR GRANTING THE WRIT ........_.. 16
I. THE COURT OF APPEALS’ DECISION WOULD
PERMIT FEDERAL AGENCIES TO IMPOSE
RESTRICTIONS OR OBLIGATIONS DERIVED
ONLY BY IMPLICATION FROM GENERALLY-
FLICT WITH DECISIONS OF THE FOURTH |
AND SEVENTH CIRCUITS.................... 16
iv
TABLE OF CONTENTS - Continued
Page
II. THE COURT OF APPEALS’ DERIVED BENEFITS
ANALYSIS IS IN CONFLICT WITH KENT
COUNTY AND 49 U.S.C. § 47129, BOTH OF
WHICH ALLOW AIRPORT SPONSORS TO USE
A COMPENSATORY METHODOLOGY TO SET
AIR II bo abc orcetcdca<ivecsance teen 25
COIR AIOE ec ities i kes is ees 30
APPENDICES
APPENDIX A
City of Los Angeles v. DOT, 165 F.3d 972 .O.C. Cir.
SI s'n une « onicshacs Cente MMA as & nae a la
Los Angeles Int'l Airport Rates Proceeding and Second
Los Angeles Int'l Airport Rates Proceeding
(Remand Decision), Order No. 97-12-31 (Dec. 23,
Ne ciscs KER heen ousnbatoasdeess rep sneake? 18a
Los Angeles Dep't of Airports v. DOT, 103 F.3d 1027
CR. CR Teas bc ubs siaweewcdneeai nab beeveseanss 79a
City of Los Angeles v. DOT, 179 F.3d 937 (D.C. Cir.
SOONG a2 on6n0ccunnkeds sed earennt asain indsnees 109a
City of Los Angeles v. DOT, No. 98-1071 (D.C. Cir.
June 18, 1999) (per curiam) (order denying
PPT PPT Te Teer ert rere yor rire Tre 118a
Air Transp. Ass'n of Am. v. DOT, 119 F.3d 38 (D.C.
Cir.), as amended by 129 F.3d 625 (D.C. Cir. 1997) ..119a
APPENDIX B
Use. 62 6 CRA 140a
1 USA... Fh Gear OF oak cons h Kcensnsisdeadenan 14la
Vv
TABLE CF CONTENTS -— Continued
49 U.S.C. § 47129
49 U.S.C. app. § 1513(b) (1988 & Supp. 1993)
49 U.S.C. app. § 2210(a) (1988 & Supp. 1993)
Pn CE OSE ERE REE EAD Ee RI & ee ee Ok
vi
TABLE OF AUTHORITIES
Page(s)
Cases
Air Transp. Ass'n of Am. v. DOT, 119 F.3d 38 (D.C.
Cir.), as amended by 129 F.3d 625 (D.C. Cir. 1997)
(“Policy AGQOGE Je cccccceccssssoccescess 2, 3, 5, 10, 22
Bennett v. New Jersey, 470 U.S. 632 (1985)............ 19
Blessing v. Freestone, 520 U.S. 329 (1997)............. 17
Chevron U.S.A., Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837 (1984)............ 7, 17, 21
City of Los Angeles v. DOT, 165 F.3d 972 (D.C. Cir.)
(“LAX II”), reh’g denied en banc, 179 F.3d 937
items 3, Vere re passim
City of Los Angeles v. DOT, 179 F.3d 937 (D.C. Cir.
FDTD). co ccccccccscdovedewsdecseeséccsceessecues passim
Denver v. Continental Air Lines, Inc., 712 F. Supp.
ge So Merrie 27
Doe v. Oak Park & River Forest High Sch. Dist., 115
RS 2273 (FUn Cle, TGR7). cccccccccnscccssee 6, 17, 19
DOT v. Paralyzed Veterans of Am., 477 U.S. 597
CRDEE) ow cvncncncnncagnacsacececsssasceccsteuuaceues 4
Evansville-Vanderburgh Airport Auth. Dist. v. Delta
Airlines, Inc., 405 US. 707 (1972)... .cccccccccccces 10
Harris v. James, 127 F.3d 993 (11th Cir. 1997) ........ 19
Indianapolis Airport Auth. v. American Airlines, Inc.,
TOS FAG 2262 (FU GOR FOBR a o civics cccccsccsescss 25
Los Angeles Dep't of Airports v. DOT, 103 F.3d 1027
(D.C. Cie. 1997) CEAR E) oc dccscnscuccecesces passim
Los Angeles Int'l Airport Rates Proceeding, Order No.
95-6-26 (June 30, 1995) (“LAX I(DOT)”) ...... 2% 35,
ie
Vii
TABLE OF AUTHORITIES - Continued
Page(s)
Los Angeles Int'l Airport Rates Proceeding and Second
Los Angeles Int'l Airport Rates Proceeding
(Remand Decision), Order No. 97-12-31 (Dec. 23,
1997) (“Remand Decision”)..................... passim
Northwest Airlines, Inc. v. County of Kent, Mich., 738
F. Supp. 1112 (W.D. Mich. 1990), aff'd in part,
rev'd in part, 955 F.2d 1054 (6th Cir. 1992), aff'd,
SOO SS SF CM cok ses snedbssshaaedaas scene: 26, 27
Northwest Airlines, Inc. v. County of Kent, Mich., 510
U.S. 355 (1994) (“Kent gg ee ae passim
Pennhurst State Sch. & Hosp. v. Halderman, 451 US.
RAE oh ececescadees keadikniaiseetel ls...’ passim
Raleigh-Durham Airport Auth. v. Delta Airlines, 429
F. Supp. 1069 (D.N.C. 1976)..................0005. 27
Second Los Angeles Int'l Airport Rates Proceeding,
Order No. 95-12-33 (Dec. 23, 1995)
Ce MT SE cvnchuctuaie< dbecemsoess 22% 22
South Dakota v. Dole, 483 U.S. 203 (1987)............ 20
Suter v. Artist M., 503 U.S. 347 EES 17
Virginia Dep't of Educ. v. Riley, 106 F.3d 559 (4th
San. Speers Ole GN. cocks cin wid. 6, 17, 19, 20, 21
Younger v. Harris, 401 U.S. 37 SRP U Ns Bewuddavice we. 7
STATUTES AND REGULATIONS
a eee Ts a 3
SAE OMI. fos. nook. Se Oe 20
ee Sere ee my mee ee ee 3
Vili ;
TABLE OF AUTHORITIES - Continued
Page(s) |
PL | en rn ere! 3, 9 :
Ph ye | ea pane a aE Scion ig 3 ;
WU 6 oh nk ks 3 |
Op UE 6 I is ibis ee 9 :
49 U.S.C. § 47107(a)(13)(A).....2..20cceccecceeceseees 5
Re ao eae cee, 3
eust 60.2... 3, 6, 11, 14, 29
49 U.S.C. § 47129(a)(1)(B)......2..0.ceeceeeeeceeees 1
49 U.S.C. § 47129(a)(2).....20.20ceeceeseeeees 11, 26, 28 |
USL 6 OUI iiss 11, 24 |
NRO A erate 10 |
eee eee. |. 10 |
M9 USC. § ATIINCMS)...2..0..0cccccccccccececes 3, 11 |
49 U.S.C. app. § 1513(b) (1988 & Supp. 1993)
CS WE Mesa cgutsdaddccasedsuBendeewes 3, 9
OD UEDA, GOD. © TGs ccna pacadscccesasseseasesssass 4 |
49 U.S.C. app. § 2210(a) (1988 & Supp. 1993) ...... 3, 4 |
49 U.S.C. app. § 2210(a)(1) (1988 & Supp. 1993) .. 5, 9, 22
49 U.S.C. app. § 2210(a)(9) (1988 & Supp. 1993)...5, 23
49 U.S.C. app. § 2210(a)(15)(C) (1988 & Supp.
asec danse dkdishaddstedisswetdve thas BB :ae
Airport and Airway Development Act of 1970,
Pub. L. No. 91-258, 84 Stat. 219 et seq. (formerly |
codified at 49 U.S.C. app. § 1701 et seq.)........... 4 '
a NT TT
ix
TABLE OF AUTHORITIES - Continued
Page(s)
Airport and Airway Improvement Act of 1982,
Pub. L. No. 97-248, 96 Stat. 671, 49 U.S.C.
§ 47101 et seq. (formerly codified at 49 U.S.C.
ws teh ibe erates, Sree OR OTERO Diy Ors aaa een 4
Individuals with Disabilities Education Act, Part
B, 20 U.S.C. § 1411 et seq. (Supp. 1996)........ 19, 20
60 Fed. Reg. 6906 (Feb. 3, 1995)..................... 28
61 Fed. Reg. 31944 (June 21, BRE pe 2, 29
61 Fed. Reg. 32007 (June 21, DN gb teint ee oss o 23
61 Fed. Reg. 32019 (June 21, ee EEE LCS ae Ree 29
63 Fed. Reg. 43228 (Aug. 12, 1998).................. 23
64 Fed. Reg. 7696 (Feb. 16, WE 6 bAteb ich shde st 23
1
PETITION FOR A WRIT OF CERTIORARI
Petitioners City of Los Angeles, City of Los Angeles
Department of Airports, and Los Angeles Board of Air-
port Commissioners (collectively, the “City”) respectfully
request that a writ of certiorari issue to review the deci-
sion of the United States Court of Appeals for the District
of Columbia Circuit entered in this case on February 5,
1999.
OPINIONS BELOW
The opinion of the United States Court of Appeals for
the District of Columbia Circuit dated February 5, 1999,
which denied the City’s petition for review of the Final
Order on remand issued by the United States Department
of Transportation (“DOT”), is reported at City of Los
Angeles v. DOT, 165 F.3d 972 (D.C. Cir.) (“LAX II”), reh’g
denied en banc, 179 F.3d 937 (D.C. Cir. 1999), and is
reprinted in the Appendix (“App.”) at 1a. The court of
appeals’ denial of the City’s petition for rehearing en banc
of the opinion issued in LAX II, the concurring statement
of Judge Silberman, and the dissenting statement of
Judges Williams and Ginsburg issued on June 18, 1999,
are reported at City of Los Angeles v. DOT, 179 F.3d 937
(D.C. Cir. 1999), and are reprinted at App. 109a.
DOT’s Final Order on remand, Los Angeles Interna-
tional Airport Rates Proceeding and Second Los Angeles Inter-
nationai Airport Rates Proceeding (Remand Decision), Order
No. 97-12-31 (Dec. 23, 1997) (“Remand Decision”), is unre-
ported, but can be found at 1997 DOT Av. LEXIS 673, and
is reprinted at App. 18a.
The opinion of the United States Court of Appeals for
the District of Columbia Circuit, dated January 17, 1997,
which affirmed in part and remanded in part DOT’s Final
2
Order issued in the Los Angeles International Airport Rates
Proceeding, is reported at Los Angeles Department of Air-
ports v. DOT, 103 F.3d 1027 (D.C. Cir. 1997) (“LAX I”), and
is reprinted at App. 79a.
The opinion of the United States Court of Appeals for
the District of Columbia Circuit, dated August 1, 1997,
which vacated portions of DOT’s Final Policy Regarding
Airport Rates and Charges, 61 Fed. Reg. 31944 (June 21,
1996) (“Final Policy”), is reported at Air Transport Associa-
tion of America v. DOT, 119 F.3d 38 (D.C. Cir.), as amended
by 129 F.3d 625 (D.C. Cir. 1997) (“Policy Appeal”). Though
not an opinion in this case, the opinion below identifies
the Policy Appeal as a “related proceeding,” App. 8a, and
thus the Policy Appeal is reprinted at App. 119a.}
1 To place these various opinions in context, in 1995,
complainant airlines filed an administrative complaint against
the City concerning landing fees imposed at Los Angeles
International Airport (“LAX”) in 1993. Following an
administrative trial, DOT issued its Final Order in the Los
Angeles International Rates Proceeding, Order No. 95-6-26 (June
30, 1995) (“LAX I(DOT)”). This opinion is unreported, but can
be found at 1995 DOT Av. LEXIS 391. The complainant airlines
and the City both petitioned the United States Court of Appeals
for the District of Columbia Circuit for review of LAX I(DOT).
Shortly after DOT issued LAX I(DOT), complainant airlines
filed a second administrative complaint against the City
concerning landing fees imposed at LAX in 1995. Again
following an administrative trial, DOT issued its Final Order in
the Second Los Angeles International Rates Proceeding, Order No.
95-12-33 (Dec. 23, 1995) (“LAX II(DOT)”). This opinion is
unreported, but can be found at 1995 DOT Av. LEXIS 841. The
complainant airlines and the City both petitioned the D.C.
Circuit for review of LAX II(DOT).
On January 17, 1997, the court of appeals issued LAX I, in
which it affirmed LAX I(DOT) in part and remanded other parts
of the case to DOT for reconsideration. On March 17, 1997, the
ee a
aA DR nk Ne co 6 AE ADIN LM AANA Gh OL ES, BE Sd tee
3
JURISDICTION
The judgment of the court of appeals was entered on
February 5, 1999. App. la. The City and intervenor Air-
ports Council International-North America (“ACI-NA”)
filed timely petitions for rehearing and suggestions for
rehearing en banc on March 22, 1999. The court of appeals
denied those petitions on June 18, 1999. App. 109a; App.
118a. The jurisdiction of the court of appeals was based
on 49 U.S.C. § 47129(c)(5), 49 U.S.C. § 46110(a) and 5
U.S.C. §§ 701-06. The jurisdiction of this Court is invoked
under 28 U.S.C. § 1254(1).
PERTINENT STATUTORY PROVISIONS
49 U.S.C. § 40116(e)
49 U.S.C. § 47107(a), (c)
49 U.S.C. § 47129
49 U.S.C. app. § 1513(b) (1988 & Supp. 1993)
49 U.S.C. app. § 2210(a) (1988 & Supp. 1993)
These provisions are printed in Appendix B.
court of appeals remanded LAX II(DOT) to DOT for
reconsideration with the remanded issues in LAX I. Air Transp.
Ass'n of Am. v. DOT, No. 96-1018, et al. (D.C. Cir.). After the
court of appeals issued its decision in LAX I, a different panel of
the court issued its decision in the Policy Appeal, which vacated
certain provisions of DOT’s Final Policy. Subsequent to the
Policy Appeal decision, DOT issued its Remand Decision,
addressing the issues in both LAX I(DOT) and LAX II(DOT) that
had been remanded to it by the court of appeals. Because the
substance of LAX I(DOT) and LAX II(DOT) has either been
superseded by or incorporated into the Remand Decision, they
are not reprinted in the Appendix. In response to the City’s
petition for review of the Remand Decision, the court of appeals
issued LAX II, the decision below, for which rehearing was
denied en banc.
+
STATEMENT OF THE CASE
For many years, the federal government has pro-
vided financial assistance to airport sponsors through
grant programs to aid in the development of the Nation’s
aviation system. See, e.g., Airport and Airway Develop-
ment Act of 1970, Pub. L. No. 91-258, 84 Stat. 219 et seq.
(formerly codified at 49 U.S.C. app. § 1701 et seq.); Airport
and Airway Improvement Act of 1982, Pub. L. No. 97-248,
96 Stat. 671, 49 U.S.C. § 47101 et seq. (formerly codified at
49 U.S.C. app. § 2210 et seq.) (“AAIA”). See also DOT v.
Paralyzed Veterans of Am., 477 U.S. 597, 604-05 (1986)
(summarizing airport aid programs).
Between the enactment of the AAIA in 1982 and 1994,
the City accepted a number of Airport Improvement Pro-
gram (“AIP”) grants, executing a separate grant agree-
ment with the federal government for each one, and
agreeing in exchange for the money to abide by the
express terms and conditions contained in the grant
agreements. The grant conditions are set forth in and
required by the AAIA and impose certain obligations and
restrictions on the City. See 49 U.S.C. app. § 2210(a) (App.
155a-163a).2 But they do not address the specific issue
raised in the underlying litigation: whether it is zeason-
able for the City, in charging landing fees at Los Angeles
International Airport (“LAX”), to include a rental charge
for use of LAX’s airfield land based on the land’s fair
market value (“FMV”). Indeed, the grant conditions set
2 The AAIA was recodified and amended in 1994. The
statutory references in this petition are to the AAIA prior to that
recodification, because it is the language of the statute before it
was recodified which is applicable to the grants at issue in this
case.
MRS Teta pm AL <6 LONE: 1h ONE RA ate 8 —_
5
forth in the AAIA do not address in any specific manner
the methodology to be used by airport sponsors in setting
airport fees (also known as “rates and charges”).
In the three administrative decisions DOT issued
below - LAX I(DOT), LAX II(DOT), and the Remand Deci-
sion - DOT clung to the conclusion that the City’s FMV
airfield land charge was inherently unreasonable, articu-
lating different rationales in response to the court of
appeals’ decisions in LAX I and the Policy Appeal. DOT's
latest rationale, appearing in its Remand Decision, is that
two of the grant conditions prescribed by the AAIA bar
the City from using FMV and require the City to use
historic cost to value its airfield land for rate purposes.
DOT reached its conclusion despite the fact that one of
those assurances merely requires the City to make LAX
“available for public use on fair and reasonable terms,”
49 U.S.C. app. § 2210(a)(1) (App. 155a), and the other
only permits the City to make alterations to LAX’s layout
plan if DOT decides that the change will not “adversely
affect the safety, utility, or efficiency of the airport,” 49
U.S.C. app. § 2210(a)(15)(C) (App. 161a). DOT reasoned
that these generally-worded grant conditions eliminate
any opportunity the City has to change the use of LAX,
and therefore the City has no opportunity costs associ-
ated with dedicating airfield land for airline use at LAX.
DOT concluded, as a result, that it was unreasonable for
3 There is only one grant condition that even generally
addresses rate methodology; it requires that airports must
“maintain a fee and rental structure for the facilities and services
being provided the airport users which will make the airport as
self-sustaining as possible ....” 49 U.S.C. app. § 2210(a)(9) (App.
158a) (recodified at 49 U.S.C. § 47107(a)(13)(A) (App. 143a)).
6
the City to charge a FMV-based rent for use of LAX’s
airfield land.
In the opinion below, the court of appeals upheld the
Remand Decision by giving undue deference to DOT’s
conclusion that the grant conditions informed the City
that it was unreasonable to charge a FMV-based rent,
even though the court below recognized that “some or
many economists would disapprove of the Department’s
approach” of requiring the use of historic cost and that
“an economist ... might well take the City’s view” that
charging a FMV rent was reasonable. App. 10a. In defer-
ring to DOT, the court of appeals rejected the argument
that DOT’s decision imposed a new grant condition, con-
trary to this Court’s holding in Pennhurst State School &
Hospital v. Halderman, 451 U.S. 1 (1981). The approach of
the court of appeals to the Pennhurst issue is in direct
conflict with the approach taken recently by the United
States Court of Appeals for the Fourth Circuit in its en
banc opinion in Virginia Department of Education v. Riley,
106 F.3d 559 (4th Cir. 1997) (per curiam, adopting the
dissenting panel opinion of Luttig, J.), and by the United
States Court of Appeals for the Seventh Circuit in Doe v.
Oak Park & River Forest High School District, 115 F.3d 1273
(7th Cir. 1997).
The court of appeals also rejected the City’s argu-
ment that DOT’s other rationale for rejecting the use of
FMV - that any opportunity costs of the City were “cov-
ered” by the overall benefits enjoyed by the City as a
result of operating LAX - was inconsistent with this
Court’s decision in Northwest Airlines, Inc. v. County of
Kent, Michigan, 510 U.S. 355 (1994) (“Kent County”), and
the provisions of 49 U.S.C. § 47129, which affirm the right
of airport sponsors to set compensatory rates.
os AI elt
a
7
The financial impact on the City of the court of
appeals’ decision is substantial. A fee calculated using the
FMV of the airfield land results in additional annual
income to LAX of nearly $15 million per year. By contrast,
because virtually all of the airfield land was acquired
decades ago for prices that are miniscule compared to the
FMV of that land in 1992, DOT proposed essentially to
preclude the City from assessing any airfield land rental
charge. Consequently, the court of appeals’ decision, if
not overturned, will result in the City refunding to the
commercial airlines who use LAX more than $90 million
in fees plus interest for the period beginning when the
disputed landing fees were first imposed in July 1993.
The broader implications of the court of appeals’
decision for state and local governments that have agreed
to conditions set forth in grant agreements are also far
reaching. Under the court of appeals’ decision, adminis-
trative agencies would be permitted to treat govern-
mental grant recipients in the same manner as they treat
private regulated entities: free to impose any restriction
or obligation so long as they are judged reasonable under
the Chevron standard,* without regard to whether the
restriction or obligation was unambiguously set forth in
grant conditions as required by Pennhurst. Such a result
would grossly distort the accepted relationship between
sovereigns inherent in “Our Federalism,” Younger v.
Harris, 401 U.S. 37, 44 (1971), by greatly expanding the
scope of the federal government's power to regulate state
and local governments pursuant to Congress’s Spending
Clause power.
* See Chevron U.S.A., Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837, 842-43 ( 1984).
8
A. The City Adopts Landing Fees At LAX Based
On A Compensatory Methodology
As of July 1, 1993, the City began using a compensa-
tory method to set the landing fees it charges airlines for
their use of LAX’s airfield facilities and related services
(the “1993 Fees”). Under the compensatory method, air-
lines are required to pay through landing fees the full
cost of the airfield facilities and services they use, allo-
cated on the basis of the weight of each aircraft that lands
at LAX.5 The compensatory system adopted by the City
for use at LAX includes a charge for the use of 1780.3
acres of land (nearly three square miles) on which the
airport’s runways, taxiways and aprons are located (“air-
field land”). Under LAX’s compensatory system, the
rental cost of the airfield land is based on the land’s FMV
in early 1992, which was undisputed. App. 91a-92a.° The
1993 Fees were replaced by new fees, based on the same
compensatory methodology, which became effective as of
July 1, 1995 (the “1995 Fees”). The 1993 Fees and 1995
Fees contained identical charges for the airlines’ use of
LAX’s airfield land.”
5 Previously, landing fees at LAX had been set by
agreement with the airlines using a residual methodology under
which the fees were subsidized by non-aeronautical revenues
and thus did not reflect the actual cost of aeronautical services
and facilities provided to the airlines. E.g., App. 81a-82a.
6 Although to the City’s knowledge FMV had not
previously been used to value airfield land, it is undisputed that
for decades airports have been using FMV to value land
underlying other airport facilities, e.g., terminals, cargo
buildings, and maintenance facilities.
7 The 1995 Fees have been supplanted by new fees which
continue to include a FMV charge for airfield land. Subject to a
statisticians
9
B. The Established Law Regarding The Rea-
sonableness Of Airport Fees
When adopted, the 1993 Fees and the 1995 Fees were
fully consistent with the terms of the two statutes which
then — and now - address airport charges to airlines. The
Anti-Head Tax Act (“AHTA”), enacted in 1973, prohibits
the imposition of “head taxes” on air passengers. It speci-
fically permits airports, however, to collect “reasonable
rental charges, landing fees, and other service charges
from aircraft operators for the use of airport facilities.” 49
U.S.C. app. § 1513(b) (App. 154a) (emphasis added)
(recodified at 49 U.S.C. § 40116(e)(2) (App. 140a)). The
AAIA, enacted in 1982, contains the previously quoted
conditions requiring an airport receiving grants to “be
available for public use on fair and reasonable terms,”
and requiring DOT’s approval before altering the airport
layout plan. 49 U.S.C. app. § 2210(a)(1), (15)(C) (App.
155a, 161a).§
This Court has once before construed the reasonable-
ness standard imposed by the AHTA. In 1994 (at about
the time the City took its last airport grant at LAX), in
response to an airline challenge, this Court in Kent County
upheld an airport sponsor’s use of a compensatory meth-
odology and rejected the claim that airport owners must
reduce airline charges below cost whenever there is sur-
plus non-aeronautical revenue at an airport. 510 U.S. at
duty to refund the FMV charge if it is ultimately disallowed, the
new fees have not been the subject of separate litigation.
8 In the recodification of Title 49 in 1994, after the City took
its last airport grant at LAX, the quoted grant condition was
changed to provide that an airport receiving grants “be
available for public use on reasonable conditions.” 49 U.S.C.
§ 47107(a)(1) (App. 141a).
10
369-74. In Kent County this Court held that, in the absence
of regulations adopted by DOT, a standard derived from
the dormant Commerce Clause jurisprudence would be
applicable to determining whether an airport charge is
reasonable and identified three factors to be considered:
whether the fees (1) were based on a fair approximation
of the use of the facilities, (2) were not excessive in
relation to the benefits conferred, and (3) do not discrimi-
nate against interstate commerce. Id. at 369 (citing Evans-
ville-Vanderburgh Airport Auth. Dist. v. Delta Airlines, Inc.,
405 U.S. 707, 716-17 (1972)).
C. The Federal Aviation Administration Authori-
zation Act Of 1994
The Federal Aviation Administration Authorization
Act of 1994 (“FAAAA”) was enacted on August 23, 1994.
In addition to directing DOT to establish guidelines for
determining whether an airport fee is reasonable (accept-
ing this Court’s invitation made in Kent County, 510 U.S.
at 368 n.14), the FAAAA created an expedited procedure
for resolution of airport-airline disputes regarding fees
charged to airlines for their use of airport facilities and
services.? 49 U.S.C. §§ 47129(b), (c) (App. 150a-151a).
% On February 3, 1995, DOT published an interim Policy
Regarding Airport Rates and Charges (“Interim Policy”), which
was superseded by the Final Policy issued on June 21, 1996.
Significant portions of the Final Policy - including DOT’s
requirement that airports use historic costs to value airfield
assets (including land) - were vacated in the Policy Appeal. See
App. 135a (DOT “simply has not explained why fair market
valuation may be appropriate for other portions of the airport,
but too difficult to use in valuing airfield assets.”).
11
The FAAAA expressly affirms that airport owners,
such as the City, can use a compensatory rate methodol-
ogy to set fees charged to airlines for use of airfield
facilities at airports. Id. § 47129(a)(2) (App. 149a). Section
47129 neither requires nor prohibits any particular
method for valuing land anywhere on an airport and
specifically bars DOT from setting the level of fees
charged. Id. § 47129(a)(3) (App. 149a). As DOT itself has
repeatedly emphasized, the FAAAA did not “change the
substantive rights and duties of the airports or the air-
lines.” See, e.g., App. 23a.
D. The Relevant Procedural History Of The Litiga-
tion Below
1. The underlying petitions for review arose from
two of the first proceedings brought under 49 U.S.C.
§ 47129.!° The complainant airlines in the Los Angeles
International Airport Rates Proceeding and in the Second Los
Angeles International Airport Rates Proceeding (the “Air-
lines”) sought determinations by DOT that the 1993 Fees
and the 1995 Fees, respectively, violated the statutory
“reasonableness” requirement imposed by the AAIA and
the AHTA. The Airlines claimed that the City’s use of
‘© Various complaints have been filed with the Secretary
challenging airport fees pursuant to the provisions of 49 U.S.C.
§ 47129(a)(1)(B). Although the statute provides that petitions for
review of DOT’s Final Order may be reviewed either “in the
Circuit Court of Appeals for the District of Columbia Circuit or
the court of appeals in the circuit where the airport which gives
rise to the written complaint is located,” 49 U.S.C. § 47129(c)(5)
(App. 151a), every petitioner seeking review of a DOT final
order in a Section 47129 proceeding thus far has filed its petition
in the D.C. Circuit.
12
FMV to measure the cost of the land in the airfield rate
base is illegal per se and that the AAIA and AHTA man-
date use of historic costs. In each proceeding, DOT
agreed, and the City petitioned the court of appeals for
review of each final order issued by DOT.
2. The court of appeals in LAX I granted the City’s
petition. it held that DOT’s view of reasonableness repre-
sented a “fundamental misunderstanding of the govern-
ing law,” App. 90a, and that the “Secretary’s view of
historic cost as the apodictically indicated measure of
‘actual cost’ [was] not . . . supported by the applicable
law,” App. 89a. The court of appeals further held that the
AHTA neither prohibited the City from including in its
landing fee a FMV airfield rental charge nor required the
use of historic cost. App. 90a.
In reaching these conclusions, the court of appeals
observed that this Court has never “held that historic cost
represents the only true measure of cost and the Secretary
points to no law, regulation, or agency decision to that
effect.” App. 89a. In rejecting DOT’s position that oppor-
tunity cost is not an actual cost, the court of appeals
found that nothing in existing, applicable law prescribed
“an accounting rather than an economic conception of
cost in airport ratemaking.” App. 90a."!
3. On remand, DOT nevertheless concluded again
that “the fair market value charge for the airfield land is
unreasonable.” App. 29a. This time DOT justified its deci-
sion by asserting that the City incurs no opportunity
—_-
11 The court of appeals separately remanded the petitions
for review of LAX II(DOT) to DOT for reconsideration along
with LAX I(DOT). DOT’s Remand Decision thus applied to both
the 1993 Fees and the 1995 Fees. See supra note 1.
Me ee ae Tee ee ee Ee ey 5 Cis 5
13
costs because the City “has no opportunity to use its LAX
property for a non-airport use.” App 29a; see also App.
38a-44a. DOT also found that the City “needs no addi-
tional incentives to operate LAX as an airport, since the
Los Angeles area obtains substantial economic benefits
from the airport’s operation,” and that even if the City
did have opportunity costs, they were “covered” by these
“benefits.” App. 29a; see also App. 45a-52a. Finally, DOT
concluded that requiring the City to use historic cost was
consistent with the Fifth Amendment’s Takings Clause,
and summarily refused to grant the City a hearing to
determine the constitutionally-mandated fair rate of
return. App. 68a-77a.
4. The City again petitioned the court of appeals for
review, arguing that the Remand Decision was inconsistent
with the court of appeals’ decision in LAX I and with this
Court’s decisions in Pennhurst and Kent County. Speci-
fically, the City argued that, contrary to DOT’s decision,
the two grant conditions cited by DOT - one which
requires the City to keep LAX “available for public use on
fair and reasonable terms” and the other which permits
the City to make alterations to LAX’s layout plan only if
DOT decides that the change will not “adversely affect
the safety, utility, or efficiency of the airport” — were
irrelevant to the City’s opportunity cost of dedicating
1780.3 acres of its land for airfield use at LAX. The City
claimed that it was therefore entitled to charge landing
fees at LAX based on the FMV of the airfield land because
FMV is the measure of its opportunity cost. This time, a
different panel of the court of appeals from the one that
heard LAX I denied the City’s petition.
The court of appeals presented two rationales for its
decision. First, it adopted DOT’s “no opportunity, hence
14
no opportunity cost” rationale. App. 9a-13a. The court of
appeals concluded that the two grant conditions mean
that the City has no lawful opportunity to devote LAX to
alternative uses, and therefore that it was unreasonable
for the City to include a FMV rental charge to recover
opp >rtunity costs. The court of appeals rejected the claim
that DOT’s “no opportunity, hence no opportunity cost”
rationale impermissibly added a new condition to the
City’s grant assurances and therefore is contrary to the
“clear statement” requirement of Pennhurst. App. 13a.
The court of appeals defended its conclusion by tersely
stating that the prohibition against charging a FMV rent
was not a new restriction but, rather, a “consequence of an
unambiguously imposed condition — that the airport
would be kept open for public use — that was present
from the outset.” App. 13a (emphasis in original).
The court of appeals also adopted DOT’s other
rationale — that even if the City did incur opportunity
costs. by devoting three square miles of its prime real
estate to airport use, “those costs are already covered by
the existing ‘benefits’ enjoyed by the City” as a result of
operating LAX. App. 13a-15a. The City had argued that
under a compensatory rate methodology, the reasonable-
ness of airfield rates is to be judged on the basis of airfield
costs, not on the basis of the overall economic perfor-
mance or amorphous public benefit of the airport enter-
prise. Finding that it was proper to take these other
considerations into account in determining whether the
landing fees were reasonable, the court of appeals also
rejected the City’s argument that, by so doing, DOT was
impermissibly challenging the City’s right — recognized
in Kent County and codified in 49 U.S.C. § 47129 — to use a
compensatory rate methodology. App. 14a.
15
Finally, while the court of appeals recognized the
right of municipalities such as the City to advance regula-
tory takings claims, App. 16a, it nevertheless rejected the
City’s claim by holding that the City would only be
entitled to a hearing before DOT if the City had alleged
that the financial integrity of LAX taken as a whole
would be jeopardized unless it could use FMV to value its
airfield land for rate-setting purposes. App. 15a-17a.
5. The City and Intervenor ACI-NA petitioned the
court of appeals for rehearing and suggested rehearing en
banc. The petitioners argued that the decision below
should be withdrawn on a variety of grounds including
the fact that the decision was irreconcilable with the
panel decision in LAX I. In LAX I the court of appeals
rejected DOT’s position that the City was barred by oper-
ation of law from including in its airfield rate base the
opportunity cost of devoting its land to airfield use — as
measured by FMV. In addition, the petitioners argued
that the decision below was inconsistent with this Court’s
decision in Pennhurst, in that it imposed new restrictions
on the City that were not unambiguously set forth in the
grant conditions, and also inconsistent with Kent County,
in that the derived benefits rationale adopted by the
panel impermissibly restricted the City’s right to set fees
at LAX using a compensatory fee methodology.
Although those petitions were rejected on June 18,
1999, per curiam, Judge Silberman, author of the court of
appeals’ opinion in LAX II, filed a separate statement
concurring in the denial of rehearing en banc, and Judge
Williams, joined by Judge Ginsburg - two of the three
judges from the LAX I panel which granted the City’s
16
first petition for review — filed a separate statement dis-
senting from the court’s decision.!2 App. 109a-117a.
In his colorful concurring statement in which he
chided Judges Williams and Ginsburg for their dissenting
statement, Judge Silberman defended the panel decision
as being required under “a deferential standard of
review.” App. 1lla. As Judges Williams and Ginsburg
point out in their dissenting statement, however, the
panel’s conclusion “that if some exogenous circumstance
blocks application of a resource to other uses, it follows
that the use of opportunity cost is inappropriate . . . is
surely a non sequitur,” and “the [panel’s] conclusion that
use of historical cost was ‘a consequence of an unam-
biguously imposed condition,’ 165 F.3d at 978, [also]
appears to me a non sequitur.” App. 114a.
REASONS FOR GRANTING THE WRIT
I. THE COURT OF APPEALS’ DECISION WOULD
PERMIT FEDERAL AGENCIES TO IMPOSE
RESTRICTIONS OR OBLIGATIONS DERIVED
ONLY BY IMPLICATION FROM GENERALLY-
WORDED GRANT CONDITIONS, WHICH IS
CONTRARY TO PENNHURST AND IN CONFLICT
WITH DECISIONS OF THE FOURTH AND SEV-
ENTH CIRCUITS
In Pennhurst, this Court held that when Congress
legislates under its spending power, any grant conditions
it imposes must unambiguously inform the grant recip-
ient of the consequences of accepting federal funds. 451
12 Three of the eleven active judges on the Court of Appeals
for the District of Columbia Circuit —- including Judge Edwards
who sat on LAX I - did not participate in the decision to deny
rehearing en banc. App. 110a.
17
U.S. at 17. As this Court held, a grant recipient cannot
voluntarily and knowingly accept the conditions if it is
“unaware of the conditions or is unable to ascertain what
is expected of it. . . . [I]f Congress intends to impose a
condition on the grant of federal moneys, it must do so
unambiguously.”13 Id.
The court below, however, instead deferred to DOT’s
principal justification in the Remand Decision for rejecting
the City’s use of FMV to value the airfield land at LAX —a
justification derived by implication from the City’s grant
assurances, which DOT contended had as their inevitable
consequence that there were no opportunity costs associ-
ated with dedicating the airfield land to airline use. This
result is contrary to this Court’s decision in Pennhurst,
and is in conflict with the Fourth Circuit's en banc opinion
in Virginia Department of Education v. Riley, 106 F.3d 559
(4th Cir. 1997) (per curiam, adopting the dissenting panel
opinion of Luttig, J.), and with the Seventh Circuit's
opinion in Doe v. Oak Park & River Forest High School
District, 115 F.3d 1273 (7th Cir. 1997).
1. In upholding the Remand Decision because “we
cannot say it was irrational,” App. 11a, the court of
appeals applied an improperly deferential standard to the
review of agency action based upon the terms of a grant
condition. Indeed, it is clear that, although the court of
appeals did not cite to the case, it applied Chevron defer-
ence to DOT’s decision. The court of appeals acknowl-
edged that the City’s use of FMV has substantial
13 In applying Pennhurst, this Court has consistently set a
high standard for establishing whether a grant condition
unambiguously imposes obligations on state and local
government grant recipients. See, e.g., Blessing v. Freestone, 520
U.S. 329 (1997); Suter v. Artist M., 503 U.S. 347 (1992).
18
economic support by stating that “an economist formulat-
ing an efficient plan for regulating [LAX’s airfield] might
well take the City’s view,” App. 10a, but nevertheless
deferred to DOT’s contrary conclusion. Judge Silberman,
author of the opinion below, went even further in the
separate statement he filed concurring in the denial of the
petitions for rehearing en banc. In response to Judges
Williams and Ginsburg’s dissenting statement, in which
they explained why the City’s “proposed use of oppor-
tunity cost is reasoned,” App. 113a, Judge Silberman
responded as follows:
By contrast, the panel, although recognizing that
economists (or we) might disagree with the
Department’s rejection of opportunity cost pric-
ing in this case, did not think that warranted us,
as a reviewing court under a deferential standard
of review, to object to the Department’s decision.
City of Los Angeles, 165 F.3d at 977.
App. 110a-11la (emphasis added).
The court of appeals should have applied a more
demanding standard to DOT’s action: because a govern-
mental grant recipient, such as the City, may not be
forced to comply with restrictions unless they are unam-
biguously expressed in the grant, DOT’s action can only
be sustained if the court concludes that the agency action
was based upon language in the grant condition that
informed the governmental grant recipient in clear and
unambiguous terms of the restriction or obligation to
which it was subjecting itself. Pennhurst, 451 U.S. at 17-18.
The court of appeals attempted to avoid the fact that
the grant conditions at issue did not explicitly prohibit
the City from charging FMV rents by contending that the
prohibition was not a new condition, but rather merely a
“consequence” of an existing grant condition that
19
required the City to make LAX “available for public use
on fair and reasonable terms.” App. 13a. If permitted to
stand, however, the court of appeals’ rationale would
enervate Pennhurst by permitting federal agencies to
impose — years later - newly formulated restrictions or
obligations on state and local government grantees based
upon the supposed “consequences” of grant conditions
rather than upon clear and unambiguous grant language,
so long as the agencies’ rationale is sustainable under
Chevron.14
The decision below is in conflict on this issue with
the en banc decision of the Fourth Circuit in Virginia
Department of Education v. Riley, 106 F.3d 559 (1997), a case
which has been subsequently followed by the Seventh
Circuit in Doe v. Oak Park & River Forest High School
District, 115 F.3d 1273 (1997) (finding “the rationale and
result” in Riley persuasive).15
In Riley, the court of appeals reviewed a Department
of Education (“DOE”) order interpreting a condition for
grants under Part B of the Individuals with Disabilities
‘4 This result is also in conflict with Bennett v. New Jersey,
470 U.S. 632 (1985), in which this Court, in finding that when a
grant recipient applied for and received grant funds, it “had no
basis to believe that the propriety [of its actions] wouid be
judged by any standards other than the ones in effect at the
time,” id. at 640, held that “changes in the substantive standards
governing federal grant programs do not alter obligations and
liabilities arising under earlier grants,” id. at 641.
1S See also Harris v. James, 127 F.3d 993, 1009 (11th Cir. 1997)
(“To hold otherwise would be inconsistent with the driving
force of Supreme Court precedent requiring a Congressional
intent to create federal rights and with the Supreme Court’s
directive that courts must find that Congress has unambiguously
conferred federal rights on the plaintiff.”) (emphasis added).
20
Education Act (“IDEA”) which required a state to
“ ‘assure[ ] all children with disabilities the right to a free
appropriate public education.’ ” 106 F.3d at 560 (quoting
20 U.S.C. § 1412(1)). The DOE order had construed the
grant language as prohibiting Virginia from maintaining
“a policy - like that the State maintains for its non-
disabled students - pursuant to which it could cease
providing free education to disabled students who are
expelled or suspended long-term for behavior unrelated
to their disabilities.” Id. at 560.
The Fourth Circuit, by a vote of six to two, over-
turned the DOE order on the ground “that IDEA at most
only implicitly conditions the States’ receipt of funds upon
the continued provision of educational services to
students expelled for misconduct unrelated to their hand-
icaps,” whereas, because what is at issue is “congres-
sional conditioning of the States’ receipt of federal
funds,” South Dakota v. Dole, 483 U.S. 203 (1987), and
Pennhurst require that “in order for the States to be bound
by a condition upon the receipt of federal monies, the
Congress must have affirmatively imposed the condition
in clear and unmistakable statutory terms.” Riley, 106 F.3d
at 562-63 (emphasis added); see also id. at 566-68.'©
The Fourth Circuit clearly recognized that “[iJn the
end, this case is about the permissible reach of federal
power under the Spending Clause in a time when the
l¢ A plurality of the Fourth Circuit also stated that “[a]
substantial constitutional question under the Tenth Amendment
would be presented were the Secretary of Education’s
interpretation of the IDEA upheld,” since the withholding of
Virginia’s entire IDEA allotment for refusal to provide tutors to
126 disabled students verged on “impermissible coercion.” 106
F.3d at 561. |
ov so Dee eae eK ico
21
several States have become increasingly dependent upon
the federal government for funds.” Id. at 570. Here, how-
ever, the court below took the opposite tack, adopting the
same general approach as the dissent in the Fourth Cir-
cuit en banc decision. That approach would hold that
Chevron is controlling over the pre-Chevron decision in
Pennhurst and would require that a reviewing court defer
to the reasonable statutory interpretation of an adminis-
trative agency regardless of whether that interpretation is
clearly and unambiguously set forth in grant conditions.
Compare, e.g., id. at 580-81 with App. 11a (“{O]ur review is
still a matter of determining whether the agency’s final
decision ‘was based on a consideration of relevant factors
and whether there has been a clear error of judgment.’ ”
(citation and quotation omitted)).
This Court should resolve the conflict between the
D.C. Circuit, on the one hand, and the Fourth and Sev-
enth Circuits, on the other, on the unsettled question
whether, in reviewing a restriction or obligation imposed
by a federal agency on a governmental grantee based
upon grant conditions, the standard for review is one
derived from Pennhurst, under which the grant recipient
must have received clear and unambiguous notice of the
restriction or obligation, or one derived from Chevron,
which requires deference to any reasonable construction
of the grant statute by an administrative agency.
2. It is uncontroverted that the grant conditions at
issue do not expressly prohibit the use of FMV to value
airport assets for rate-setting purposes. None of the con-
ditions contained in the grants accepted by the City for
use at LAX between 1982 and 1994 even mention either
historic costs or FMV much less require the City to use
22
historic costs to establish reasonable rental charges, land-
ing fees or other charges. It is also undisputed that, until
the Interim Policy in 1995, DOT had no regulation or
policy governing airport rate methodologies and cer-
tainly nothing requiring airfield land to be valued using
historic cost as opposed to FMV, or any other cost basis.
See App. 23a.!”
One of the grant conditions relied upon by DOT
merely requires that LAX “be available for public use on
fair and reasonable terms.” 49 U.S.C. app. § 2210(a)(1)
(App. 155a). The other simply precludes the City from
making any alteration to LAX’s layout plan unless DOT
decides that the change will not “adversely affect the
safety, utility, or efficiency of the airport.” 49 U.S.C. app.
§ 2210(a){15)(C) (App. 161a). Given the language of these
conditions, it is not surprising that even the panel deci-
sion below did not hold that the grant conditions them-
selves “unambiguously” imposed the requirement that
airfield land at LAX be valued at historic cost in calculat-
ing landing fees, but rather argued that the restriction
was a “consequence” of the grant conditions. App. 13a.18
17 Because the FMV-based charge for airfield land at LAX
was first imposed in 1993, DOT has never sought to apply either
the subsequently promulgated Interim Policy or the Final Policy
to the present case. In any event, the prohibition against FMV-
based charges for airfield land in the Interim Policy which was
also part of the Final Policy was vacated by the D.C. Circuit in
1997, Policy Appeal, App. 119a, 137a, and no successor regulation
has even been proposed by DOT. See App. 8a-9a.
18 DOT’s Remand Decision and the decision below are both
necessarily premised on a reading of the grant conditions to
impose a continuing duty on the City to keep LAX in operation.
However, such a duty is not clearly and unambiguously stated
in any of the grant conditions, but can at best only be implied
from grant conditions dealing with other matters.
23
Remarkably, at the same time DOT has contended
that the following seemingly inconsistent “consequences”
were also implicit in the two generally worded grant
conditions on which they rely to prohibit use of FMV to
value airfield land: (1) that the City is required to charge
FMV for non-aeronautical land (to comply with the grant
conditions that requires the airport to be as self-sustain-
ing as possible, 49 U.S.C. app. § 2210(a)(9) (App. 158), see
supra note 3), as DOT has recently announced in its Policy
and Procedures Concerning the Use of Airport Revenue,
64 Fed. Reg. 7696, 7721 (Feb. 16, 1999), and (2) that the
City will be required to use some other yet-to-be-deter-
mined scheme for non-airfield, aeronautical land, a sub-
ject of DOT’s Advanced Notice of Proposed Policy, 63
Fed. Reg. 43228 (Aug. 12, 1998). While these additional
“consequences” are not at issue in the present case, they
demonstrate the arbitrary and unbounded results which
the court of appeals’ approach would sanction.!9
3. Under the circumstances, the court of appeals’
contention that the newly imposed restrictions on the
City were merely a “consequence” of general grant condi-
tions is nothing more than a convenient - and ultimately
unavailing — way to permit DOT to evade the strictures of
19 The City’s use of FMV to value other portions of LAX
without criticism from air carriers or action by DOT - both
before and concurrently while entering into AIP grant
agreements in the 1982 to 1994 period ~ underscores why the
grant conditions could not have unambiguously informed the
City that a FMV-based rental charge for airfield land would
have been prohibited. In fact, DOT acknowledges that fair
market valuation of land and assets has long been used to arrive
at fees for non-airfield portions of airports throughout the
nation. See, e.g., Final Policy, 61 Fed. Reg. at 32007 (June 21,
1996).
24
Pennhurst which prohibits federal agencies from impos-
ing obligations on grant recipients based on other than
clear and unambiguous grant conditions.
Indeed, DOT's implied prohibition on the use of FMV
conflicts with congressional intent in the FAAAA to mini-
mize federal interference with local airport rates and
charges policies. Specifically, Congress did not authorize
DOT to impose on airport grantees any restrictions or
obligations it considered “reasonable.” To the contrary,
Congress limited DOT’s authority to disallowing airport
fees found not to be “reasonable” and specifically prohib-
ited DOT from setting the level of the fee. 49 U.S.C.
§ 47129(a)(3) (App. 149a); see also infra p. 28 note 23.
If the decision below is permitted to stand, federal
agency authority based on the Spending Clause will be
permitted to expand dramatically. Unconstrained by
Pennhurst’s requirement that grant conditions be set forth
clearly and unambiguously, federal agencies would be
permitted to impose on state and local government
grantees new and unforeseen conditions that are sup-
posedly implied from, but not actually stated in, grant
statutes. This would irrevocably - and unwisely —- alter
the balance of power in our federal system, shifting
power to the federal government in the absence of the
requisite clearly stated Congressional intent.
For all these reasons, a writ of certiorari should issue
to resolve the conflict between the decision below and
Pennhurst, and to resolve the circuit split between the
D.C. Circuit, on the one hand, and the Fourth and Sev-
enth Circuits, on the other, concerning the appropriate
standard for judicial review of agency interpretations of
grant conditions.
25
Il. THE COURT OF APPEALS’ DERIVED BENEFITS
ANALYSIS IS IN CONFLICT WITH KENT
COUNTY AND 49 U.S.C. § 47129, BOTH OF
WHICH ALLOW AIRPORT SPONSORS TO USE A
COMPENSATORY METHODOLOGY TO SET
LANDING FEES
In Kent County, this Court upheld the right of public
airport owners, such as the City, to use “compensatory”
rate-setting methods to recover through landing fees the
economic costs of airfield facilities the airlines use. 510
U.S. at 369-74. The alternative justification (adopted by
both DOT and the court of appeals) for rejecting the
City’s use of FMV in setting its landing fees - that any
opportunity costs associated with the use of the airfield
are somehow “covered” by non-airfield revenue or
derived benefits — is inconsistent with Kent County.?° If,
as the City contends, its opportunity costs (as measured
by FMV) would otherwise be allowable, DOT cannot
lawfully forbid the City from using FMV simply because
the airport as a whole generates net income or substantial
municipal benefits from its total operations. The
20 The claim that the airport’s overall revenues, or the
City’s aggregate benefits, can be taken into account, and
deemed amply to compensate for any shortfall in airfield
revenue, is reminiscent of the approach taken by the Seventh
Circuit in Indianapolis Airport Auth. v. American Airlines, Inc., 733
F.2d 1262, 1267-68 (7th Cir. 1984). This misconception of
compensatory ratemaking was repudiated by this Court in Kent
County, 510 U.S. at 371-72. The Court overruled Indianapolis
Airport and affirmed the ability of airport owners to use the
“multiple cash register” compensatory approach to airport rate-
setting, in which the airport is divided into different revenue-
producing cost centers (such as the airfield) that each must pay
its own way. Id. at 369-72; Indianapolis Airport Auth., 733 F.2d at
1270.
26
approach taken by DOT and the court of appeals cannot
be squared with the essential premise of compensatory
rate-setting, approved by this Court in Kent County, 510
U.S. at 369-72, and later expressly sanctioned by Congress
in 49 U.S.C. § 47129(a)(2) (App. 149a).?!
The airlines brought their complaint in Kent County
in an effort to establish as a matter of law that compensa-
tory rate-making is unreasonable per se. See Northwest
Airlines, Inc., v. County of Kent, Mich., 738 F. Supp. 1112,
1113 (W.D. Mich. 1990), aff'd in part, rev'd in part, 955 F.2d
1054 (6th Cir. 1992), aff'd, 510 U.S. 355 (1994). The airlines
claimed that airport owners are required to recognize the
“interdependency” of aeronautical and non-aeronautical
activities, i.e., there would not be much (if any) non-
aeronautical income if passengers were not using the
airport to fly to or from the city where the airport is
located. The airlines argued that airport owners should
be required to offset their landing fees and terminal rents
to account for any “surplus” non-aeronautical income. See
Kent County, 738 F. Supp. at 1114; Northwest Airlines, Inc.
21 The decision by the court of appeals rejecting the City’s
claims under the Takings Clause also reflects this erroneous
approach. The City claimed that if it were restricted to the
recovery of its historical airfield costs, without any provision for
a rate of return, an unlawful taking would be effected. Unlike
DOT, the court of appeals acknowledged that even though it is a
public landowner, the City could bring a regulatory takings
claim. App. 16a. The court of appeals was wrong, however,
when it held that to pursue such a claim, the City would have to
allege that the “finafcial integrity of LAX” as a whole would be
jeopardized if the contested FMV charge were disallowed. App.
16a-17a. Under Kent County, the existence vel non of a
compensable regulatory taking of the airfield land should not
turn on whether a property owner is able to generate revenue
from independent sources.
ue ee ee eee Oe!
Te
27
v. County of Kent, Mich., 955 F.2d 1054, 1057 (6th Cir.
1992), aff'd, 510 U.S. 355 (1994). This Court rejected the
airlines’ theory and affirmed that compensatory rate-set-
ting is not inherently unreasonable. Kent County, 510 U.S.
at 369-70.
Under a compensatory rate-setting regime, as upheld
in Kent County, an airport is divided into a number of
functional cost centers (such as the airfield), and the rates
for the use of the facilities in each cost center are sep-
arately calculated to recover from each aeronautical user
its fair share of the costs attributable to the facility with-
out taking into account the costs or revenues associated
with other cost centers. E.g., App. 3a; App. 81a-82a; Kent
County, 510 U.S. at 359.22 Under this system, the existence
of so-called “surplus” revenue elsewhere within the air-
port, or the creation of alleged “benefits” outside the
airport, does not, and cannot, affect the reasonableness of
a compensatory rate. Thus, the reasonableness of airfield
rates is to be judged in relation to airfield costs, not on the
basis of the overall economic performance - or beneficial
impact — of the airport enterprise. Kent County, 510 U.S. at
369-72.
Even if it were true, as DOT and the court of appeals
have assumed, that the use of the entire LAX property as
22 It is typical for airport owners that use the compensatory
method to establish a separate cost center for the airfield which
is expected “to pay its own way” through the collection of
landing fees. See, e.g., Kent County, 510 U.S. at 359-60; Denver v.
Continental Air Lines, Inc., 712 F. Supp. 834, 835 (D. Colo. 1989);
Raleigh-Durham Airport Auth. v. Delta Airlines, 429 F. Supp. 1069,
1078-79 (D.N.C. 1976). Here, the Airlines never challenged the
City’s establishment of a separate airfield cost center at LAX.
28
an airport generates on an enterprise basis more aero-
nautical and non-aeronautical revenue for the City than
any alternative use would yield, the City will still incur
opportunity costs in dedicating its airfield land to airport
use unless the landing fees cover the FMV of the land. See
App. 115a (“But the panel never explains, and I cannot
understand, why the existence of those benefits under-
cuts the reasons for using opportunity cost.”) (Williams,
J., dissenting). The existence of opportunity costs in dedi-
cating land to airfield use simply does not depend upon
the uncertain and risky revenue streams the City may be
able to generate from other airport assets or upon the
collateral benefits the City may derive from having a
successful airport in its midst. Neither Kent County nor 49
U.S.C. § 47129(a)(2) permits DOT to disallow airfield
opportunity costs based on the aggregate revenues or
benefits obtained from the use of all aeronautical and
non-aeronautical assets.2>
23 It is true that in Kent County the Supreme Court invited
DOT to adopt a reasonableness standard that might entail
“more rigorous scrutiny” than the Court had articulated under
the dormant Commerce Clause. Kent County, 510 U.S. at 368
n.14. The Court cautioned, however, that any standard DOT
adopts must represent “a permissible construction of the
statute.” Id. When Congress subsequently enacted Section
47129(a)(2), codifying the right of airports to use a
compensatory method, it expressly foreclosed the possibility
that DOT would assess the reasonableness of compensatory
aeronautical charges on the basis of non-aeronautical revenue.
Indeed, in the past, DOT has acknowledged that Section
47129(a)(2) bars airline claims that non-aeronautical revenues
should be taken into account in assessing the reasonableness of
compensatory charges. See, e.g., Interim Policy, 60 Fed. Reg.
6906, 6908-09 (noting that the Air Transport Association of
America’s position that revenues derived from non-aeronautical
29
Accordingly, under both Kent County and 49 U.S.C.
§ 47129, it was improper for DOT and the court of
appeals to rely upon the existence of “surplus” non-
aeronautical revenue at LAX or the overall benefits the
City derives from LAX in ruling that the City had no
opportunity cost or, alternatively, that any opportunity
costs were adequately compensated by non-airfield reve-
nues (or benefits). A writ of certiorari should be granted
to resolve the conflict between Kent County and the deci-
sion below.
ac<.vities should be considered was “specifically rejected by the
Supreme Court in the Kent County decision” and that “§ [47129]
expressly preserves an airport proprietor’s right to use a
compensatory methodology”); Final Policy, 61 Fed. Reg. 31994,
31999-32000 (DOT “will not require cross-crediting of revenues,
because section 47129 does not permit us to do so.”). In
accordance with Section 47129, the Final Policy provides in 42.1
that “[flees may be set according to a ‘residual’ or
‘compensatory’ rate-setting methodology ...” and in 42.1.1 that
“[aJeronautical users may receive a cross-credit of non-
aeronautical revenues only if the airport proprietor agrees.” 61
Fed. Reg. 32019.
30
CONCLUSION
For the foregoing reasons, the petition for a writ of
certiorari should be granted.
Respectfully submitted,
STEVEN S. ROSENTHAL
Counsel of Record
JEFFERY A. TOMASEVICH
Cooper, CARVIN &
ROSENTHAL, PLLC
1500 K Street, N.W., Suite 200
Washington, DC 20005
(202) 220-9600
Scott P. Lewis
KENNETH W. SALINGER
PALMER & DODGE LLP
One Beacon Street
Boston, MA 02108
James K. HaAHn
BRETON K. LoBNER
TimotHy A. HoGANn
City Attorney
City of Los Angeles
One World Way
Los Angeles, CA 90045
Attorneys for Petitioners City of
Los Angeles, City of Los Angeles
Department of Airports, and Los
Angeles Board of Airport
Commissioners
APPENDIX A
la
APPENDIX A
CITY OF LOS ANGELES,
et al., Petitioners
Vv.
UNITED STATES DEPARTMENT
OF TRANSPORTATION, et al., Respondents.
Airports Council International —
North America, et al., Intervenors.
No. 98-1071
United States Court of Appeals,
District of Columbia Circuit.
Argued Jan. 7, 1999.
Decided Feb. 5, 1999.
Steven S. Rosenthal argued the cause for petitioners.
With him on the briefs were Jeffery A. Tomasevich, Scott
P. Lewis, Kenneth W. Salinger, Ronald N. Wilson, Stanley
A. Zamel, and Breton K. Lobner. Leilani F. Battiste
entered an appearance.
Thomas L. Ray, Senior Trial Attorney, United States
Department of Transportation, argued the cause for
respondents. With him on the brief were Joel I. Klein,
Assistant Attorney General, United States Department of
Justice, Robert B. Nicholson and Marion L. Jetton, Attor-
neys, Nancy E. McFadden, General Counsel, United
States Department of Transportation, and Paul M. Geier,
Assistant General Counsel.
2a
Jonathan S. Franklin argued the cause for intervenors
Air Transport Association of America, et al. With him on
the brief was Allen R. Snyder.
G. Brian Busey, Anthony L. Press, and Patricia A.
Hahn were on the briefs for intervenor Airports Council
International — North America.
Before: SILBERMAN, SENTELLE and RANDOLPH,
Circuit Judges.
Opinion for the Court filed by Circuit Judge SILBER-
MAN.
SILBERMAN, Circuit Judge:
The City of Los Angeles increased the landing fees at -
Los Angeles International Airport, and the airlines chal-
lenged those fees as unreasonable before the Department
of Transportation. The DOT set aside the increased fees,
reasoning that the City’s attempt to recoup its “oppor-
tunity costs” through the fees was impermissible as a
matter of statute. In City of Los Angeles v. DOT, 103 F.3d
1027 (D.C.Cir.1997), we rejected that statutory interpreta-
tion and remanded for the DOT to consider the oppor-
tunity cost issue as a matter of policy. The DOT did so,
concluding that the City’s claimed entitlement to recover
its opportunity costs was unreasonable, and rejected the
fees. The City petitions for review. We deny the petition.
I.
Until 1993, the City of Los Angeles, pursuant to a
contractual agreement with the airlines, established land-
ing fees at the Los Angeles International Airport (LAX)
based on a residual methodology. Under that technique,
ii
3a
the City estimated the revenue and cost attributable to
non-aeronautical operations - such as parking contracts
and concession franchising - for the coming fiscal year.
Expected nonaeronautical surplus, if any, was then
applied toward the anticipated cost of aeronautical opera-
tions. Landing fees were set (based on estimated landed
weight) at a sufficient level to make up for the remaining
aeronautical cost. In 1992, the last year in which the City
used this methodology, the fee was $.51 per 1,000 pounds
of landed weight. In 1993, the expiration of the City’s
contract with the airlines opened the door for the City to
adopt the potentially more lucrative compensatory fee
methodology. That approach treats aeronautical opera-
tions separately from non-aeronautical operations; the
airport sets landing fees at a sufficient level to compen-
sate it for the entirety of its aeronautical costs, and any
surplus or deficit from non-aeronautical operations is
irrelevant.
The City also decided in 1993, for the first time, to
include in its estimated aeronautical costs a charge
reflecting the current annual fair market rental value of
the land on which the airfield rests. The City thought
itself entitled to recover this “opportunity cost,” for only
then would the City be compensated fully for the cost of
using the land as an airport instead of pursuing its alter-
native opportunity to earn profits by renting the land.!
' A leading economics text defines “opportunity cost” in
this way: “[MJaking a choice in effect costs us the opportunity to
do something else. The alternative forgone is called the
Opportunity cost... .” Paut A. SAMUELSON & WituiaAM D.
Norpuaus, Economics 128 (16th ed.1998).
4a
The City appraised the current fair market value of the
land at $150,000 per acre. (The City had purchased most
of the 1,780.3 acres on which the airport is built over 50
years ago at an average price of $2,427 per acre.) Adjust-
ing for the effects of federal grants and converting to an
annual rental value, the City arrived at a figure of $8,348
per acre per year, or $14,861,900 per year for the entire
1,780.3 acres occupied by the airport. Putting this fair
market rental value, among other costs, into its compen-
satory fee calculation, the City computed a landing fee of
$1.56 per 1,000 pounds of landed weight (effective July 1,
1993), an increase of more than $1.00 over the 1992 fee.
When contract negotiations looking to a compensatory
fee agreement between the City and the airlines broke
down, the City unilaterally imposed the $1.56 fee by
ordinance, informing the airlines that they could not land
at LAX unless they paid the increased fee.
The airlines challenged the fee increase pursuant to
an expedited administrative procedure in which the
Department of Transportation has authority to set aside
unreasonable fees. See 49 U.S.C. § 47129 (1994); see also
Anti-Head Tax Act, 49 U.S.C. § 40116(e)(2) (1994) (provid-
ing that a political subdivision of a State may levy or
collect “reasonable . . . landing fees”); 49 U.S.C.
§ 47107(a)(1) (1994) (requiring federal airport grant recip-
ients to assure the DOT in writing that “the airport will
be available for public use on reasonable conditions”).
The Department determined the fee unreasonable, rea-
soning that the Anti-Head Tax Act’s “requirement of rea-
sonable fees . . . mandatles] the use of historic cost for
airfield land” — i.e., the original acquisition cost of the
land on which the airport was built - and thereby forbids
5a
consideration of opportunity cost. Los Angeles Int'l Airport
Rates Proceeding, Order No. 95-6-36, at 24 (June 30, 1995).
In the meantime, the City had announced a new landing
fee in 1995 of $2.06 per 1,000 pounds of landed weight
(effective July 1, 1995), again including among its costs its
claimed “opportunity cost,” i.e., the forgone fair rental
value of the airfield land. The airlines challenged this fee
before the DOT, and the Department set the fee aside for
the same reason given in rejecting the 1993 fee. Second Los
Angeles Int'l Airport Rates Proceeding, Order No. 95-12-33
(December 22, 1995).
In City of Los Angeles v. DOT (LAX 1), 103 F.3d 1027
(D.C.Cir.1997), we granted the City’s petition for review
of the Department's decision regarding the 1993 fee. (We
had stayed proceedings relating to the 1995 fee pending
our review of the Department's decision on the 1993 fee.)
We concluded that the Department had no basis for its
view that the Anti-Head Tax Act forbade the consideration
of opportunity costs in determining the reasonableness of
landing fees and permitted only the consideration of his-
toric costs. Id. at 1032. Although we noted that “[h]istoric
cost is . . . one permissible measure of costs in cost-of-
service rate-making,” we rejected the “Secretary's view of
historic cost as the apodictically indicated measure of
‘actual cost.’ ” Id. Accordingly, we vacated the Secretary's
decision and remanded “for his fuller consideration of
the respective merits of the historic cost and [opportunity
cost] methodologies here at issue.” Id. We granted the
Department's request for a remand of the 1995 fee pro-
ceeding to conduct a similar policy evaluation of the
competing methodologies. See Air Transport Ass'n of Am.
6a
v. DOT, No. 96-1018 (D.C.Cir. March 7, 1997) (per curiam
order).
On remand, the DOT consolidated the 1993 and 1995
fee proceedings. As before, the Department held that the
1993 and 1995 fees should be set aside because it was
unreasonable for the City to recover its claimed “oppor-
tunity cost.” Los Angeles Int'l Airport Rates Proceeding and
Second Los Angeles Int'l Airport Rates Proceeding (Remand
Decision), Order 97-12-31 (December 23, 1997). But this
time the Department rested its decision explicitly on pol-
icy grounds. It pointed to the airport’s obligation as a
federal airport grant recipient to keep the airport “avail-
able for public use,” 49 U.S.C. § 47107(a)(1), and to
another provision that bars a grant recipient from making
any alteration to the airport’s layout unless the Secretary
decides that the change will not “adversely affect the
safety, utility, or efficiency of the airport,” id.
§ 47107(a)(16)(C). See Remand Decision at 13. These provi-
sions forbid the City from converting the airfield land to
rental property; the City at present has no lawful oppor-
tunity to use the land in any capacity other than as an
airport. (Although the Department and the City seem to
disagree on precisely when the City’s grant assurance
obligation will expire, it is undisputed that the grant
assurance obligation is currently in force.) The Depart-
ment therefore concluded that it would be unreasonable
for the City to recover compensation through its landing
fees for a “lost opportunity” that does not lawfully exist.
See id. at 14.
Alternatively, the DOT held that even if the City were
thought to incur opportunity costs, the fees should be set
aside because the City’s “benefits” from operating LAX
i a
a
7a
already sufficed to cover the City’s opportunity costs. The
Department viewed the City, rather than the airport, as
the relevant economic actor; pursuing the rental oppor-
tunity would require the City either to build a new air-
port (or expand an existing minor airport such as Long
Beach or Orange County), or else simply to go without a
major airport. The latter option, according to the Depart-
ment, would entail an enormous loss to the City; a 1992
study quantified the benefits of LAX “in terms of jobs
(402,000); direct, indirect, and induced economic impacts
($37 billion per year); and state and local taxes ($1.7
billion per year).” Id. at 17. And the City would sacrifice
the current revenue the City earns from its airfield and
non-airfield activities at LAX. In the Department's view,
these losses far outweigh any reasonable forecast of
rental revenue — the City’s estimate of that revenue,
recall, was a mere $14,861,900 per year. In short, the
stream of benefits from using the land as rental property
rather than as an airport would be smaller than the
stream of benefits from operating the airport - i.e., the
opportunity cost of using the land as an airport was
already being covered. And the Department thought the
calculus would not be much different if the City, rather
than going without a major airport, attempted to build a
new major airport or expand existing minor airports.
Relying on the City’s own appraisal firm's report that the
“relocation of the Los Angeles International Airport
(LAX) is practically impossible” given the paucity of
alternative airport development sites and the prohibitive
costs of acquiring such a site, the Department concluded
that once these costs were taken into account, the net
8a
profit from renting the LAX land would again be out-
weighed by the benefits of using the LAX land as an
airport. Id. at 18-19. In the end, the Department con-
cluded that the City’s analysis of its opportunity costs -
which treated only the airport as the relevant economic
actor and considered only the annual rental income of
$14,861,900 — was overly simplistic, and therefore rejected
the City’s attempt to include its self-described “oppor-
tunity costs” in calculating its landing fees.
We should briefly mention a related proceeding, the
DOT’s effort to fulfill its statutory mandate under 49
U.S.C. § 47129(b)(2) to publish final regulations, policy
statements, or guidelines establishing the “standards or
guidelines that shall be used by the Secretary in deter-
mining . . . whether an airport fee is reasonable.” In June
1996, the Secretary published a regulation entitled the
“Policy Regarding Airport Rates and Charges.” See 61
Fed.Res. 31,994 (June 21, 1996). The regulation required
airports to value their airfield assets at historic cost, but
allowed airports to use “any reasonable methodology” in
valuing their non-airfield assets. Id. In Air Transport Asso-
ciation v. DOT, 119 F.3d 38 (D.C.Cir.1997), we vacated the
regulation, challenged both by the airlines and Los
Angeles, because, inter alia, the Secretary “simply ha[d]
not explained why fair market valuation may be appro-
priate for other portions of the airport, but too difficult to
use in valuing airfield assets.” Id. at 44. The Secretary is
presently in the process of formulating a new regulation
on airport fees, and has issued an advance notice of
proposed rulemaking asking for comments on what cost
methodologies should be required for airfield and non-
airfield fees. See 63 Fed. Reg. 43,228 (Aug. 12, 1998). The
9a
City contends that our vacatur of the Department's regu-
lation in Air Transport Association somehow casts doubt
on the Remand Decision presently before us. But the
: Department did not rely on its vacated regulation, see
Remand Decision at 8, and has not yet adopted a new
regulation on the appropriate methodology for non-air-
field fees as compared to airfield fees.
II.
The City and the Department before us principally
dispute the reasonableness of the City’s methodology of fee
calculation, not the reasonableness of the magnitude of the
resulting fees.
; Reiterating its first reason for rejecting the City’s fee
: methodology, the Department submits that it is unreason-
able to attempt to include as an airfield cost the “oppor-
: tunity cost” of employing the land as an airport rather
than as rental property, for the proposed opportunity
i does not lawfully exist at present. As one of the members
of the panel observed, in paraphrasing the DOT’s argu-
ment, the City is like an owner of a hot dog stand who
claims his opportunity cost is the revenue he would earn
‘ by selling cocaine rather than hot dogs. The City con-
tends, however, that the Department has adopted an erro-
neous conception of opportunity cost; for an economist,
we are told, the present impossibility of pursuing the
Opportunity to rent the airfield land does not mean that
no Opportunity cost has been incurred.
10a
At bottom, the parties’ dispute as to the concept of
opportunity cost seems to rest on a single question:
Should the legal barrier to pursuing the opportunity be
treated as immutable? If opportunity costs are measured
as of now and the grant assurance obligation is viewed as
fixed, then the Department’s view would seem inevitable.
For then the City would have no opportunity to use the
land in any non-airport capacity — the City at least would
face enormous transition costs (the cost of violating the
law or perhaps of buying a release from the obligation) in
pursuing the opportunity, which alone could render the
potential profit from that opportunity small or even nega-
tive. But if we ignore (i.e., treat as changeable at zero cost)
the present legal hurdle to pursuing the opportunity, then
the City’s position is much stronger.
To be sure, an economist formulating an efficient
plan for regulating the City’s monopoly over landing
space might well take the City’s view, treating all regula-
tory tools — including existing grant assurance obligations
— as easily changeable. Cf. Wiitiam J. Baumot & J. GreGory
SIDAK, TRANSMISSION PRICING AND STRANDED COSTS IN THE
Etectric Power INbustry 53 (1995). But the airlines’ expert
suggested otherwise when he testified that “[s]ometimes
the opportunity is virtually nil, in which case there is no
opportunity cost.” In any event, that some or many econ-
omists would disapprove of the Department’s approach
does not answer the question presented to us. In review-
ing the Department’s order, we do not sit as a panel of
referees on a professional economics journal, but as a
panel of generalist judges obliged to defer to a reasonable
judgment by an agency acting pursuant to congression-
ally delegated authority. See Air Canada v. DOT, 148 F.3d
lla
1142, 1151 (D.C.Cir.1998); LAX I, 103 F.3d at 1031 (citing
Northwest Airlines v. County of Kent, 510 U.S. 355, 366-68,
114 S.Ct. 855, 127 L.Ed.2d 183 (1994)); see generally Motor
Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463
U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983). The City
submits that our review should be more strict given that
the Department arrived at the same result on remand as it
had reached in its initial decision, but that proposition
strikes us as flatly inconsistent with the Chenery doc-
trine. See SEC v. Chenery Corp. (Chenery I), 318 U.S. 80, 63
S.Ct. 454, 87 L.Ed. 626 (1943); SEC v. Chenery Corp. (Chen-
ery II), 332 U.S. 194, 200, 67 S.Ct. 1575, 91 L.Ed. 1995
(1947) (“We held no more and no less [in Chenery I] than
that the Commission’s first order was unsupportable for
the reasons supplied by that agency.”). To be sure, there is
some support for the City’s view in our cases. See, e.g.,
Greyhound Corp. v. iCC, 668 F.2d 1354, 1358 (D.C.Cir.1981).
But as we have more recently explained, “[w]hile we are
mindful that [the agency] has adhered to the position it
first took in the decision that we remanded, cf. [Grey-
hound], our review is still a matter of determining
whether the agency’s final decision ‘was based on a con-
sideration of the relevant factors and whether there has
been a clear error of judgment.’ ” Competitive Enter. Inst.
v. NHTSA, 45 F.3d 481, 484 (D.C.Cir.1995) (quoting State
Farm, 463 U.S. at 43, 103 S.Ct. 2856).
Here we cannot say it was irrational for the Depart-
ment to treat the grant assurances as a given and evaluate
the City’s proposed methodology from that perspective.
And the grant assurance obligations may in fact be a
fixed point for the DOT. Although the Department has
some contro! over grant assurances insofar as the grant
12a
recipient ab initio promises the Department to keep the
airport open for public use, see 49 U.S.C. § 47107(a)(1), it
is unclear whether the Department is free at this stage to
release an airport from its promise —- to do so might
violate the statute.
The City argues that the Department’s “no oppor-
tunity, hence no opportunity cost” rationale attempts an
“end run” around our holding in LAX I that the Anti-
Head Tax Act, 49 U.S.C. § 40116(e)(2), does not itself
proscribe consideration of opportunity costs in establish-
ing reasonable landing fees. See LAX I, 103 F.3d at 1032.
The City explains that under the Remand Decision, no
airport that accepts federal grants (and thus gives grant
assurances) could ever justify the recovery of opportunity
costs — the result is a “per se rule” against using oppor-
tunity costs in calculating landing fees, which is another
way for the Department to claim that it is legally manda-
ted to reject the opportunity cost methodology. But the
Department did not say that it was obliged to take into
account the federal grants. Even if it were, in LAX I, we
addressed only the Anti-Head Tax Act and the expedited
2 Ina contention related to its attack on the Remand Decision
as economically unsound, the City argues that the airlines, as
proponents of an order setting aside the fees, failed to carry the
burden of persuasion assigned to them by the Administrative
Procedure Act. See 5 U.S.C. § 556(d) (1994); Air Canada, 148 F.3d
at 1155-56° (citing Director, Office of Workers’ Compensation
Programs, Dep't of Labor v. Greenwich Collieries, 512 U.S. 267, 272,
114 S.Ct. 2251, 129 L.Ed.2d 221 (1994)). We think this argument
lacks merit, given that the airlines did introduce in evidence the
City’s grant assurances, and that the Department’s conclusions
turned on its own policy determination. See Air Canada, 148 F.3d
at 1157.
13a
review provision, see LAX I, 103 F.3d at 1032 (“Nothing in
the Anti-Head Tax Act or [the expedited review provi-
sion] . . . prescribes an accounting rather than an eco-
nomic conception of cost in airport ratemaking.”), and
did not analyze any argument based upon the federal
airport grant provision.
intervenor Airports Council International (ACI)
points to a different alleged problem with the Depart-
ment’s “no opportunity, hence no Opportunity costs”
rationale: ACI submits that DOT has retroactively added
new conditions to the City’s grant assurances by relying
on those grant assurances to deprive the City of the
ability to recover its opportunity costs, which ACI claims
conflicts with the “clear statement” requirement of Penn-
hurst State School & Hospital v. Halderman, 451 U.S. 1, 17,
101 S.Ct. 1531, 67 L.Ed.2d 694 (1981). But we do not view
the Department’s reasoning as adding new conditions to
the grant. Rather, the Department focused on a conse-
quence of an unambiguously imposed condition — that the
airport would be kept open for public use — that was
present from the outset.
~
B.
Even were we to hold the Department’s first ratio-
nale unlawful, we would uphold its order. We cannot say
~ and the City does not seriously argue — that the DOT’s
alternative rationale, that if the City is deemed to incur
opportunity costs, those costs are already covered by the
existing “benefits” enjoyed by the City, is an unreason-
able one. See Air Canada, 148 F.3d at 1142; LAX I, 103 F.3d
at 1031; State Farm, 463 U.S. at 43, 103 S.Ct. 2856. The City
l4a
does argue that the Department's “comprehensive oppor-
tunity cost analysis” rationale runs into a separate legal
problem. By taking into account the current non-airfield
revenue at LAX in deciding whether the City’s oppor-
tunity costs are presently covered, it is claimed that the
Department deprives the City of its right to use the
compensatory fee methodology by forbidding the City
from valuing its airfield assets without considering non-
airfield revenues.* The compensatory fee methodology,
the City reminds us, was recognized by the Supreme
Court in Northwest Airlines, 510 U.S. at 369, 114 S.Ct. 855,
and codified by Congress, see 49 U.S.C. § 47129(a)(2) (“A
fee subject to a determination of reasonableness under
this section may be calculated pursuant to either a com-
pensatory or residual fee methodology or any combina-
tion thereof.”). This is a clever argument, but not
persuasive because the Department in no sense adopted a
general requirement that airports must credit their non-
airfield surpluses toward their airfield costs. The DOT is
only taking into account non-airfield revenues, as well as
all other economic benefits the City enjoys, in determin-
ing whether Los Angeles really has an uncovered oppor-
tunity cost. It is the City itself, by using the opportunity
costs concept, that has invited the Department to think
broadly about how such costs should be measured. And
we cannot hold that it was unreasonable for the DOT,
when faced with a demand for an economic analysis, to
* The compensatory fee methodology, recall, permits an
airport to set landing fees at a sufficient level to cover its airfield
costs and, unlike the residual methodology, does not require an
airport to apply any surplus from non-airfield activities toward
those airfield costs.
15a
consider factors that an economist might take into
account.
The City argues that the setting aside of its fees
amounted to an unconstitutional taking. The question is
entirely one of the adequacy of the fee the Department
permits the City to charge; the Takings Clause has noth-
ing to do with the methodology of ratemaking. See
Duquesne Light Co. v. Barasch, 488 U.S. 299, 314, 109 S.Ct.
609, 102 L.Ed.2d 646 (1989); FPC v. Hope Natural Gas Co.,
320 U.S. 591, 602, 64 S.Ct. 281, 88 L.Ed. 333 (1944) (“It is
not the theory but the impact of the rate order which
counts.”); Jersey Central Power & Light Co. v. FERC, 810
F.2d 1168, 1176 (D.C.Cir.1987) (en banc). Determining
whether a taking has occurred in the ratemaking context
requires us to examine whether the authorized rate
reveals that the agency has reasonably balanced the
investor and consumer interests at stake. Jersey Ceniral,
810 F.2d at 1177-78. The “legitimate investor interest” is a
question of
the financial integrity of the company whose
rates are being regulated. From the investor or
company point of view it is important that there
be enough revenue not only for Operating
* Intervenor ACI objects that the Department's “compre-
hensive opportunity costs analysis,” carried to its logical
conclusion, could prevent airports from charging landing fees at
all, depending on the level of benefit provided to the residents
and businesses of the city-owner. But the Department has not in
fact pursued that approach — to do so would raise a serious
Takings Clause question.
l6a
expenses but also for the capital costs of the
business. These include service on the debt and
dividends on the stock. [The return] should be
sufficient to assure confidence in the financial
integrity of the enterprise, so as to maintain its
credit and to attract capital.
Id. at 1176 (quoting Hope, 320 U.S. at 603, 64 S.Ct. 281).
The Department contends, and we agree, that these
principles do not precisely carry over to the situation
presented here of a municipally-owned airport as the
regulated entity. A municipality has no stockholders, so it
makes little sense to analyze the proper return on equity.
That is not to say that the Takings Clause has no applica-
tion here. The Supreme Court has explained that the
Clause applies to the federal government’s condemnation
of property owned by a local government, see United
States v. 50 Acres of Land, 469 U.S. 24, 31, 105 S.Ct. 451, 83
L.Ed.2d 376 (1984), and we see no logical reason why a
different rule should apply in the ratemaking context.
Although the City (LAX) does not have equity investors,
it does have bondholders, and it makes perfect sense to
ask whether the entity’s rates are sufficient “to maintain
its credit” and to “assure confidence in the financial
integrity of the enterprise.” Hope, 320 U.S. at 603, 64 S.Ct.
281; cf. 49 U.S.C. § 47101(a)(13) (providing that it is the
policy of the United States “that airports should be as
self-sustaining as possible”).
The only suggested “hardship” under the current
fees is a lack of flexibility in undertaking airport
improvement projects. (The thrust of the City’s argument
is the oblique claim that the City is being denied a “fair”
rate of return.) The City has never alleged that its current
a
17a
fees jeopardize the financial integrity of LAX, and there-
fore the City had no right to a hearing before the Depart-
ment on its Takings Clause claim. Compare Jersey Central,
810 F.2d at 1181-82 (regulated entity was entitled to a
hearing where it “presented allegations, which, if true,
suggest that the rate order almost certainly does not meet
the requirements of Hope Natural Gas, for the company
has been shut off from long-term capital, is wholly
dependent for short-term capital on a revolving credit
arrangement that can be cancelled at any time, and has
been unable to pay dividends for four years”).
* * *
For the foregoing reasons, the petition for review is
Denied.
18a
UNITED STATES OF AMERICA
DEPARTMENT OF TRANSPORTATION
OFFICE OF THE SECRETARY
WASHINGTON, D.C.
issued by the Department of Transportation
on the 23rd day of December, 1997
LOS ANGELES
INTERNATIONAL AIRPORT . Docket OST-97-2329
RATES PROCEEDING : (Docket 50176)
SECOND LOS ANGELES
INTERNATIONAL AIRPORT . Docket OST-95-474
RATES PROCEEDING
FINAL DECISION ON REMAND
The Department of Transportation issued final decisions
under 49 U.S.C. 47129 on the reasonableness of the land-
ing fees charged at Los Angeles International Airport
(“LAX”) from July 1, 1993 through June 30, 1995, and
from July 1, 1995 to the present. We determined that the
fees were unreasonable insofar as they included a rental
cost for the airfield and apron land based on the land’s
estimated fair market value. Los Angeles International Air-
port Rates Proceeding (“First LAX Rates Proceeding”),
Order 95-6-36 (June 30, 1995); Second Los Angeles Interna-
tional Airport Rates Proceeding (“Second LAX Rates Pro-
ceeding”), Order 95-12-33 (December 22, 1995). On
review the U.S. Court of Appeals for the District of
Columbia Circuit remanded our decision in the First LAX
19a
Rates Proceeding on that issue, although it affirmed our
decision insofar as the airline complainants had chal-
lenged it. City of Los Angeles Dept. of Airports v. Dept. of
Transportation (“LAX I”), 103 F.3d 1027 (D.C. Cir. 1997).
The Court directed us to reexamine the City’s arguments
in favor of using fair market value for the airfield land in
calculating the landing fees.
The Court’s decision caused us to ask the Court to
remand our decision on the land valuation issue in the
Second LAX Rates Proceeding, since we based that decision
on our rationale in the First LAX Rates Proceeding. See
Order 95-12-33 at 17. The Court granted our request on
March 7, 1997. Air Transport Ass‘n et al. v. Dept. of Trans-
portation, D.C. Cir. Nos. 96-1018 et al. (“LAX II”) (March 7,
1997 order).
In response to the Court’s remand, we asked the parties
to submit briefs on the land valuation issue and ten-
tatively determined to decide the issue on the basis of the
existing record. Order 97-4-12 (April 10, 1997).
In their briefs the City of Los Angeles (“the City”), which
owns and operates LAX, argues that its charge for the fair
market value of the airfield land is reasonable, while the
airline complainants argue that the charge is unreason-
able. The Airports Council International - North America
(“ACI”), an airport trade association that intervened in
this case, supports the City’s position. The parties agree
that we should decide the issue without additional evi-
dence.
After considering the briefs and the record in light of the
Court’s decision, we have determined that the airport's
charge for the land’s fair market value is unreasonable, as
20a
explained in detail below. In summary, the issue is
whether the City may include in the landing fee a rental
charge for the airfield land based on the land’s estimated
fair market value, that is, whether the charge represents a
cost that may reasonably be imposed on the airlines using
the airfield. In concluding that this charge is unreason-
able, we rely on several factors. Among other things, the
charge cannot be justified as compensation for the air-
port’s opportunity costs in using its land for airport
facilities, since the City made a commitment to continue
using LAX as an airport and the airport’s overall reve-
nues compensate the City for using the land as an airport.
There is no economic policy reason for allowing the use
of fair market value, because the City needs no additional
incentive to use its property at LAX as an airport, for the
airport provides significant economic benefits to the Los
Angeles area. There is also no evidence that the fair
market value charge is needed to deter excessive use of
LAX. Finally, the use by every other U.S. airport of his-
toric cost, not fair market value, in valuing its airfield
assets for landing fee calculations further supports our
decision.!
1 As indicated, our decision on the land valuation issue in
the Second LAX Rates Proceeding relied on the findings in the
First LAX Rates Proceeding, since none of the parties submitted
additional evidence on that issue in the second case. Unless
stated otherwise, all of the record citations in this order are
citations to the evidence in the First LAX Rates Proceeding.
2la
BACKGROUND
1. Regulatory Background
Like LAX, most airports used by commercial airlines are
operated by a state or local government. Airports such as
LAX charge airlines landing fees for using the airfield
and different fees for using other airport facilities and
services. Airport operations, like airline Operations, have
long been subject to extensive federal regulation. Federal
law also authorizes airports to charge passenger facility
charges (“PFC’s”).
Among other things, two federal Statutes allow airports
like LAX to charge airlines only reasonable landing fees.
Section 511 of the Airport and Airway Improvement Act
of 1982, now recodified as 49 U.S.C. 47107, which autho-
rizes the airport grant program, requires airports that
accept federal grant money for an airport improvement to
give certain assurances to the Department. LAX, like
most airports used by commercial airlines, has received
substantial grants of federal funds for airport improve-
ments. One such assurance requires the airport to be
available for public use on fair and reasonable terms and
_ without unjust discrimination. This obligation to make
the airport available on reasonable terms includes an
obligation to charge aeronautical users only reasonable
fees. See 61 Fed. Reg. 31994, 31995 (June 21, 1996).
* From 1973 to 1993 the City entered into federal grant
agreements enabling it to obtain $300 million in federal funds,
and it had received over $175 million of these amounts by
September 1993. Exhibit ATA-1. In the 1993-1994 fiscal year, the
City’s Department of Airports received $38 million in federal
grants and $53 million from PFCs. Exhibit ATA-98 at 225.
22a
Section 511 of the Airport and Airway Improvement Act
of 1982 also provides, with some exceptions, that all
revenues generated by a public airport, and any local
taxes on aviation fuel, will be expended for the capital or
operating costs of the airport, the local airport system,
and other local facilities owned or operated by the airport
that directly and substantially relate to the air transporta-
tion of passengers or property. As a result, under current
law, LAX’s revenues — whether derived from aeronautical
or non-aeronautical users — may only be used for airport
purposes and may not be diverted, for example, to the
City’s general fund.
The second statute allowing airports to charge only rea-
sonable fees is section 1113(b) of the Federal Aviation
Act, the Anti-Head Tax Act, recodified as 49 U.S.C. 40116.
The statute allows publicly-owned airports to collect only
reasonable rental charges, landing fees, and other service
charges from aircraft operators for the use of airport
facilities. See Northwest Airlines v. County of Kent, 510 U.S.
355 (1994) (“Kent County”).
Neither the airport grant statute nor the Anti-Head Tax
Act restricts the airport fees charged non-aeronautical
users, such as restaurants, stores, and parking lots.
To give airlines a more effective method for enforcing the
airports’ obligation to charge only reasonable fees, Con-
gress enacted 49 U.S.C. 47129 in 1994. That statute
requires us to decide whether a new or increased airport
fee is reasonable in an expedited proceeding if an airline
files a complaint against the fee and the complaint
involves a significant dispute. See First LAX Rates Proceed-
ing, Order 95-4-5 at 2-5. The statute, however, does not
23a
change the substantive rights and duties of the airports or
the airlines. Id. at 3, 12-13.3
While the statute requires us to determine whether a fee
is reasonable and to award refunds to the extent that the
fee is unreasonable, the statute also bars us from setting
the fee. As a result, in cases decided under 49 U.S.C.
47129 we determine whether the airport’s fee methodol-
ogy and calculation are reasonable.
The new statute, 49 U.S.C. 47129, also required us to
publish guidelines for determining whether a fee is rea-
sonable. We first issued an interim policy statement on
airport rates and charges, 60 Fed. Reg. 6909 (February 3,
1995) (“the Interim Policy Statement”), petition for review
dismissed, City of Los Angeles v. DOT, D.C. Cir. Nos.
95-1188 et al. (July 1, 1996), and then a final policy state-
ment on airport rates and charges, 61 Fed. Reg. 31994
(June 21, 1996) (“the Final Policy Statement”), vacated in
part, Air Transport Ass’n et al. v. Dept. of Transportation, 119
F.3d 38 (D.C. Cir. 1997), as modified on rehearing, October
15, 1997 order. Both the interim and final policy state-
ments required landing fees to be based on the historic
cost, not the fair market value, of airfield assets. The Final
Policy Statement allowed airports to use any reasonable
* When Congress enacted 49 U.S.C. 47129, it also amended
the airport grant statute’s policy statement so that it states that
airports “in establishing new fees, rates, and charges, and
generating revenues from all sources, . . . should not seek to
create revenue surpluses that exceed the amounts to be used for
airport system purposes and for which airport revenues may be
spent under 49 U.S.C. 47107(b)(1), including reasonable
reserves and other funds to facilitate financing and cover
contingencies.” 49 U.S.C. 47101(a)(13).
24a
methodology to set non-airfield fees. The Court of
Appeals vacated the Final Policy Statement’s provision
allowing airports to use any reasonable method for set-
ting non-airfield fees and vacated the historic cost
requirement for airfield fees because the Final Policy
Statement had not adequately justified the distinction
between airfield and non-airfield fees. The Court’s deci-
sion on the Final Policy Statement does not control this
decision, since we have not based our decision on the
LAX land valuation issue on the policy statements’ guide-
lines. See First LAX Rates Proceeding, Order 95-6-36 at
19-26; LAX I, 103 F.2d at 1030, n. 1.
2. The First LAX Rate Proceeding
For many years the City used a residual fee methodology
to calculate LAX’s landing fees under an agreement with
the airlines. Under that methodology, the airport’s profits
from non-airfield sources were used to reduce the air-
lines’ landing fees. On the other hand, the airlines made a
commitment to pay higher landing fees when needed to
offset any losses on the airport’s non-airfield activities.
Because the airport’s non-airfield revenues in recent
years have exceeded its non-airfield costs, the airlines’
fees for using the airfield in the last years of the residual
fee system were significantly lower than the airport’s
airfield costs. See First LAX Rates Proceeding, Order
95-6-36 at 5. The residual fee agreement additionally gave
the airlines an ability to veto major capital improvements
at LAX. Exhibit LAX-C1 at 2.
In 1993 the airport switched to a compensatory methodol-
ogy for calculating its landing fees. That methodology
25a
based the fees on the airport's costs of providing airfield
facilities and services. The airport’s calculation of those
costs included a charge reflecting the fair market value of
the airfield land. First LAX Rates Proceeding, Order 95-6-36
at 19. The City originally bought the land at an average
cost of $2,427 per acre and estimated the land’s current
fair market value at $150,000 per acre. The annual rental
charge based on this estimated value was $14,861,900.
LAX I, 103 F.3d at 1031.
After Congress enacted 49 U.S.C. 47129, sixteen airlines
jointly filed a complaint alleging that the LAX landing
fees charged since July 1, 1993, were unreasonable, in
part because of the airport's inclusion of the charge repre-
senting the estimated fair market value for the airfield
land. First LAX Rates Proceeding, Order 95-4-5 at 7. Our
Order 95-4-5 set the airlines’ complaints for hearing
under 49 U.S.C. 47129.
The Department’s Chief Administrative Law Judge, John
J. Mathias, held a hearing and issued a recommended
decision finding that the landing fees were unreasonable
insofar as the City had used the airfield land’s fair market
value instead of the land’s historic cost in calculating the
fees. See First LAX Rates Proceeding, Order 95-6-36 at
19-20.
On review we affirmed his decision on this issue. In
determining that the airfield land should be valued at
historic cost, not fair market value, we relied on the use
of historic cost by all other airports, the relative adminis-
trative ease of determining historic cost, and the airport’s
ability to recover its out-of-pocket costs by using historic
cost. First LAX Rates Proceeding, Order 95-6-36 at 19-26.
26a
The City and the airline complainants sought judicial
review of our decision, which led to the Court’s LAX I
decision. While the court case was pending, we held a
new proceeding under 49 U.S.C. 47129 on the reasonable-
ness of new LAX fees, as discussed next.
3. The Second LAX Rates Proceeding
The City adopted higher landing fees at LAX for the fiscal
year beginning July 1, 1995, just before we issued our
final decision in the First LAX Rates Proceeding. The new
fees also included a charge for the fair market value of
the airfield land.
Fifty-nine airlines filed a complaint alleging that the new
LAX landing fees were unreasonable. We issued a deci-
sion under 49 U.S.C. 47129 that found that the fees were
unreasonable because, among other things, the airport
had valued the airfield land at fair market value, not
historic cost. We based our decision on the latter issue on
the rationale and evidence used in the First LAX Rates
Proceeding, since the parties had submitted no new evi-
dence on this issue in the second proceeding. Second LAX
Rates Proceeding, Order 95-12-33 at 17.
The City and the airline complainants sought judicial
review of our decision. Air Transport Ass‘n et al. v. Dept. of
Transportation, D.C. Cir. Nos. 96-1018 (filed January 22,
1996) (“LAX II”). The Court stayed the proceedings in
that case pending its decision on review of our decision
in the First LAX Rates Proceeding.
27a
4. The Court of Appeals’ Remand
On review of our decision in the First LAX Rates Proceed-
ing, the Court concluded that we had wrongly concluded
that federal law prohibited the use of fair market value in
calculating landing fees. In the Court’s view we therefore
had not given adequate consideration to the City’s argu-
ments defending its use of fair market value. LAX I, 103
F.3d at 1032. The Court remanded the land valuation
issue to us so that we would consider the City’s argu-
ments.
The Court further questioned two elements of our ratio-
nale for disallowing the fair market value charge: our
reliance on the universal practice of other airports of
using historic cost for calculating landing fees, and our
reliance on the relative difficulty of determining the fair
market value of airfield land. 103 F.3d at 1033.
We did not seek rehearing or rehearing en banc of the
Court’s decision. We asked the Court to remand the land
valuation issue in LAX II so that we could examine in a
single proceeding the reasonableness of the airport’s fair
market value charge in the fees adopted in 1993 and those
adopted in 1995.
5. Proceedings on Remand
To carry out the Court’s remand order, we issued an
order asking the parties to file briefs and reply briefs on
the issue of the reasonableness of the airport’s fair market
value charge for the airfield land. Order 97-4-12 (April 9,
1997). The parties entitled to file briefs would be the
airline complainants in each case that were eligible to
28a
receive refunds (together with the Air Transport Associa-
tion, an intervenor), the City, and ACI. Id. at 6.
We tentatively determined not to reopen the record in
these cases, since our procedural rules for cases heard
under 49 U.S.C. 47129 require parties in such cases to
submit all of their evidence (subject to certain exceptions
not relevant here) before we referred the case to an ALJ.
Id. at 6-7.
We also ruled that we would reexamine only the land
valuation issue — since the Court had remanded only that
issue, Our decisions on all other issues in the two LAX
cases were final. Id. at 7.4
In their briefs the airline complainants continue to argue
that the fair market value charge is unreasonable while
the City and ACI contend that the charge is reasonable. In
our analysis of our decision we will summarize the par-
ties’ positions on each of the issues.
All of the parties agreed with our tentative decision that
no new evidence should be introduced in this case and
4 We also extended our stay of the City’s obligation to
refund the portion of the landing fees representing the charge
for the fair market value of the airfield land. Order 97-4-12 at 8.
No one objects to that action. Due to that stay and the escrow
agreement between the airport and the airlines, the airport has
not yet had to repay the portion of the fees charged since 1993
that represent the fair market value charge, since there has been
no final decision on whether the charge is reasonable. See Order
97-4-12 at 4, 8.
> The airline complainants and the City filed motions for
leave to file unauthorized documents. We will grant these
motions.
29a
that we should decide the land valuation issue on the
basis of the Original record. Airlines Brief at 2,n. 1; LA
Brief at 5, n. 3.
OUR DECISION
The question on remand is whether the landing fee calcu-
lation, based on a compensatory methodology, may rea-
sonably include the charge for the fair market rental
value of the airfield land. After considering the record in
these cases on this issue and the points that the Court
directed us to examine, we conclude again that the fair
market value charge for the airfield land is unreasonable.
Among other things, the City has no opportunity to use
its LAX property for a non-airport use, so the City incurs
No opportunity cost from using the property for an air-
port. The City needs no additional incentives to operate
LAX as an airport, since the Los Angeles area obtains
substantial economic benefits from the airport’s opera-
tion. We also find that the historic cost requirement is
consistent with the Constitution’s prohibition against the
taking of property without just compensation.
In explaining our decision, we will begin by discussing
the airlines’ statutory claims and the scope of our author-
ity to review an airport’s fee methodology under 49
U.S.C. 47129, and by explaining why Professor Arrow’s
declaration - a declaration originally submitted by the
City and later withdrawn - is not properly within the
record of this case. We will then address the City’s princi-
pal justification for the fair market charge — its claim that
the charge compensates the City for using LAX as an
30a
airport. After explaining why we find that claim unten-
able, we will show that there is no other economic justi-
fication for the charge (for example, the City needs no
additional incentive to use its property at LAX as an
airport), and that the LAX charge is contrary to the prac-
tice of all other U.S. airports. We will then explain why
the City’s takings clause argument is without merit.
Finally, while our decision in this proceeding would not
be affected by the issue of whether calculating the fair
market value of airfield land is substantially more bur-
densome than calculating the land’s historic value, we
discuss the record on this issue since our analysis may
provide guidnace [sic] in future proceedings.
We have analyzed the reasonableness of the City’s fair
market value charge for the airfield land on the basis of
the record in this proceeding, not on the basis of the
Interim or Final Policy Statements. Our decision in this
case does not foreshadow our eventual decision on air-
field fee guidelines in our forthcoming proceeding for
adopting such guidelines, a proceeding required by the
Court’s decision in Air Transport Ass‘n partially vacating
the Final Policy Statement. The airport parties are urging
that those guidelines not require the use of historic cost
for airfield fees. We will consider their proposals — and
those of all other parties in that proceeding — on the basis
of the record in that proceeding.®
© As we stated earlier, we did not apply the Interim Policy
Statement’s historic cost requirement in our original decision on
the LAX fair market value charge. In its brief the City argues
that our determinations on reasonableness in the Final Policy
Statement support its position, but this argument is based on a
mischaracterization of the Final Policy Statement. On the
3la
1. The Statutory and Regulatory Provisions on Allow-
able Costs ,
The Court remanded this case since it believed that we
had wrongly read the statutes as prohibiting the use of
the fair market value charge. The Court held that the
applicable federal statutes do not exclude all costs but
out-of-pocket costs from an airport's calculation of com-
pensatory landing fees and that the statutes may allow an
airport to recover such costs as opportunity costs. LAX I,
103 F.2d at 1032.
Notwithstanding the Court’s decision, the airline com-
plainants argue that the airport's fair market value charge
is prohibited by the federal statutes, since those statutes
assertedly require airport fees to be based on costs and
since Opportunity costs are not a legitimate cost within
the meaning of these statutes. Congress allegedly
intended to keep airports from making a profit from their
aeronautical fees, including their landing fees. Airlines
Brief at 3-9.
We agree with the airline complainants that Congress
intended to limit airport fees and did not intend to give
airports complete discretion over the level of their fees.
ground that we recognized that fair market value can be a
reasonable method of calculating non-airfield fees (but not
airfield fees), the City wrongly claims that we are committed to
allowing the use of fair market value for calculating airfield
fees. LA Brief at 5. The City similarly errs in claiming that our
decision in the policy statement rulemaking to allow imputed
interest on some airfield investments means that we have
effectively rejected our decisions in these cases to require LAX
to value the airfield assets on the basis of historic cost. LA Brief
at 6-7.
32a
Congress, after all, included a reasonable fee requirement
in both the Anti-Head Tax Act and the airport grant
statute and created procedures in 49 U.S.C. 47129 for
ensuring that airlines complaining about the reasonable-
ness of a new or increased fee will obtain a hearing before
an administrative law judge and a prompt decision in
cases satisfying the jurisdictional requirements of that
section. As we stated at the beginning of the First LAX
Rates Proceeding, Congress created the expedited pro-
cedures required by 49 U.S.C. 47129 in the expectation
that we would closely examine airport fees to ensure that
they met the statutory standard. Order 95-4-5 at 26. But
Congress’ overall goal of limiting airport fees to reason-
able amounts does not answer the question of whether
the LAX fees are reasonable.
We cannot agree with the airlines’ position that the fair
market value charge is clearly barred by the terms of the
statutes governing airport fees. The Court has already
held that the applicable federal statutes do not prohibit
the use of opportunity costs in calculating airport fees.
Given the Court’s ruling, we could not adopt the airline
complainants’ position in this case even if we agreed with
it.
Instead of defining reasonableness by statute, Congress
chose to give the Secretary the discretion to determine
reasonableness. The statute requires the Secretary to
adopt guidelines for use in determining whether airport
fees are reasonable without limiting his discretion in
choosing those guidelines, except by expressly giving
airports the right to choose a compensatory or residual
fee methodology or a hybrid of those methodologies. The
statute’s history confirms Congress’ intent to give the
7 |
— a
33a
Secretary the authority to define reasonableness. See, €.g.,
140 Cong. Rec. $6986 (June 16, 1994) (Senator Feinstein);
140 Cong. Rec. $7030 (June 16, 1994) (Senator Boxer); 140
Cong. Rec. S6658 (June 9, 1994) (Senator Pressler). We
therefore have the authority to determine whether an
airport's fee methodology is reasonable or not, and that
discretion applies to the issue remanded by the Court.
2. Our Authority to Review an Airport’s Fees
ACI and the City contend that the Anti-Head Tax Act, the
airport grant statute, and 49 U.S.C. 47129 require us to
defer to the airport's judgment on the reasonableness of
its fees, that we do not have the authority to set binding
standards governing airport fees, and that an airport's fee
methodology decisions are entitled to a presumption of
validity. LA Brief at 13; LA Reply Brief at 11-12; ACI Brief
at 2-4.
The airline complainants contend that the issue of the
scope of our authority is an issue that we need not and
should not consider here, since we had decided that issue
in the earlier orders in the First LAX Rates Proceeding, the
City did not seek review of our decision on that issue,
and our decision therefore became final. Airlines Sur-
Reply Brief.
We agree with the airline complainants’ position. We held
in the First LAX Rates Proceeding that Congress had
intended us to examine in detail the reasonableness of an
airport’s fees, Order 95-4-5 at 26-27 and Order 95-6-36 at
15, and the City did not ask the Court to review that
holding in LAX I.
34a
The Court of Appeals, moreover, resolved this dispute
over the scope of our authority in Air Transport Associa-
tion, where it rejected the City’s contention that we could
not adopt reasonableness standards that would be bind-
ing on airports. Air Transport Association, 119 F.3d at 41.
See also New England Legal Foundation v. Massachusetts Port
Authority, 883 F.2d 157, 168-170 (1st Cir. 1989), affirming
Investigation into Massport’s Landing Fees, FAA Docket
13-88-2, Opinion and Order (December 22, 1988) at 8-9
(the First Circuit held that the Secretary had the respon-
sibility and the expertise for administering the reasonable
fee requirement in the airport grant statute).
Although the Court’s opinion in Air Transport Association
seems to suggest that the statutory reasonable fee
requirements may require airport fees to be based on
costs and require us to adopt precise standards for all
fees charged aeronautical users, not just for airfield fees,
119 F.3d at 41, 43, the Court also suggests that we chose
to submit fees “to something approaching de novo
review” and thereby “seem[ed] to have burdened [our-
selves] with administrative difficulties,” 119 F.3d at 44, n.
7. The latter suggestion appears inconsistent with Con-
gress’ purpose in enacting the statute. As we have
explained before in this proceeding, it is our view that
Congress intended us to closely examine airport fees in
cases heard under 49 U.S.C. 47129. First LAX Rates Pro-
ceeding, Order 95-4-5 at 26. Congress must have adopted
the extraordinary procedures imposed by that statute,
which include strict deadlines and a requirement to hold
hearings before an administrative law judge on com-
plaints satisfying the statute’s jurisdictional require-
ments, with the expectation that we would resolve
PMD Pret hha FC ey F.
PL IT SO, LESS SP LO 2
35a
disputes over airport fees without presuming that the
airport’s judgment was likely to be correct. Nothing in
the terms or legislative history of the statute indicates
that we should defer to an airport's judgment. The Court,
moreover, gave no explanation for its suggestion that we
should have chosen to construe the Statute in a different
manner. Even if the Court’s Suggestion represents a rea-
sonable reading of the statute, our construction is cer-
tainly a permissible construction.
3. Burden of Proof
The airline complainants have the burden of proof in this
proceeding, but, if they present a prima facie case that a
fee is unreasonable, the burden shifts to the airport. First
LAX Rates Proceeding, Order 95-6-36 at 17-18, citing the
Administrative Procedure Act, 5 U.S.C. 556(d). The City
contends that we must uphold the reasonableness of the
fair market value charge because the airline complainants
assertedly have failed to Satisfy their burden of proof. LA
Brief at 4-5. We disagree. The airline complainants have
submitted evidence demonstrating that the charge is
unreasonable, for example, evidence showing that no
other U.S. airport calculates landing fees on the basis of
fair market value.
4. Evidence within the Record
As noted above, all of the parties agreed with our tenta-
tive decision that the land valuation issue should be
decided on the basis of the existing record and that no
new evidence should be submitted in this proceeding.
The only disagreement concerns the question of whether
36a
the record includes the declaration of Professor Kenneth
Arrow, a Nobel laureate in economics.
The City’s response to the complaint filed in the First
LAX Rates Proceeding included the declaration from Pro-
fessor Arrow. In directing us to examine the City’s eco-
nomic arguments in favor of the charge, the Court of
Appeals cited Professor Arrow’s testimony. LAX I, 103
F.3d at 1034. The Court assumed that his declaration was
part of the record in this proceeding, since the City had
cited it in its brief (pages 8, n. 5, and 23). Neither our
brief nor the airline complainants’ brief had noted that
his declaration was not properly part of the record.
In their brief in this remand proceeding, the airline com-
plainants assert that Professor Arrow’s declaration is not
part of the record, since the City withdrew it before the
hearing. Airlines Brief at 15. The City concedes that it
withdrew his declaration before the hearing but argues
nonetheless that we must consider it. LA Brief at 7, n. 9.
We agree with the airline complainants.
While the City’s response to the airline complainants’
amended complaint in the First LAX Rates Proceeding
included Professor Arrow’s declaration, the airline com-
plainants objected before the hearing to his declaration.
Complainants’ Objections to Respondents’ Exhibits (April
19, 1995) at 1. The City then agreed with the airline
complainants that it would not submit Professor Arrow’s
declaration for purposes of the hearing. April 19, 1995
Letter from Steven Rosenthal to Allen Snyder (the City
filed the letter in this docket). See also Respondents’
Opposition and Response to Complainants’ Objections to
Respondents’ Exhibits (April 21, 1995) at 2.
CREA NA EA ALAA TRING EAR ANG Hoole iad
lp Ses pa ks kA eR ecco nite Se ek
Sates
37a
On the first day of the hearing, the Chief Judge therefore
stated as to the airline complainants’ objection to Pro-
fessor Arrow’s declaration, “[T}]hat declaration has been
withdrawn so the objections are moot.” Tr. 25. Professor
Arrow never appeared at the hearing, the City’s final
exhibits omitted his declaration, and the City’s briefs to
the Chief Judge and to us did not cite his declaration.
Since the City withdrew the declaration and never made
Professor Arrow available for cross-examination, his dec-
laration is outside the record in this proceeding.
Despite this history, the City now argues that its initial
filing of his declaration means that it is in the record
before us. LA Reply Brief at 7, n. 9. The City’s contention
is plainly wrong. The evidence of record in a formal
hearing case like this generally consists of the testimony
and exhibits accepted at the hearing. A party’s initial
submission of a declaration (or an exhibit) does not make
it part of the record if the testimony is not submitted at
the hearing and the witness is not made available for
cross-examination. See, e.g., Tr. 12. Professor Arrow’s dec-
laration therefore cannot be part of the record.
We recognize that the Court’s opinion cited Professor
Arrow’s declaration, but the Court did not rule that the
record included the declaration and was not told that the
City had withdrawn it. In these circumstances the Court’s
opinion cannot be construed as a ruling that we must
treat Professor Arrow’s declaration as part of the record.
However, we would not find the airport’s fair market
value charge reasonable if his declaration were in the
record, as explained below in our discussion of oppor-
tunity costs. In particular, he undertook no analysis of the
38a
revenues and benefits obtained from using the LAX prop-
erty as an airport before concluding that the City was
incurring an opportunity cost by using the property for
an airport.
5. The City’s Opportunity Cost Argument
The Court remanded the case to us primarily so that we
would consider the City’s justification for its fair market
value charge for the airfield land. The City’s principal
justification is its claim that the charge compensates the
airport for its opportunity costs. Requiring the airport to
use historic cost would allegedly deny the airport any
compensation for its alleged opportunity costs incurred
by using the land as an airfield. LA Brief at 5-11. Accord-
ing to the City, the fair market value charge “reflects the
actual economic worth of the land and serves as a basis to
calculate the opportunity costs associated with the use of
the land.” The City defines its opportunity cost as the
value the City would have obtained from using the land
in the best alternative use. LA Brief at 5.
In response the airline complainants argue that the air-
port is incurring no opportunity costs and that the fair
market value charge is therefore unreasonable. Airlines
Brief at 3-6.
We conclude that LAX incurs no opportunity cost when
the airfield land is used for the airfield and that the
charge cannot be upheld on that basis. The City has made
a commitment to the FAA that it will continue operating
LAX as an airport for a number of years to come. As a
result of the City’s agreement to continue using its LAX
property as an airport, the City has no other opportunity
spttthic Side Mintibiaihs wd el
Pisep ye ee ee
39a
for use of the airfield land. Thus, whether or not oppor-
tunity costs are relevant in determining the reasonable-
ness of airport landing fees, LAX’s fair market value
charge is unreasonable.”
The City has defined its Opportunity cost as “the income
forgone annually in order that the land be used as an
airport....” LA Brief at 5. Or, as the City stated in its
reply brief, “LAX land is optimally employed as an air-
port if and only if it is at least earning the return it could
receive in its best alternative employment (i.e., its oppor-
tunity cost).” LA Reply Brief at 5. One of the City’s
economics experts, Professor Levy, similarly testified,
“The opportunity cost of an asset or resource is its for-
gone value in its best alternative use.” He reasoned that
resources were optimally allocated “when the oppor-
tunity costs of their ownership is zero or negative; that is,
when the present owner is deriving the maximum of all
possible benefits from ownership.” Exhibit LAX-F1 at 7.
When the City accepted federal grant funds for LAX, it
gave the FAA the assurances required by the airport
grant statute, 49 U.S.C. 47107. One of those assurances
” Alternatively, if the City were deemed to have oppor-
tunity costs, its charge would still be unreasonable for two
reasons. First, as explained below, the airport generates such
large profits for the City’s Department of Airports (and benefits
for the Los Angeles area) that any opportunity costs are already
covered by the airport’s existing revenues from airfield and
non-airfield sources. Secondly, it would be unreasonable for us
to allow the City to charge for Opportunity costs based on
estimated earnings from non-airport usage when the City
voluntarily agreed with the FAA that it would only use the
property as an airport.
40a
requires the grant recipient to continue operating the
airport as an airport, 49 U.S.C. 47107(a)(1): “[T]he airport
will be available for public use on reasonable conditions
and without unjust discrimination.” Another assurance
requires the airport operator to maintain a current layout
plan approved by the Secretary; it further bars the airport
operator from making any change in the airport or any of
its facilities if the change does not comply with the
approved plan, if the Secretary decides that the change
“may adversely affect the safety, utility, or efficiency of
the airport.” 49 U.S.C. 47107(a)(16).§
The City has accepted grant funds for LAX. In the eleven
years ended September 1993, the City received more than
$70 million in grants for LAX and had contracts with the
FAA entitling LAX to additional grant funds. In every
year during that eleven-year period the City signed at
least one grant agreement for LAX. The most recent grant
agreement was signed in September 1993 and authorized
LAX to obtain up to $18 million in federal funds. Exhibit
ATA-1 at 2-3; Exhibit ATA-71 at 3, 6. That agreement
included a commitment that the City would operate LAX
8 The grant assurance requirements make up part of
Congress’ overall regulation of airport development and
operations, regulation designed to create an efficient national
air transportation system. Other grant assurances prohibit most
airport operators, including the City, from diverting airport
revenue to non-airport purposes. 49 U.S.C. 47107(b). Congress
has similarly authorized airports like LAX to charge passenger
facility fees for airport projects. 49 U.S.C. 40117. The City has
imposed a passenger facility fee on travellers using LAX and
obtained FAA approval for that fee on the condition that part of
the fee revenues would be used for LAX airfield projects. See
Second LAX Rates Proceeding, Order 95-12-33 at 36-41.
——————
i a ales Cian a ae ef a ho rt
4la
as an airport. Id. at 19, 25-26. The assurances would
remain in effect for the life of the projects or twenty
years, whichever is less. Id. at 20.
As a result, the City is legally required to continue using
its property at LAX for airport purposes. This commit-
ment means that the City has no opportunity to use the
airfield land for any other purpose. The City therefore
may not charge the airlines for its alleged opportunity
costs when it has agreed to forgo the opportunity of
using the property for any non-airport purpose. See also
Tr. 429 (there is no opportunity cost, if the owner of land
has no opportunity to change the use of the land).?
The City concedes that the assurances given by it as a
condition to the federal grants require the City to main-
tain LAX as an airport, subject to certain exceptions. LA
Brief at 8. The City nonetheless suggests that it has some
ability to close LAX, an argument based on the closing of
airports by other cities, LA Brief at 7-8, citing Denver’s
closing of Stapleton Airport when it opened Denver
International Airport. The City, however, could close LAX
only with FAA approval. The City has not shown that
° In reviewing the Final Policy Statement’s historic cost
requirement for airfield fees, the Court noted that the Final
Policy Statement had observed “that since airports are obliged
to use their property as an airport, the concept of opportunity
cost, and therefore fair market value, does not quite fit.” Air
Transport Ass'n, 119 F.3d at 44. And, if the City were viewed as
having an opportunity cost, the City’s commitment to continue
using the land for an airfield would make it unreasonable for
the City to charge airlines for revenues that it allegedly could
obtain from non-airport use, since the City has agreed not to
make any such use of the land.
42a
there is any realistic possibility that the FAA would
approve the closing of LAX. After all, the record indicates
that LAX is the only practical site for an airport for Los
Angeles. Denver, in contrast, could close Stapleton
because it replaced it with a new airport, Denver Interna-
tional.
The City additionally notes that the grant conditions will
not obligate it to operate LAX at its existing location
“forever.” LA Brief at 7-8. However, the grant conditions
typically last for twenty years (and the City has cited
nothing in the record indicating that its grant assurances
will have a shorter term). Furthermore, the City began
charging the fees at issue in this proceeding in 1993, and
the City is currently obligated by its assurances to con-
tinue operating LAX as an airport.!° Finally, nothing in
the record indicates that the City is seriously thinking of
abandoning LAX.!!
‘0 According to the airline complainants, during the
argument on review of the Final Policy Statement, the City’s
counsel implied that the restrictions on its use of the LAX land
might end in about eight years. Airlines Reply Brief at 4, n. 4,
citing Air Transport Ass'n v. Dept. of Transportation, D.C. Cir. Nos.
96-1253 (argued May 15, 1997). The Court’s opinion seems to
assume that the grant assurances either do not bind the City
now or will soon become inapplicable. Air Transport Ass'n, 119
F.3d at 44. Any belief that the restrictions on the City’s use of
LAX have ended or will end within a few years would be wrong.
The assurances created by the 1993 grant should in fact remain
in force past 2010.
'!_In that regard we note that the City is developing a
master plan for the airport that will enable LAX to
accommodate the growth in passenger and cargo traffic
expected during the next twenty years and is using its Internet
website to promote the plan and seek comments on it. The City’s
43a
We find similarly unpersuasive the City’s contention that
someone may incur an opportunity cost after choosing to
use a property or resource for a specific purpose and
legally obligating itself to continue that use. LA Brief at
8-9. The City voluntarily chose to obligate itself to con-
tinue operating LAX as an airport. When it did so, it
presumably concluded that using its property at LAX for
the airport was the property's best use and that the
benefits obtained from the airport amply covered the cost
of using the LAX property for the airport. Furthermore,
in return for the City’s commitment, the City received
large amounts of federal funds for the airport. We think
that the City therefore could incur no opportunity cost,
even if it were not. otherwise compensated by using its
LAX property as an airport. And in any event the federal
grant funds received by the airport have compensated the
City for maintaining LAX as an airport.
We are not persuaded, furthermore, that opportunity
costs should be used in valuing airfield land in calculat-
ing landing fees. We are aware that, as the Court stated, a
number of economists believe that regulatory agencies
should use opportunity costs in setting rates or determin-
ing whether rates are reasonable. See, e.g., William J.
Baumol and J. Gregory Sidak, Transmission Pricing and
Stranded Costs in the Electric Power Industry at 139 et seq.,
cited at 103 F.3d at 1032. However, as the Court recog-
nized, there are substantial benefits from using historic
cost in ratemaking cases. Alfred E. Kahn, The Economics of
——
development of the plan is consistent with the complete lack of
record evidence supporting the City’s claim that moving the
airport would be a realistic possibility.
44a
Regulation, vol. 1 at 41 (“[T]Jhe transformation of the rate
base by most state commissions from a hypothetical or
imaginary to an actual book figure, represe: ing actual
money outlays, introduced a strong element of stability
and predictability into the regulatory process”), cited at
103 F.3d at 1032. See also Missouri ex rel. Southwestern Bell
Telephone Co. v. Public Service Comm'n, 262 U.S. 276,
292-308 (1923) (Brandeis, J., dissenting).
The Court of Appeals has recognized that regulatory
agencies normally use historic costs for rate cases. Jersey
Central Power & Light Co. v. FERC, 810 F.2d 1168, 1175
(D.C. Cir. 1987) (en banc) (“The Supreme Court cases of
the 1940’s eliminated the requirement that the market
value of the property be recovered, and regulated indus-
tries now collect rates calculated to generate a reasonable
return on the original cost of the investment”) (emphasis
in original). See also Exhibit ATA-D2 at 2. And, as shown
below, no other U.S. airport has used the fair market
value of land in setting landing fees.
Thus, as shown, while economists believe that historic
cost has significant disadvantages when used in setting
rates, regulatory agencies generally and airports almost
universally continue to use historic cost in setting rates.
We need not decide here, however, whether we would
allow LAX to include opportunity costs in setting its
landing fees, because the record demonstrates that LAX
incurs no opportunity costs.!?
12 The airline complainants contend that Professor Baumol
and Mr. Sidak stated that opportunity costs should not be
allowed in rates when the regulated firm has a monopoly and
can charge monopoly prices. Airlines Brief at 12-13. This point
45a
6. The City Needs No Additional Incentives To Operate
LAX as an Airport
We see no other economic justification for the City’s fair
market value charge for the airfield land. As directed by
the Court, 103 F.3d at 1034, we have considered the City’s
claim that the fair market value charge is necessary to
give the City “the proper incentive” to continue operating
the airport. We find that the City has not shown that it
needs any such incentive. The airport provides major
benefits for the Los Angeles area’s economy, generates
large earnings, and cannot Practicably be replaced or
moved, as shown next.
LAX’s Economic Benefits for the City’s Economy and Resi-
dents. The record indicates that using the LAX land for
LAX is economically desirable since the Los Angeles area
needs a major airport and has no other practicable loca-
tion for a major airport.
As an important and dynamic city Los Angeles obviously
must have an airport. Without an airport few travellers
could easily reach the city, Angelenos could not conve-
niently travel to other cities, and Los Angeles could not
seems irrelevant here, since our implementation of the
reasonableness requirement for landing fees is intended to keep
LAX from charging monopoly prices. The airline complainants
also note that Professor Kahn argued that allowing regulated
firms to charge prices based on factors like market prices creates
the danger that the regulated firm will exaggerate its cost of
service. Airlines Brief at 14. While this observation would be
relevant in other cases to a decision on whether we should
Opportunity costs [sic] to be used in landing fee calculations, the
City has failed to show here that it has incurred any opportunity
costs.
46a
be a significant commercial and industrial center or enjoy
a substantial convention and tourist trade.
As demonstrated by the record, the airport greatly bene-
fits Los Angeles. John Driscoll, the Executive Director of
the City’s Department of Airports, thus stated, “The
Department fully recognizes the value of the Airport, the
gateway to Southern California, as a tool of economic
development for the community.” Exhibit LAX-C1 at 4.
One of the City’s experts similarly testified that LAX was
“an important economic asset of the City,” that there was
“no doubt” about that, and that without it the City
“would not be what it is today.” Second LAX Rates Pro-
ceeding, Tr. 379.
The record provides some evidence on the size of the
benefits created by LAX. In 1994 the Los Angeles area
had 25 million visitors who spent $7.2 billion, and almost
seventy percent of all of its overnight visitors travelled by
air. Exhibit ATA-98 at 117. And a memorandum prepared
for the City stated, “The economic benefit of LAX to the
Los Angeles area, however, may be quantified in terms of
jobs (402,000); direct, indirect, and induced economic
impacts ($37 billion per year); and state and local taxes
($1.7 billion per year), according to a 1992 study... . ”
Exhibit ATA-5 at 71, n. 34.
Secondly, no airport or combination of airports in the Los
Angeles metropolitan area could substitute for LAX if the
City were able to close LAX and use its land for non-
airport purposes. The area contains other airports -
Ontario, Hollywood-Burbank, Long Beach, and Orange
County, but they are relatively small and could not han-
dle the volume of passengers and cargo served by LAX.
47a
In 1993, for example, seventy-three percent of the domes-
tic passengers using an airport in that area used LAX,
and virtually all of the international Passengers using a
Los Angeles area airport used LAX. None of the area’s
other airports served as much as ten percent of the area’s
total domestic passengers in that year. Exhibit ATA-98 at
103-104. LAX in fact was the world’s fourth largest air-
port in 1993, based on total passengers. Id. at 120. See also
Exhibit ATA-7 at 43, n. 45. Thus, in terms of the City’s
Own economic interests, it could close LAX only if it
could create a replacement airport of comparable size.
The record indicates, however, that LAX is the best possi-
ble location for a major airport for Los Angeles and that
there is no good alternative site for an airport. The City’s
appraisal firm thus stated in their report, Exhibit LAX-14
at 20,
[T]he relocation of the Los Angeles International
Airport (LAX) is practically impossible. There
are no urban sites in Los Angeles that can pro-
vide an alternative airport development site. In
addition, the costs to acquire such a site would
be prohibitive. Thus, from a financially feasible
view, the current airport use of the site is the
highest and best use. . . . In sum, based upon
Our research and analysis of the subject prop-
erty, it is our opinion that the highest and best
use of the subject property is the current airport
use.
See also Exhibit ATA-48; Exhibit ATA-E2 at 5.13
'S The City has not cited any evidence indicating that the
airport could be moved. The City’s Department of Airports
48a
The City’s past conduct confirms that the City requires no
additional incentives to use its land at LAX for the air-
port. Before the City switched to the compensatory fee
methodology in 1993, it charged landing fees set under a
residual fee methodology, which, as shown, ensured that
the City would obtain no profits from the airport’s opera-
tion. That did not deter the City from operating and
expanding the airport. The airport had to offset its profits
from non-airfield operations against its airfield costs in
calculating its landing fees. The City nonetheless agreed
to that restriction in order to ensure its ability to obtain
the financing necessary for the airport’s development and
expansion. Exhibit LAX-C1 at 3. The City’s willingness to
forgo profits from airport operations indicates that the
City believed that the airport’s benefits to the City were
great enough to amply justify LAX’s operations even
though the airvort’s aeronautical users did not pay fees
covering their share of the airport’s out-of-pocket costs
under the residual fee agreement.
Furthermore, the City continues to operate three other
airports —- Ontario, Palmdale, and Van Nuys - although
none of these airports seems to generate significant earn-
ings. In the fiscal year ended June 30, 1994, for example,
owns a large amount of land at Palmdale, but nothing in the
record indicates that the City is considering using that land for
an airport or that doing so would be practicable. We note,
among other things, that Palmdale is farther from downtown
Los Angeles than LAX and has limited highway access from Los
Angeles. As noted earlier, the City is currently developing a
master plan for expanding LAX’s facilities, which indicates that
the City recognizes that LAX is the only possible site for the
area’s major airport.
Da ee APLAR
NM FES ERS tI ve
PEE AE OLE AO a ha ENGR PE i eae Bale
ee eRe
Rk SEN ft oe oes
49a
all three of those airports had an operating loss. Exhibit
ATA-11 at 23.
LAX Produces Profits for the City. In addition, under the
compensatory fee methodology the airport generates sub-
stantial profits for the City’s Department of Airports, as
we pointed out earlier in the First LAX Rates Proceeding,
Order 95-6-36 at 22:
The City’s financial statements show that LAX
has been quite profitable. For example, in the
1993-1994 fiscal year, the first year of the com-
pensatory fees, the airport’s net income from all
operations was $71 million, and its operating
revenues were almost forty percent greater than
its operating expenses. The airport’s landing fee
revenues were $35 million higher in that year
than in the previous year, the last year of the
residual fees, but, even if the landing fee reve-
nue had not increased, the airport’s operating
revenues would still have been twenty percent
greater than its operating expenses. Exhibit
ATA-11 at 23, 25.
The airport's operating earnings without the fair market
value charge and net of the airport’s $25 million interest
expense, moreover, would still be $31 million, an amount
that substantially exceeds the $15 million rental charge
for the airfield land.
We have calculated these benefits on the basis of the
airport’s overall profits, not its earnings from airfield
sources. Our analysis is consistent with the City’s own
definition of its incentives in terms of the overall airport.
The City thus stated in its reply brief, “LAX land is
optimally employed as an airport if and only if it is at
50a
least earning the return it could receive in its best alterna-
tive employment (i.e., its opportunity cost).” LA Reply
Brief at 5.
Even if the City had not so stated the issue, we could
consider the airport’s overall earnings in assessing the
reasonableness of the fair market value charge for the
airfield land. The airfield services and the non-airfield
services provided by the airport are joint products — the
airport can obtain revenue from its non-airfield services
only by providing the airfield services. The airport, after
all, could not operate without runways and taxiways.
Since the use of the airfield land for runways and taxi-
ways is essential to the City’s ability to obtain profits
from other airport operations, any alleged revenue losses
involved in that use of the land are amply compensated
by the airport’s overall earnings. Thus, while the profits
derive from the airport’s non-aeronautical activities, we
may reasonably consider them in determining whether
the City’s use of the land for the airport imposes oppor-
tunity costs on the City.
The City’s calculation of its alleged opportunity costs
gave no recognition to the benefits it receives from the
airport. The City’s position essentially assumes that the
City’s use of the land as an airport creates no benefits at
all for the City, a statement which, as shown, is contrary
to the record and common sense. See Airlines Brief at 22;
Airlines Reply Brief at 8-9.
The benefits provided the City and its economy by its
operation of LAX undermine its opportunity cost claims.
The City’s expert, Professor Levy, stated that a person’s
use of a property incurs no opportunity costs if that use
5la
generates more revenue than the person could obtain
from any other use of the property: “the opportunity cost
of an asset to its owner'caii .« seen to be measured by the
difference between the «sset’s market value or market
stream of income and its vaiue or stream of income to the
owner.” Exhibit LAX-F1 at 7. See also Pennsylvania Electric
Co. v. FERC, supra (utility is not entitled to receive com-
pensation for its alleged opportunity costs when its rates
already compensate it for its costs of providing service).
Thus, whatever opportunity costs are associated with the
use of the land as an airfield are already covered by the
airport’s earnings.
The City wrongly argues that we may not consider the
airport’s value for the City as an offset to the City’s claim
for a charge equal to the fair market rental value of the
land. According to the City, such a recognition of the
airport’s value would be contrary to the Supreme Court's
decision in Kent County that federal law does not require
an airport to use its earnings from non-aeronautical
sources to lower its aeronautical fees. LA Brief at 9-10.
This argument misconstrues our analysis and, as shown,
ignores the City’s own definition of opportunity costs. In
considering the City’s economic justification for the fair
market value charge, we must determine whether the
benefits currently obtained by the City for using the LAX
property as an airport exceed the estimated amount of
the land’s fair rental value. Since we are not using the
City’s benefits to offset the City’s other airfield costs, our
analysis is consistent with the Court’s holding in Kent
County.
Similarly flawed is the City’s contention that our consid-
eration of the benefits provided by the City’s use of the
52a
LAX property for an airport would result in the airport
being unable to charge any fees. LA Brief at 10. We are
considering those benefits only to evaluate the City’s
arguments, as required by the Court, that the City incurs
an opportunity cost and needs additional incentives to
operate LAX. Our analysis in no way precludes the air-
port from charging landing fees covering its other costs.
Indeed, we have upheld over the airline complainants’
objections most of the other charges included in calculat-
ing the LAX landing fees.
7. The City’s Claims of Overuse and Subsidization
Another economic justification for the fair market value
charge offered by the City is its assertion that the charge
is necessary to keep the airlines from making excessive
use of the airfield. If the City cannot impose landing fees
reflecting the true cost of providing airfield facilities and
services, the airlines will assertedly overuse the airfield.
Since the City assumes that the airfield’s true costs
include opportunity costs based on the fair market value
of the land, which could otherwise be used for a different
purpose, the City contends that disallowing the fair mar-
ket value charge will cause airlines to make excessive use
of the airfield. LA Brief at 12; Exhibit LAX-I1 at 4; Arrow
Declaration at 4.
Nothing in the record indicates that the fair market value
charge for the airfield land is needed to prevent overuse
of the airfield or to correct a misallocation of resources.
The City has presented no evidence that there has been
excessive use of the airfield or that the higher fees are
needed to prevent congestion. The City has also cited no
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53a
evidence suggesting that it adopted the fair market value
charge in order to cause its facilities to be more efficiently
used. In these circumstances the City has failed to justify
the charge as a means of discouraging overuse of the
airfield.!4
We are similarly unpersuaded by the City’s contention
that we will be forcing the airport to subsidize the air-
lines’ use of the airfield if we disallow the charge for the
fair market value of the airfield land. LA Brief at 14. The
airport would be subsidizing the airlines, however, only
if the charge for the fair market value of the land
reflected a cost borne by the airport. We do not believe
there is any such a cost. As shown above, the City has
failed to show that it incurs any opportunity costs by
operating LAX as an airport. As a result, the landing fees,
calculated under historic cost valuation, will cover the
airport’s costs of providing airfield facilities and services.
We find, therefore, that the airport is not subsidizing the
airlines.
8. Offset for Inflation
The City also contends that historic cost is an irrational
cost standard to use since it does not account for general
inflation. The City claims that the airport’s cost of acquir-
ing the airfield land should at least be adjusted to reflect
‘4 We have been willing to allow airports to charge fees that
will encourage more efficient use of airport facilities. In
particular the Final Policy Statement allows airports to charge
peak-period prices when justified. 61 Fed. Reg. at 32016. The
LAX landing fees do not include any peak-period charges.
54a
inflation. The City’s experts testified that general infla-
tion was a factor that could be taken into account in
valuing the land for purposes of the landing fee calcula-
tion. LA Brief at 12.
We recognize that economists consider that the valuation
of an asset should reflect inflation, but we also know that
regulatory agencies usually do not value assets at fair
market value in ratemaking cases. But the fair market
value charge — based only on the rise in land prices in the
Los Angeles area — was never designed to offset general
inflation and so cannot be justified on that basis.
Professor Ferdinand Levy, an economics expert for the
City who helped develop the fee methodology, originally
advised the City that his preferred methodology for valu-
ing the land was “current cost,” whereby the historic cost
of the land would be adjusted by an increase based on the
general rise in prices. Since the adjustment would reflect
general inflation, not the increase in land values around
the airport, he noted “a high probability that this method
of valuation may not correspond closely to the market
value of the land.” Exhibit ATA-72 at 1, 6, 7.!°
The airport’s consulting firm rejected Professor Levy’s
recommendation on the ground that “we cannot identify
an index capable of adequately adjusting historical costs
IS He further “stated that the airport could obtain some
compensation for the difference between the land’s value
determined under the current cost method and the land’s actual
value by increasing the rate of return allowed on the
investment. Exhibit ATA-72 at 6. The City, however, chose not to
include a rate of return in its fee calculation for its investment in
the airfield land.
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... to something remotely close to current value.” Exhibit
ATA-75. In other words, the airport’s consultants rejected
his proposal solely on the ground that it would not
generate enough income, not on the ground of economic
theory.
As a result, we cannot agree with the City that the fair
market value charge should be upheld as compensation
for inflation. The City did not create the charge as such
compensation and chose not to adopt the one valuation
method which would have fairly reflected inflation. We
also note, as discussed in the next section, that no other
airport has found it necessary to use the airfield land’s
fair market value in calculating landing fees, which sug-
gests that the use of a cost standard that does not reflect
inflation will not interfere with the airport's ability to
operate and finance capital improvements.
9. The Universal Use of Historic Cost by U.S. Airports
Our earlier conclusion that the fair market value charge
was unreasonable relied in part on the record evidence
that LAX was the first U.S. airport to base landing fees on
the fair market value of the airfield land rather than the
land’s historic cost. The Court, as noted, remanded our
decision on the ground that we had not adequately con-
sidered the City’s arguments, because we wrongly
believed that federal law did not allow the airport to
charge a fee based on the airfield land’s fair market
value. The Court, however, also questioned our reliance
on the practices of other airports. The Court stated that
we had said that LAX was the first airport to switch from
a
56a
a residual fee methodology to a compensatory fee meth-
odology. On that basis it considered our reliance on the
practices of other airports unpersuasive. LAX I, 103 F.3d
at 1033.
Our order asking the parties to file briefs in this remand
proceeding pointed out that the Court had erred when it
assumed that LAX was the first airport to adopt compen-
satory fees. In fact, many airports had begun using the
compensatory fee methodology before the City, as shown
by the City’s own evidence. Order 97-4-12 at 8, citing
Exhibit LAX-A1 at 4-5. Indeed the airport fees challenged
in Kent County were compensatory fees.
In its brief in this remand proceeding the City contends
that other airports assertedly had so little ability to use
compensatory fees that their practices can provide no
guidance, while ACI contends that the failure of other
airports to follow a certain practice cannot mean that the
practice is unreasonable. LA Brief at 20-23; ACI Brief at
5-6. The airline complainants, on the other hand, argue
that the universal use of historic cost by other airports is
relevant and should be followed by us in this case. Air-
lines Reply Brief at 6-7. Neither the City nor ACI tries to
defend the Court’s assumption that LAX was the first
airport to switch to -a compensatory fee methodology.
After considering the parties’ arguments, we conclude
again that the practices of other airports on the land
valuation issue are both relevant to this issue and support
our conclusion that the airport’s fair market value charge
is unreasonable.
We begin with the undisputed fact that no other U.S.
airport calculates its landing fees on the basis of the fair
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57a
market value of its airfield land, as shown by the record.
Tr. 643-644, 829-830. The City’s consultant admitted that
the City was the first airport in the United States to value
its airfield land at fair market value. Tr. 646. See also
Exhibit ATA-25 at 4.
We think the universal practice of other U.S. airports on
valuing airfield land is entitled to considerable weight in
determining whether the contrary practice adopted by
LAX is reasonable. We view airport fee practices gener-
ally accepted by airports and airlines as a strong indica-
tion that they are widely considered reasonable by the
industry, although, as noted by ACI, airport practices are
not conclusive evidence on reasonableness issues. Cf.
Miami International Airport Rates Proceeding, Order 97-3-26
(March 19, 1997) at 34-35, petition for review pending sub
nom. Air Canada v. Dept. of Transportation, D.C. Cir. No.
97-1274. We have therefore taken airport practices into
consideration in deciding other issues in these cases and
used them as an indication of the types of fees and
charges that are or are not considered reasonable. Second
LAX Rates Proceeding, Order 95-12-33 at 33, 45; First LAX
Rates Proceeding, Order 95-6-36 at 31. In addition, the use
of a charge by only one of the many airports in the
United States suggests that the charge is neither essential
for airport operations nor generally viewed by other air-
ports as desirable.
Our consideration of the practices of other airports is, of
course, consistent with the Supreme Court’s view on how
the Secretary should exercise the authority to determine
whether airport fees are reasonable. The Court thus
stated in Kent County, 510 U.S. at 366-367:
58a
The Secretary of Transportation is charged with
administering the federal aviation laws, includ-
ing the [Anti-Head Tax Act]. His Department is
equipped, as courts are not, to survey the field
nationwide, and to regulate based on a full view
of the relevant facts and circumstances.
We conclude, therefore, that our consideration
of the practices of other airports prope
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