# Petition for Writ of Certiorari — City of Los Angeles v. Department of Transportation

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 2000
- **Citation:** 528 U.S. 1074

## Text

In The
Supreme Court of the United States

¢
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 orcetcdcartunity 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 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.

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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 properly carries
out our authority under the Anti-Head Tax Act
to regulate airport fees.

We find unconvincing the City’s arguments that the prac-
tices of other airports do not support the airlines’ posi-
tion that its fair market value charge is unreasonable.
First, on the ground that many airports use fair market
value in valuing the land under terminals and other non-
airfield facilities, the City claims that airports in fact
commonly use fair market value in setting aeronautical
fees. LA Brief at 21. But while many airports use fair
market value for setting non-airfield fees, as we have
recognized elsewhere, no other airport uses fair market
value for setting airfield fees. The airports’ practice of
using different methodologies for non-airfield and air-
field fees, moreover, is based on the differences between
the airlines’ use of non-airfield and airfield facilities. 61
Fed. Reg. at 32007.

Equally unpersuasive is the City’s contention that other
airports have not set landing fees on the basis of fair
market value since many airports used a residual fee
methodology for calculating landing fees and thus were
not in a position to even consider using fair market value.
LA Brief at 21. This contention is inaccurate. As demon-
strated by the City’s own evidence, many airports had

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59a

adopted a compensatory fee methodology before LAX
switched from residual fees to compensatory fees. See,
e.g., Exhibit LAX-A1 at 4-5.'© The City further suggests
that few of the airports cited in the 1984 report were
using “a true compensatory methodology,” LA Brief at
22, n. 20, but it gives no record citation for that assertion
or any explanation of what a “true” compensatory meth-
odology would be.

Similarly irrelevant is the City’s observation that rela-
tively few airports impose compensatory fees by ordi-
nance, as LAX did, since most charge compensatory fees
under agreements with the airlines, which would never
accept airfield fees based on fair market value. LA Brief
at 22, n. 20. Some airports, however, have adopted com-
pensatory fees by ordinance. See, e.g., Second LAX Rates
Proceeding, Order 95-12-33 at 45. Airports, moreover, gen-
erally have the right to adopt fees by ordinance, subject
to any pre-existing agreements with airlines, so other
airports could have used a fair market value charge if

they had considered such a charge reasonable and desir-
able.

The City additionally asserts that we may rely on the
practices of other airports in assessing the reasonableness
of its fair market value charge only if we also take into

6 The City wrongly suggests that many airports could not
consider using fair market value in calculating compensatory
fees until the Supreme Court's Kent County decision rejected the
airlines’ argument that compensatory fees were unreasonable.
LA Brief at 22. This assertion has no merit. Many airports -
including LAX itself - were already using compensatory fees
before the Supreme Court decided Kent County.

60a

consideration the relatively low level of LAX landing fees
compared to the fees charged by other major airports. LA
Brief at 23. This argument has no merit. As we have said
before, LAX’s fees under a compensatory fee methodol-
ogy must be based on LAX'’s costs. If LAX has relatively
low costs, as it has, then it must charge lower fees. First
LAX Rates Proceeding, Order 95-4-5 at 25. See also Exhibit
ATA-77 at 2.

The City further errs in arguing that its fees are reason-
able under Supreme Court precedent, whatever the
merits of the individual elements of its fee methodology.
The City cites Supreme Court decisions like FPC v. Hope
Natural Gas Co., 320 U.S. 591, 603 (1944), which hold that
a court reviewing a regulatory agency's rate decision
should affirm the decision if the result is reasonable, even
if the method is imperfect. LA Brief at 23. These cases
govern judicial review of a regulatory agency's decision
and do not hold or imply that a regulated firm’s rate
methodology is insulated from review by a regulatory
agency.

10. The Airport’s Compliance with the Self-Sustaining
Requirement

The City contends that the fair market value charge is
necessary to fulfill the City’s obligation under a section of
the airport grant statute, 49 U.S.C. 47107(a)(13), to charge
fees “that will make the airport as self-sustaining as
possible under the circumstances existing at the airport.”
LAX Brief at 18-19

We considered and rejected that argument earlier in this
proceeding. We held that landing fees must be based on

al i as ei

6la

costs and that the airport may not charge landing fees
that will cause the airport to generate unreasonable sur-
pluses. First LAX Rates Proceeding, Order 95-6-36 at 24. We
reached the same conclusion in the policy statement
rulemaking. 61 Fed. Reg. at 32010. The City has not
shown any error in this reasoning.

11. Funding for Airport Capital Projects

ACI contends that we should give airports the option of
charging landing fees based on the fair market value of
airfield assets since airports must make substantial capi-
tal investments which they should be allowed to fund
through higher fees. ACI Brief at 6-7. The City briefly
notes that LAX has massive capital needs and that the
airport could invest funds derived from charging for
opportunity costs in its capital projects. LA Brief at 9. In
response the airline complainants contend that the air-
port's alleged capital needs cannot justify the charge, for
the airport may not now charge airlines for the cost of
future capital improvements not yet completed and in
use. Airlines Reply Brief at 2.17

We agree with the airline complainants. First, ACI’s argu-
ment is inconsistent with judicial interpretations of the
Anti-Head Tax Act. City and County of Denver v. Continen-
tal Air Lines, 712 F. Supp. 834 (D. Colo. 1989). Indeed, in
the Second LAX Rates Proceeding the City agreed that the

'? The airline complainants additionally note that the City
has been accused of diverting $90 million in airport funds,
conduct which suggests that the City does not believe that the
airport has insufficient funds for capital improvements. Airlines
Reply Brief at 2, n. 2.

62a

landing fees could not include costs associated with capi-
tal projects that were not yet in use. Order 95-12-33 at
49-51.

Secondly, we are unaware of any evidence in the record
in this case indicating that the airport developed the fair
market value charge in order to fund future capital pro-
jects. The record does show that one of the City’s two
goals for switching from a residual fee methodology to
the compensatory fee methodvlogy was to give the air-
port “greater control over the scope and timing of airport
development projects.” Exhibit ATA-23 at 6. LAX’s resid-
ual fee methodology had given the airlines the power to
veto major construction projects, as is common in resid-
ual fee agreements. The record does not indicate, how-
ever, that the City took into consideration airport capital
needs in choosing the specific fee formula adopted by
LAX and, in particular, creating the fair market value
charge for the airfield land. In contrast, the record sug-
gests that the airport instead may have adopted that
formula in order to raise funds that could be diverted off
the airport if federal law were changed to allow that
diversion of airport revenues. See, e.g., Exhibit ATA-4 at 4;
Exhibit ATA-5 at 7. We are not deciding that the City
adopted its fee methodology in order to raise funds avail-
able for diversion, but this evidence undermines any
claim that the airport created the fair market value charge
in order to fund airport improvements.

12. The Difficulty of Determining Fair Market Value

Our original decision disallowed the fair market value
charge in part on the ground that calculating the fair

63a

market value of airfield land would be significantly more
difficult than calculating historic cost. Order 95-6-36 at
21. The ALJ similarly found that determining the fair
market value of airfield land would be more difficult.
R.D. at 16.

The Court questioned our reliance on this factor, since the
Court doubted that the valuation of airfield land would
be difficult. The Court assumed that there would be
enough of a market in comparable land parcels to enable
an appraiser to estimate the fair market value of the
airfield land with some confidence. The Court reasoned
that other regulatory agencies had stopped using fair
market value because they typically dealt with assets
such as utility plants that presented severe valuation:
difficulties. The Court noted, moreover, that the airline
complainants in this proceeding had not challenged the
City’s estimated fair market value for the airfield land.
The Court further assumed that the City would not recal-
culate the land’s fair market value in future years, which
would make the difficulty of valuing airfield land rela-
tively unimportant. LAX I, 103 F.3d at 1033. In reviewing
the Final Policy Statement the Court again expressed its
doubt that resolving the value of airfield land would be
difficult. Air Transport Ass'n, 119 F.3d at 44.

For the reasons discussed earlier in this opinion, we have
determined that the City’s fair market value charge is
unreasonable. That determination essentially moots the
issue of whether airfield land may be valued without
undue difficulty. Moreover, as the Court pointed out, the
airline complainants had not challenged the accuracy of
the specific appraisal offered by the City in this case.
Nonetheless, the question of the difficulty or lack of

64a

difficulty in valuing airfield land is likely to arise in
future cases, since we cited the relative difficulty of deter-
mining the fair market value of airfield land as a factor
supporting the historic cost requirement for airfield fees
in these cases and in the Final Policy Statement. First LAX
Rates Proceeding, Order 96-6-36 at 21; 61 Fed. Reg. at
32010. The question of the difficulty of determining fair
market value is, of course, important in airport rate cases,
since the expedited procedures required by Congress in
cases heard under 49 U.S.C. 47129 make the resolution of
complex factual issues a severe burden. We will discuss
the evidence in this case since it may help our analysis in
future proceedings, even though the issue is not material
for our decision in this case.

First, the record indicates that determining the historic
cost of land is relatively simple. See, e.g., Exhibit ATA-D2
at 2; Exhibit ATA-E1 at 6-7; Exhibit ATA-72 at 4 (the
historical cost of an asset “is obviously quite easy to
determine and to verify”). Determining the land’s fair
market value, on the other hand, is significantly more
difficult. There is no easy objective method for determin-
ing the value of a large parcel of land like LAX’s airfield.

Although the Court had assumed that airfield land could
be appraised on the basis of comparable sales of land
parcels, the appraisal firm used by the City determined
that that approach should not be the primary basis for the
appraisal. The firm instead based its fair market value
estimate on “a hypothetical developmental approach.”
The firm stated that “meaningful analysis on a direct
comparison basis is not possible” due to “the numerous
differences in the development of such a large property

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and the current environmental and political consider-
ations.” Exhibit LAX-14 at 21. For example, the appraisal
firm noted that the owners of a 1,000 acre property just
north of the airport had spent fifteen years trying to
redevelop that property, formerly the Hughes Airfield,
but had not succeeded due to “environmental and politi-
cal roadblocks.” Exhibit LAX-14 at 21. The appraisers
indeed concluded that at that time - January 1, 1993 - the
redevelopment of the airfield would not be feasible, since
the market could not absorb more space and since financ-
ing for commercial/industrial projects was virtually non-
existent. Id. at 19. For these reasons, the firm did not rely
primarily on comparable land sales and development
projects.

For its appraisal the firm instead used “the estimated
anticipated revenues which would be derived from the
sale of finished commercial/industrial sites of a theoreti-
cal development over the projected term of the project.”
The calculation reflected estimated land development and
construction costs, indirect costs, financing costs, and a
profit for the developer. Exhibit LAX-14 at 21.

Thus, while the Court assumed that calculating the fair
market value of the airfield land should not be difficult
because “there is no need to reconstruct a hypothetical
asset in order to account for technological changes, and
there is often (indeed, perhaps usually) a ready market in
parcels sufficiently comparable for a professional
appraiser to extrapolate with some confidence,” at least
in this case the appraisal firm conducted an analysis that
was similar to the creation of a hypothetical asset.

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Of course, even if the appraisal had been based on sales
of other land parcels, as the Court assumed would be
possible, there could still be major disputes about the
accuracy of the fair market value estimate. As the Chief
Judge pointed out in the First LAX Rates Proceeding, when
the estimate of fair market value is based on land adjoin-
ing the airport, the estimate uses land parcels whose
value is greatly influenced by their location near the
airport, which can lead to “bootstrap” accounting. R.D. at
16. If the estimate is based on land that is not near the
airport, as was largely true of the estimate made by the
City’s appraisal firm, the validity of the estimate will
depend on whether the land used for the calculation is
comparable to the airfield land, an issue which may be
difficult to resolve. See also Exhibit ATA-E1 at 6-7.

In suggesting that the difficulties of revaluing the land
should have little significance in airport rate cases, the
Court also believed that “there was no record evidence to
suggest that the airport intended to recalculate its rate
base periodically in order to capture increases in the
market value of the underlying land; for all that appears
in the record, however, the City would appraise the mar-
ket value of the land only once, i.e., tor the purpose of
bringing that land into the rate base.” 103 F.3d at 1033.18

The record in fact suggests that the City was planning to
revalue the land periodically. Exhibit ATA-74 at 1. Indeed,
the logic of the City’s preferred rate methodology calls

18 The Court did not explain the source of this belief. The
parties’ briefs had not addressed the point, and the record
excerpts submitted to the Court did not discuss the matter.

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67a

for a periodic revaluation of the land. After all, the meth-
odology assumes that the airfield fees will be inaccurate
if they do not reflect the airfield land’s fair market value.
See, e.g., Exhibit LAX-F1 at 16; Exhibit LAX-I1 at 2-3.
Under this rate theory, the airport would have to revalue
the land from time to time to ensure that the fee calcula-
tion used the correct value.!% The airline complainants
point out, moreover, that they should have the right to
challenge a fair market value charge if the value of the
land declines. Airlines Brief at 21-22.

The City’s documents indicate that the airport had
intended to periodically reexamine the land’s fair market
value. The City’s consultants advised the executive direc-
tor of the City’s Department of Airports, Exhibit LAX-17
at 9:

Having initially determined the appropriate
return On airfield and apron land .. ., then re-
determine an appropriate return on land every
five years using a similar methodology. During
the interim between formal re-determinations
adjust land costs by an established economic
index.

We note that the City’s lease policy, as set forth in Decem-
ber 1986, similarly states that the property at each airport
would be reappraised every five years. Exhibit LAX-31 at
4.

'9 BAA, which operates airports in Britain and is the one
airport operator identified in the record as basing its landing
fees on fair market value, revalues its land annually. Exhibit
LAX-D2 at 1-2.

68a

The City has essentially conceded that the record indi-
cates that the land would be periodically revalued. LA
Brief at 20, n. 18. The City nonetheless contends that we
should ignore the record evidence because the airport has
not yet undertaken any such revaluation. Ibid. However,
if, as the record suggests, the airport intended to revalue
the land only every five years, the first revaluation would
not occur until 1998. The lack of any revaluation so far is
entirely consistent with the intent to periodically reex-
amine the land’s market value.

The record in this case accordingly shows that determin-
ing the fair market value of an airport's airfield land ina
contested fee case will be difficult and may well cause
periodic disputes requiring resolution, given the likeli-
hood that an airport using fair market value would peri-
odically revalue its land. Given the time deadlines
imposed by statute on our decision of airport fee cases
under 49 U.S.C. 47129, the difficulty of determining fair
market value for airfield land rationally suggests that
landing fees should not use a fair market value charge.

13. The City’s Takings Clause Argument

The City claims that it is entitled to a return on its
investment in the airfield land under the Fifth Amend-
ment’s Takings Clause. The Takings Clause requires the
government to pay fair compensation when it takes pri-
vate property for public use. The Supreme Court has held
that the Takings Clause applies when the federal govern-
ment condemns property owned by a state or local gov-
ernment. United States v. 50 Acres of Land, 469 U.S. 24
(1984). While the Court has not held that the Takings

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Clause applies to federal regulation of an activity carried
out by a state or local government, we will assume here
that the clause does apply to our regulation of airport

fees.

The Takings Clause is generally viewed today as the
source of the government's obligation to ensure that pri-
vate utilities subject to rate regulation are allowed to
charge rates that will give them the opportunity to earn a
fair return on their investment. See, e.g., Tenoco Oil Co. v.
Dept. of Consumer Affairs, 876 F.2d 1013, 1020-1021, 1022
(1st Cir. 1989), citing, inter alia, Pennell v. City of San Jose,
485 U.S. 1 (1988). The City assumes that the principles
applicable to the regulation of rates charged by private
utilities are fully applicable to landing fees charged by an
airport owned by a state or local government. On that
basis the City contends that LAX is entitled to a return on
its investment in the airfield land. LA Brief at 23-25.

The issue in this remand proceeding is whether the air-
port may include the fair market value charge in the
landing fee calculation or whether it must instead use
historic costs in calculating the fees. The Supreme Court
has held that a regulatory agency’s use of historic cost
valuation in rate-making cases does not violate the Con-
stitutional principle that regulated firms must be allowed
the opportunity to earn a return on their investment. See
Duquesne Light Co. v. Barasch, 488 U.S. 299, 308-310 (1989).
The Court’s holding would seem to settle the issue. The
City nonetheless argues that whenever the courts uphold
rates based on historic cost the rates also provided for a

return on the regulated firm’s investment.

70a

The airport, however, chose to include no return on
investment in its fee methodology, except for an imputed
interest charge for certain capital asset investments, a
charge which we upheld. Although the City treats its fair
market value charge as though it were the equivalent of a
return on its investment, the City is not really seeking a
return on its actual investment in the land, most of which
was acquired many years ago. Instead, the City seeks to
take advantage of the rise in land values in the area
around the airport. Second LAX Rates Proceeding, Order
95-12-33 at 17-18. Indeed, as discussed above, the City’s
consulting firm rejected Professor Levy's preferred
approach to valuing the airfield land — an approach based
on the City’s actual investment in the airfield adjusted for
general inflation — because it would not enable the airport
to charge fees comparable to the estimated fair market
rental value of the land. And the City’s brief in this
remand proceeding admits that an imputed interest
charge on its actual investment would be “a pittance”
compared to the land’s estimated fair market rental
value. LA Brief at 6, n. 6. The landing fees thus were not
intended to enable the airport to obtain a return on its
investment. Furthermore, the rise in value of the airfield
land in large part stems from the airport's success and the
resulting growth of the City’s economy and population.

Nonetheless, since the City has raised the Constitutional
issue, we will address its argument that the Takings
Clause gives the airport the right to charge landing fees
that will enable the airport to earn a return on its invest-
ment in the airfield. After considering the standards used
by the Supreme Court for determining whether a taking

has occurred, we find that our decision here on airfield

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fees does not constitute a taking of property without just
compensation.*° Our conclusion is based on an applica-
tion of the Supreme Court’s standards to airfield opera-
tions, so our conclusion does not cover non-airfield fees
charged aeronautical users or fees charged non-aero-
nautical users. And our conclusion concerns fees that
allow the airport to cover its out-of-pocket costs of pro-
viding airfield facilities and services, not fees that require
the airport to charge less than those costs. Moreover, our
analysis involves airports, which are different in impor-
tant respects from typical governmentally-owned util-
ities, primarily because airports have long been subject to
extensive federal regulation and have received large fed-
eral grants.

The City correctly points out that the courts have invaria-
bly held that private utilities have a right to an oppor-
tunity to earn a rate of return on their investment. The
City is demanding that its operation of the LAX airfield
be deemed the equivalent of a privately-owned firm’s
operations. Regulatory agencies must allow privately-

20 We reached the same conclusion in our original decisions
and in our policy statement rulemaking. First LAX Rates
Proceeding, Order 95-6-36 at 22; Second LAX Rates Proceeding,
Order 95-12-33 at 17-18; 61 Fed. Reg. at 32011. The Court did not
need to reach the Takings Clause issue in LAX I, because the
Court remanded the case on other grounds. Since the City has
used its Takings Clause claim to support the fair market value
charge and since the City will presumably raise the
Constitutional issue on review, we have chosen to discuss our
reasons for finding that no taking has occurred.

72a

owned firms to charge rates which give them an oppor-
tunity to earn a fair return on their investment. But this
principle does not apply to a publicly-owned airfield.

The federal courts have never decided whether a pub-
licly-owned utility like an airport is entitled under the
Takings Clause to earn a profit. Given the differences
between publicly-owned airports and private utilities, it
would be irrational to blindly apply the principles gov-
erning private utility rates to airport rates, as the City
seeks to do. In particular, as explained below, airports
have not been built as profit-making enterprises, even
though a number of airports like LAX earn profits from
their non-airfield activities. We therefore think that the
proper approach on this issue is to determine whether a
taking has occurred under the general standards estab-
lished by the Supreme Court for deciding whether a
regulatory action constitutes a taking.

The Supreme Court considers three factors in determin-
ing whether government action constitutes a taking: the
action’s character, its economic impact, and the extent to
which the action interferes with investment-backed
expectations. Connolly v. Pension Benefit Guaranty Corp.,
475 U.S. 211, 224-225 (1986); Concrete Pipe & Products v.
Construction Laborers Pension Trust, 113 S. Ct. 2264, 2291
(1993). Under these standards requiring the airport to
value the airfield land at its historic cost cannot be
deemed a taking.

On the first factor, the character of our valuation require-
ment, there is no physical invasion or permanent appro-
priation of an airport's property. Instead, as is typical of
many regulatory programs, our historic cost valuation

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73a

requirement adjusts the benefits and burdens of economic
life in order to promote the common good. That type of
regulation is not normally deemed a taking of property.
Connolly, 475 U.S. at 225. That obviously does not end our
inquiry, for regulatory decisions unreasonably limiting
private utility rates can constitute a taking despite the
lack of a physical invasion or permanent appropriation of
the utility’s assets and business. See, e.g., Duquesne Light
Co. v. Barasch, 488 U.S. 299 (1989).

The second element of the Court’s standard involves the
economic impact of our decision. Requiring airport land-
ing fees to be based on historic cost cannot have an
unduly harmful impact on LAX. Even as limited by our
decision, the airport’s landing fees enable it to recover the
out-of-pocket costs of its airfield investments and opera-
tions and to recover imputed interest on some capital
investments. The airport may also include charges for
reasonable reserve requirements and debt expense. More-
over, as shown, every airport in the United States except
LAX has valued airfield land at historic cost in imposing
fees. This indicates that a historic cost requirement does
not conflict with an airport’s ability to operate suc-
cessfully. And since federal law does not limit the fees
charged non-aeronautical users by LAX, the airport may
~ and does — charge fees for non-aeronautical facilities

that make the airport's overall operations quite profita-
ble.

The third element of the Court’s standard concerns
whether our decision has interferred with the City’s
investment expectations. Cf. Connolly, 475 U.S. at 226-227.
We find for two reasons that there will be no such inter-
ference. Cf. Connolly, 475 U.S. at 226-227. First, state and

74a

local governments invest in airports in order to further
the well-being and general welfare of their citizens, not in
order to make a profit. 61 Fed. Reg. at 32011. The City has
cited no evidence in the record suggesting that the City’s
motives were any different when it created LAX. Indeed,
for many years the airport used the residual fee meth-
odology, which guaranteed that the airport would not
earn significant profits, since the airport had to offset
profits from non-airfield sources against its airfield costs
in calculating landing fees. The City accepted that restric-
tion on its ability to charge higher landing fees in order to
obtain financing for capital developments. See, ¢.g.,
Exhibit ATA-9 at 1-2; Exhibit LAX-Cl at 3. The City’s
willingness to accept the residual fee methodology sup-
ports our decision that the City did not build the airport
with an eye towards earning profits from airport opera-
tions. The City, moreover, continues operating its other
three airports, even though none of them appears to
generate significant operating profits, as shown above.
And the City’s agreements with the airlines using Ontario
limited the landing fees to the amount needed to cover
operating and debt expenses and debt service and did not
provide for any return on investment. Exhibit ATA-7 at
13-14.2!

21 The California Supreme Court suggested that municipal
water companies and similar types of municipal utilities in
California historically included a rate of return element in
setting rates. Hansen v. City of San Buenaventura, 233 Cal. Reptr.
22, 27 (Calif. 1986). Nothing in the record here indicates that
airports in California ever followed that practice as to airfield
fees. LAX, of course, did not when it operated under the
residual fee methodology. An Illinois decision, moreover,
suggests that a municipal utility serving its own residents is

75a

Secondly, federal statutes have limited airport fees for
many years and, as to airports like LAX that accepted
federal grants, imposed other restrictions on the use of
airport funds and property. In particular, the grant statute
prohibits an airport owner (with a few grandfathered
exceptions) from using airport revenues for non-airport
purposes. As a result, the City could not transfer airport
revenues to its general fund and could not have expected
to earn any return on its investment in the airport. Noth-
ing in the federal laws governing airports indicates that
Congress expected that the state and local governments
operating airports would derive earnings from airport
operations and property. Public utilities, in contrast,
expect to be able to pay out a substantial portion of their
earning [sic] as dividends to their shareholders. Given
these restrictions, a decision limiting the airport's landing
fees to the amount needed to cover out-of-pocket costs,
the funding of reserves, and imputed interest on certain
investments cannot frustrate the City’s investment expec-
tations.

We also note that the City’s claims assume that a pri-
vately-owned regulated firm is entitled to earn a return
on all parts of its business. The contrary is the case. The
courts have held that a rate decision may be Constitu-
tional even though it causes the firm to operate part of its

treated as acting in a governmental capacity and that rate of
return considerations become relevant only when the municipal
utility serves customers outside the city limits of the utility’s
owner. Village of Niles v. City of Chicago, 558 N.E. 2d 1331, 1335
(Ili. App. 1990). LAX’s operations, of course, directly benefit the
City’s residents, even though many of its users are not
Angelenos.

76a

business at a loss. Baltimore & Ohio Railroad v. United
States, 345 U.S. 146, 148 (1953); Metropolitan Transportation
Authority v. ICC, 792 F.2d 287, 296-297 (2d Cir. 1986).
Those decisions tend to support our decision here,
although our decision will not force the City to operate
any part of the airport at a loss. Any limitations imposed
by us on LAX’s airfield fees will not restrict the airport's
non-aeronautical fees and fees for non-airfield facilities,
and LAX earns large operating profits from its non-aero-
nautical revenues. And the airfield fees allowed by our
decision will cover the airport's airfield costs as mea-
sured by the historic cost standard.

The City objects that the airport’s earnings from non-
airfield sources may not be considered in determining
whether our decision disallowing the fair market value
charge constitutes a taking. LA Brief at 24. In determining
the reasonableness of a rate for an airport facility, we
ordinarily may not offset the airport’s earnings from
other sources in determining whether the fee is reason-
able. In this decision we made no such offset. But in
determining whether the fee allowed by a regulatory
agency is so low as to be confiscatory and a violation of
the Takings Clause, the courts consider the total impact of
the agency decision, which may involve a consideration
of the regulated firm’s earnings from related services.

Finally, we deny the City’s claim that it is entitled to a
hearing on a rate of return for the airfield fees. LA Brief
at 25, n. 24. Requiring the landing fees to be based on
historic cost does not violate the Takings Clause. Further-
more, the airport chose not to include a rate of return
element in its fees, as shown above, except insofar as it
charged imputed interest on a portion of its investment in

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77a

airfield capital assets. Since the airport decided to calcu-
late its fees in a different manner and since our decision
on the fees is consistent with Constitutional and statutory
requirements, we see no need for us to hold a proceeding
to revise the City’s chosen methodology.

ACCORDINGLY:

1. We find that the landing fees charged by the respon-
dents, the City of Los Angeles, the City of Los Angeles
Department of Airports, and the Los Angeles Board of
Airport Commissioners, for Los Angeles International
Airport for the period from July 1, 1993, through June 30,
1995, and for the period from July 1, 1995, were unreason-
able and therefore unlawful under 49 U.S.C. 40116, 49
U.S.C. 47107, and 49 U.S.C. 47129, insofar as the respon-
dents include in the rate base for such fees a fair market
rental based on an estimated fair market value for the
land underlying the airport’s airfield and apron;

2. We order the respondents, the City of Los Angeles,
the City of Los Angeles Department of Airports, and the
Los Angeles Board of Airport Commissioners, to refund
with interest the fees paid from August 23, 1994, to the
extent that such fees are unreasonable due to the inclu-
sion in the rate base for such fees of a fair market rental
based on an estimated fair market value for the land
underlying the airport's airfield and apron, as provided
by our earlier orders in the Los Angeles International Air-
port Rates Proceeding and the Second Los Angeles Interna-

tional Airport Rates Proceeding; and

78a

3. We grant all motions for leave to file unauthorized
documents.
By:
/s/ Patrick V. Murphy
PATRICK V. MURPHY

Deputy Assistant Secretary for
Aviation and International Affairs

(SEAL)

79a

CITY OF LOS ANGELES DEPARTMENT
OF AIRPORTS et al.,
Petitioners,

V.

UNITED STATES DEPARTMENT
OF TRANSPORTATION et al.,
Respondents,

Aero California et al., Intervenors.

Nos. 95-1344, 95-1361, 95-1387,
95-1388 and 95-1422.

United States Court of Appeals
District of Columbia Circuit.

Argued Sept. 6, 1996.
Decided Jan. 17, 1997.

Steven S. Rosenthal, argued the cause, for petitioner
City of Los Angeles, CA, with whom G. Brian Busey,
Washington, DC, and Breton K. Lobner, Los Angeles, CA,
were on the briefs.

William Karas, argued the cause, for petitioners Aero
California et al., with whom Frank J. Costello, Jr., Wash-
ington, DC, was on the briefs.

Walter A. Smith, Jr., argued the cause, for petitioners
Air Transport Association of America et al., with whom
Allen R. Snyder, Jonathan L. Abram and Jonathan S.
Franklin, Washington, DC, were on the briefs.

Thomas L. Ray, Attorney, U.S. Department of Trans-
portation, argued the cause, for respondents, with whom

80a

Anne K. Bingaman, Assistant Attorney General, U.S.
Department of Justice, John J. Powers, III, and Marion L.
Jetton, Attorneys, Nancy E. McFadden, General Counsel,
U.S. Department of Transportation, and Paul M. Geier,
Assistant General Counsel, were on the brief. Robert B.
Nicholson, Attorney, Washington, DC, U.S. Department
of Justice, entered an appearance.

Walter A. Smith, Jr., Allen R. Snyder, Jonathan L.
Abram, Jonathan S. Franklin, Frank J. Costello, Jr. and
William Karas, Washington, DC, were on the brief, for
intervenors Air Transport Association of America et al.

Steven S. Rosenthal, G. Brian Busey, Washington, DC,
and Breton K. Lobner, Los Angeles, CA, were on the brief,
for intervenor City of Los Angeles Department of Air-
ports.

Scott P. Lewis and Patricia A. Hahn, were on the
brief, for intervenor Airports Council International -
North America.

Janet P. Holt, Mark S. Kahan, Susan B. Jollie, Gary B.
Garofalo, Moffett B. Roller, Washington, DC, Roxanne S.
Clements, New York City, Stephen H. Lachter, Lawrence
D. Wasko, Stephen L. Gelband and Joanne W. Young,
Washington, DC entered appearances.

Before: EDWARDS, Chief Judge and WILLIAMS and
GINSBURG, Circuit Judges.

Opinion for the Court filed by Circuit Judge GINS-
BURG.

GINSBURG, Circuit Judge:

F
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;

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The City of Los Angeles Department of Airports
(hereinafter the City) and two groups of airlines request
review, each for different reasons, of the order of the U.S.
Department of Transportation approving in part the com-
pensatory landing fee scheme that the City implemented
in the spring of 1993. We grant the petition of the City
and deny those of the airlines.

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I. BACKGROUND

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Until 1993 the City calculated the landing fee at Los
Angeles International Airport (LAX) by subtracting esti-
mated airport revenues from estimated airport expenses
and dividing the remainder by the total estimated landed
weight for the coming fiscal year. This so-called residual
i fee methodology produced landing fees that ranged from
a low of $.26 per 1,000 pounds of landed weight in 1989
to a high of $.75 per 1,000 pounds of landed weight in
1982 and 1983. In 1992, the last year in which the City
used this methodology, the fee was $.51 per 1,000 pounds
of landed weight.

Anticipating the expiration of its fee agreements with
the airlines, the City reevaluated its choice of the residual
tee methodology. The City concluded that the practice of
setting the annual landing fe

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386014_0050%3A1. Public record. Not legal advice.