Private Enterprise Participation; Notice DEPARTMENT OF TRANSPORTATION

SUMMARY: On November 26, 1993, the Federal Transit Administration

published a Notice in the Federal Register proposing to rescind its

current guidance on private enterprise participation, which was

believed to be unnecessary, as well as overly restrictive of the

ability of local planning agencies and transit operators to make

rational transportation choices in light of local needs. The agency

provided a 60-day comment period in connection with the Notice. This

final notice announces the agency's decision to rescind the private

enterprise guidance as proposed and presents its statement of policy on

this issue.

DATES: The recisions and statement of policy will be effective 30 days

after the date of publication in the Federal Register.

FOR FURTHER INFORMATION CONTACT: John W. Spencer, Deputy Associate

Administrator, Office of Budget and Policy, Federal Transit

Administration, 202/366-4050; Gregory B. McBride, Deputy Chief Counsel,

Federal Transit Administration, 202/366-4063.

SUPPLEMENTARY INFORMATION:

I. Introduction

On November 26, 1993, the Federal Transit Administration (FTA)

published a Notice of Proposed Recision of Private Enterprise

Participation Guidance (58 FR 62407) (the Notice) in which it sought

public comment on a proposal to rescind its current guidance on the

participation of private enterprise in the provision of mass transit

service. The agency stated its belief that the current guidance is

unnecessary and restricts the ability of local planning agencies and

transit operators to make rational transportation choices in light of

local needs. As discussed in detail below, FTA received a total of 415

comments from the public on its proposal. Although many comments were

not supportive, we found all helpful in the decisionmaking process. In

the end, FTA remains convinced that its proposed course of action

represents responsible public policy that adheres to the statutory

construct and recognizes the appropriate roles to be played by the

entities involved; accordingly, FTA hereby provides final notice to the

public of its decision to rescind its policy statement, ``Private

Enterprise Participation in the (Federal Transit) Program'' (49 FR

41310, October 22, 1984); Circular 7005.1; Chapter X of Circular

9040.1C; and Chapter IV of Circular 9070.1C.

In this final notice, we present FTA's view of the private

enterprise provisions at issue, summarize the comments received in this

docket, respond to the five primary issues raised, and discuss the

policies that will guide FTA action in this arena in the future.

II. Background

In light of the comments received, the background discussion of the

private enterprise provisions in our November Notice bears reiteration

and expansion. As noted there, the principal purpose of the Federal

Transit Act, as amended (FT Act), 49 U.S.C. app. 1601 et seq., is to

assist the development and improvement of mass transportation systems

in metropolitan and rural areas. In sections 3, 9, 16(b)(2), and 18,

Congress has authorized FTA to make funds available to State and local

public bodies for capital acquisition and construction, operating

assistance, and planning activities in connection with mass

transportation projects. Congress has expressed its concern that such

Federal assistance not be used without regard for the interests of

private enterprise. The agency's original authorizing statute, the

Urban Mass Transportation Act of 1964, now the FT Act, contained two

provisions, section 3(e) and the first two sentences of section 4(a),

which expressed this intent. Section 4(a) provided that

[N]o federal financial assistance shall be provided pursuant to

subsection (a)- of section 3 unless the Secretary determines that

the facilities and equipment for which the assistance is sought are

needed for carrying out a program * * * necessary for the sound

economic and desirable development of such area. Such program shall

encourage to the maximum extent feasible the participation of

private enterprise.

(Emphasis added.)

The Federal Public Transportation Act of 1978 deleted this

provision, but added a new section 8 that included subsection (e), now

subsection (o), which provides that ``[t]he plans and programs required

by this section shall encourage to the maximum extent feasible the

participation of private enterprise.''

In section 3(e), as revised by the 1978 Act, Congress has directed

that where an existing mass transportation company is providing

service, FTA may not provide financial assistance to a public body for

the operation of competing or supplemental service, unless it finds

that the relevant transportation improvement program required by

section 8 provides for the participation of private enterprise to the

``maximum extent feasible.''

In South Suburban Safeway Lines, Inc. v. City of Chicago, 416 F.2d

535, 539 (7th Cir., 1969), the court observed that in section 3(e)

Congress seems to have been primarily concerned over the

possibility of public acquisition of private facilities * * *

although competition with and supplementation of existing facilities

are also dealt with.

The legislative history of section 3(e) is consistent with the

court's understanding. In brief, section 3(e) originated in Senate Bill

S.6 (88th Cong., 1st Sess.), one of the bills leading to the Urban Mass

Transportation Act of 1964. The principal sponsor of S.6, Senator

Harrison Williams of New Jersey, indicated that this provision was

intended to further a neutral Federal posture on the question of

whether public or private companies should operate federally assisted

mass transportation services. In discussing the provisions of the bill,

Senator Williams said that

The public would not have to operate the transit facilities and

equipment itself. It could provide for their operation by lease or

other arrangement. Thus, every locality would remain free to choose

public or private operation of its transportation system or any

combination of the two.

109 Cong. Rec. 198 (Daily ed., January 14, 1963) (emphasis added).

In the House of Representatives, an amendment to H.R. 3881 (88th

Cong., 1st Sess.) contained language substantially similar to that

which the Senate had passed. Subsequently, the Senate adopted the House

language, and the provision was signed into law. The debate in the

House revealed that the intent of section 3(e) was to provide fair and

equitable treatment of private providers whose existing operations

might face competition from or acquisition by federally funded transit

systems and to require the Administrator to use his judgment in making

the required findings. 110 Cong. Rec. 14464 (Daily ed., June 25, 1964).

However, the legislative history provides no guidance on how the

required findings are to be made.

The statute does not favor private operations over publicly owned

operations. ``All the statute requires is encouragement of private

participation to the maximum extent feasible. It does not allow private

operators to write their own ticket.'' Westport Taxi Service, Inc. v.

Adams, Civil No. B-76-369 (D.Conn., April 13, 1977), slip opinion at

12; aff'd. in part, rev'd. in part, 571 F.2d 697 (2d Cir. 1978).

At the same time, Congress has made it clear that decisions

regarding mass transportation services to be provided with Federal

assistance are to be made locally. Indeed, section 2(b) of the FT Act

states that one of the fundamental purposes of the Act is

To provide assistance to State and local governments and their

instrumentalities in financing such systems, to be operated by

public or private mass transportation companies as determined by

local needs * * *.

49 U.S.C. app. 1601(b)(3) (emphasis added). Strongly reinforcing this

principle, section 12(d) prohibits FTA from regulating ``in any manner

the mode of operation of any mass transportation system * * *.'' Thus,

the public/private operator choice is to be made at the local level.

This emphasis on local decisionmaking in determining how best to

serve the transportation needs of the local area has been recognized by

the courts:

The statutory scheme of (FTA) emphasizes the large role to be

played by local bodies responsible for urban mass transit * * *.

This reliance on the local or State group is consistent with the

statute's encouragement of local responsibility in urban mass

transportation. The statute does not promote a procedure which

leaves all decisions with the Secretary (of Transportation), but

rather emphasizes local solutions to problems.

Pullman v. Volpe, 337 F. Supp. 432, 438-439 (E.D. Pa. 1970).

The participation of private enterprise in mass transit is

addressed at several points in the current FT Act; most notably,

section 9(f) requires that in developing a proposed program of projects

recipients consult with ``interested parties, including private

transportation providers'' and in developing the final program of

projects recipients particularly consider the ``comments and views * *

* of private transportation providers.'' This activity at the recipient

level is the first step that leads to the planning process under

section 8. In section 8(o) Congress has required that local

transportation plans and programs prepared under section 8 encourage

``to the maximum extent feasible the participation of private

enterprise.'' In section 3(e), Congress has directed that where an

existing mass transportation company is providing service, FTA may not

provide financial assistance to a public body for the operation of

competing or supplemental service, unless it finds that the relevant

transportation improvement program required by section 8 provides for

such private enterprise participation to the ``maximum extent

feasible.'' In section 9(e)(1), Congress extended the requirement of

section 3(e) to the section 9 formula grant program.

The statutory scheme viewed as a whole thus juxtaposes two

potentially competing interests: private enterprise participation and

local determination. By authorizing the Administrator to use his

discretion in making the required finding, Congress has placed

responsibility for resolving any conflicts in the hands of the Federal

agency. Since that finding rests on judgments of ``feasibility,'' which

are made in the first instance in the program of projects developed by

the local metropolitan planning organizations (MPOs), it is apparent

that Congress has vested the agency with broad discretion in carrying

out this responsibility.

Between 1964 and 1984, FTA provided no separate guidance relating

to the participation of private enterprise in mass transportation. FTA

first issued guidance on this issue in a policy statement, ``Private

Enterprise Participation in the (Federal Transit) Program'' (49 FR

41310, October 22, 1984), which set forth the factors FTA would

consider in determining whether a recipient's planning process

appropriately considered the participation of private enterprise. These

factors included consultation with private providers in the local

planning process, consideration of private enterprise in the

development of the mass transit program, the existence of records

documenting the participatory nature of the local planning process, and

the rationale used in determining whether or not to contract with

private operators for transit services.

In 1986, FTA further informally implemented its private enterprise

guidance for sections 3 and 9 recipients in FTA Circular 7005.1

(``Documentation of Private Enterprise Involvement in sections 3 and 9

Programs'') and for sections 16(b)(2) and 18 recipients in Chapter X of

FTA Circular 9040.1C (``Section 18 Program Guidance'') and Chapter IV

of FTA Circular 9070.1C (``Section 16(b)(2) Program Guidance''). These

circulars state clearly that FTA will not condition grants on a certain

level of private enterprise involvement. At the same time, the

circulars outline certain elements and procedures relating to private

enterprise participation that a grantee should use in its planning

process.

Congress has responded twice to FTA's 1984/1986 policy initiative

on private enterprise participation, on both occasions acting to

restrain the agency. First, in the Conference Report accompanying the

Department of Transportation and Related Agencies Appropriations Act,

1987 (Pub. L. 99-464), Congress expressed concern that FTA had exceeded

its discretion by conditioning certain section 9 grants on private

enterprise involvement; section 327 of that Act prohibited such

conditioning of section 9 formula grants.

Second, the Intermodal Surface Transportation Efficiency Act of

1991, Pub. L. 102-240, (ISTEA) amended section 8(i)(5) of the FT Act to

add the following:

The Secretary shall not withhold certification under this

section based upon the policies and criteria established by a

metropolitan planning organization or transit grant recipient for

determining the feasibility of private enterprise ----participation

in accordance with section 8(o) of the Federal Transit Act.

Thus, on the one hand, section 3(e) requires that FTA make a

finding that the MPO has appropriately encouraged private enterprise

participation; on the other, this new provision requires that in

considering whether to certify that an MPO is meeting its obligations

under Federal law, FTA may not consider the process used by the MPO (or

a transit grant recipient) to determine the feasibility of private

enterprise participation. Moreover, the ISTEA Conference Committee

Report states that under section 8(i)(5), ``localities shall be

afforded wide flexibility in establishing criteria to be used in

determining the `feasibility' of private involvement in local

programs.'' Clearly, then, Congress signaled FTA that it is to pay as

significant deference to MPO judgments as to feasibility.

In the Notice, FTA stated that it had reviewed its policy in light

of the statutory background and believed that the 1984/1986 initiatives

should no longer be part of its guidance. The Notice pointed out that

FTA has not generally provided advance notice and opportunity for

comment when adopting or rescinding the circulars it uses to provide

guidance to grantees. FTA invited public comment on the 1984 Policy

Statement and Circular 7005.1 only after their issuance as final

documents. In this proceeding, however, FTA has provided prior notice

of its proposal to change policy consistent with ISTEA to remove

unnecessary Federal direction of local parties' discharge of their

planning responsibilities under the FT Act and to thereby give full

weight to the local decisionmaking process. FTA invited comments on its

proposed action during the 60 days following publication of the Notice.

Before summarizing the comments generally, we will briefly address

two issues. First, a few commenters suggest, in effect, that the

agency's action to rescind the previous policy represents a retreat

from the statute's requirements. We firmly disagree. The participation

of private enterprise in the Nation's transit industry is not only

encouraged by the FT Act, it is essential to the health and success of

that industry. The question addressed in this notice is not whether,

but how, FTA will go about encouraging that participation.

Second, this question is essentially one of policy choices. An

earlier administration chose to play an active Federal role in

restricting the options of MPOs and grantees in their consideration of

private enterprise participation (e.g., requiring the use of a

particular accounting method and mandating route reviews every three

years). The program it developed, based on 20-year-old statutory

provisions previously unelaborated by the agency and adopted without

the benefit of prior notice and comment, can be argued to have been a

fair exercise of the discretion vested in an administrative agency

wrestling with policy choices. But as discussed at greater length

below, the claims of a few commenters that the previous policy had, in

effect, taken on some kind of quasi-statutory status cannot withstand

scrutiny. As the Supreme Court has noted,

An agency to which Congress has delegated policymaking

responsibilities may, within the limits of that delegation, properly

rely upon the incumbent administration's views of wise policy to

inform its judgments. While agencies are not directly accountable to

the people, the Chief Executive is, and it is entirely appropriate

for this political branch of the Government to make such policy

choices * * *

Chevron U.S.A. v. Natural Resources Defense Council, 497 U.S. 837,

865-866 (1984).

In the transportation arena, new State and Federal mandates--the

Americans with Disabilities Act and mandated drug and alcohol testing,

for example--require new programs and services, but the availability of

Federal operating assistance to help pay the costs of these programs

remains limited. Given the increasingly limited funds available, it is

local decisionmakers responsible for meeting the transit needs of the

community who most keenly feel the need to obtain the most transit

service possible with the funds available.

III. Summary of Comments

A. -Overview

Some 415 comments were received in response to the Notice from

commenters representing a variety of views and interests, including

transit systems, private operators, unions, and members of Congress:

--Transit systems and government entities

73

Private operators---

263

--Unions------

55

--Members of Congress----

24

In general, private operators opposed the proposed recision,

arguing that the existing private enterprise policy was effective and

consistent with the FT Act, brought needed competition to the provision

of transit services, and helped lower the cost of those services.

Unions, a number of transit systems, and others, in contrast, took the

view that the current policy needlessly creates paperwork burdens and

reviews that are time consuming and not relevant to privatization

efforts, which should be left to the local decisionmaking process. Many

commenters simply expressed general support for or opposition to the

policies under review.

B. -Summary of Comments by Issue

1. Procedural Objections

While many commenters addressed the substance of the proposal, a

few asserted that the manner in which the agency announced its

proposal, i.e., the Notice of Proposed Recision, was itself flawed.

These commenters noted that the FT Act specifically requires the agency

to follow notice and comment procedures. The fact that an agency uses

the term ``guidance'' or ``guideline'' is not controlling; the status

of such materials as ``rules'' is determined by their binding

character. By rescinding the existing guidance, the commenters contend,

the FTA will effectively create a new ``binding norm'' by establishing

the standards and procedures by which the agency maintains it will

fulfill its statutory obligation to encourage participation of private

transportation companies in transit service. Further, these commenters

argued, the existing guidance clearly is mandatory in nature. Because

such guidance effectively is a rule, they assert, the agency is

obligated to comply with rulemaking procedures before amending or

repealing the guidance. One commenter cited a Supreme Court case to the

effect that an agency changing its course by rescinding a rule is

obligated to supply reasoned analysis for the change beyond that which

may be required when an agency acts in the first instance. In this

regard, commenters also alleged that, contrary to what FTA stated in

its Notice, there is no significant record to show that grantees have

found the existing guidance burdensome.

Another commenter noted that although certain specific protections

and activities are explicitly and implicitly contained in the FT Act,

no process or procedure is prescribed in the statute for the

enforcement of these requirements, which is therefore left to the

rulemaking process. Nor is the agency free to act independent of the

administrative record. The problem with the FTA analysis, asserted this

commenter, is that it has failed to adhere to the requirement that a

nexus exist between the need for changes and the underlying, supportive

facts.

Another commenter argued that the agency had predetermined its

final action on the Notice, notwithstanding its notice and comment

review period. This commenter maintained that the agency's Notice

misstates the private enterprise requirements, the statutory

provisions, and the legislative history. This commenter also argued

that the Notice misrepresents the material in the agency's files, the

agency's interpretations of the current requirements, and the

enforcement history of the program.

On the other hand, many commenters supported the agency's proposal

and the procedure by which it was announced. One argued that much of

the administrative burden imposed by the existing requirements could

have been avoided or alleviated had the policies been subjected to the

Federal Register notice and comment process.

2. Fully Allocated Cost Methodology

The current private enterprise policies require that grantees use a

fully allocated cost methodology when calculating their costs of

providing service for comparison with those of potential private

operators. The Notice indicated, however, that the method was not

always an appropriate gauge of the true cost of providing a particular

service and that FTA believes that in comparing public and private

costs of operating a particular service, a recipient should be free to

use any reasonable accounting method it finds appropriate in a given

setting. A number of commenters particularly supported this aspect of

the Notice. They noted that they long have argued that the criteria and

policies for choosing among public and private providers should be left

to local transit agencies and community planners and that the proper

role for the Federal government should be one of neutrality. The

constraints imposed on local decisionmakers by the fully allocated cost

method resulted in service choices that not only failed to produce

expected cost savings, but resulted in serious service, safety, and

maintenance problems as well, they contended.

One commenter stated that recision of the guidance would enable it

to award contracts consistent with its Board's policy requiring it to

consider only avoidable costs when evaluating the cost-effectiveness of

private carrier proposals. This transit system argued that the

avoidable cost method best measures the true cost savings achieved

through the contracting of service.

One commenter presented an analysis by a Columbia University

professor of a report by a consulting company recommending, on the

basis of a fully allocated cost methodology, that a large transit

system privatize 25 percent of its transit bus service. Contrary to the

cost savings projected in the report, the professor's study, using a

marginal cost analysis, concluded that the proposed privatization

program would produce no savings and, in fact, would cost the transit

agency a considerable sum. Moreover, the commenter argued, the proposal

would result in seriously fragmented service and the associated

organizational, safety, and service problems evidenced in other cities

that privatized on this basis.

Another commenter argued that experience throughout the country

indicates that forced privatization efforts have resulted in

significant cost increases, serious service problems, and ridership and

revenue losses. This submission provided examples of areas where

privatization allegedly increased costs. In one case, an audit showed

that projected savings of 30-40 percent were actually in the 3 to 4

percent range. The commenter contended that because the fully allocated

cost analysis requires public agencies to include their fixed costs as

part of their bottom line as well as costs incurred for buses and

employees, comparisons on this basis are fundamentally flawed. They

contended that fixed costs should not be included among the costs of a

public transit operator because these costs will be incurred regardless

of whether the particular service is offered or not.

On the other hand, some commenters argued in favor of the fully

allocated cost methodology. By standardizing the way costs are counted,

they contended, the fully allocated cost method can reduce

transactional costs, help highlight and eliminate cross-subsidies, and

improve accountability and transparency.

One commenter argued: (1) That permitting public transit agencies

to submit cost of service bids based solely on the short-run marginal

cost of service would result in calculations that ignore the costs of

facilities and rolling stock and assume that the public transit agency

operates its system at the least possible cost; (2) that marginal cost

analysis does not permit the riding public and taxpaying public to

compare the total costs of service for the transit system with and

without the proposed alternative service patterns of providers of

service; (3) that direct comparisons of labor productivity between the

public transit agency and private contractors would be difficult or

impossible since the bases for calculating costs would be different, as

might the reliability and quality of the service in question; and (4)

that fully allocated cost comparisons are intended to permit a

transparent view of the costs of existing and proposed services and the

acquisitions of assets and liabilities that may be relevant.

Another commenter noted that concern about using fully allocated

costs is misplaced in that the disclosure of all costs is designed to

level the playing field in light of Federal and other subsidies

available to public operators. This commenter further noted that the

fully allocated cost method is an analytical baseline, more of a

disclosure than an absolute sum, and that fully allocated costs may be

discounted for costs that cannot be saved when determining the

feasibility of using private contractors.

3. Institutional Barriers

The current policy requires that local authorities ignore local law

when considering the feasibility of using private enterprise in local

transit service. That is, under the current private enterprise policy,

FTA does not recognize, as legitimate barriers to private enterprise

participation, local laws or policy or labor agreements that call for

direct operation of mass transit service. Many commenters maintained

that this position unduly restricts the prerogatives of local officials

and impedes their ability to consider a broad range of transit options.

They also argued that the successful negotiation of collective

bargaining agreements often requires that transit officials be accorded

a maximum degree of bargaining flexibility. The comments in response to

this point varied: unions and certain transit systems argued for

flexibility in light of unique local situations. Private operators

argued in favor of a ``level playing field'' so that local arrangements

are not used to bar private operators from being considered for the

purpose of providing public transit services.

A commenter argued that FTA must balance the two often conflicting

provisions of the FT Act: the section 13(c) labor protection provisions

and the private enterprise provisions. To the extent that FTA reduces

the private enterprise requirements while the 13(c) requirement

continues in full effect, this commenter argued, the balance will

inevitably be altered and riders of public transit will be harmed by

the imbalance.

Another commenter noted that Federal financial assistance

necessarily comes with overriding Federal requirements, e.g.,

procurement rules, that follow the Federal dollar. It is inconsistent,

the commenter contended, for an agency to impose Federal procurement

requirements on grantees, but at the same time to permit them to thwart

the purposes and conditions of Federal assistance merely by agreeing

with third parties such as unions. If, continued the commenter, the

concern about institutional barriers is labor protection, then one must

consider that section 13(c) of the Act contains express provisions for

the protection of labor. If Congress intended to exempt contrary

provisions of labor agreements from the private enterprise mandates of

the Act, it would have done so; breaking down institutional barriers is

a necessary precondition to enabling competition to develop new and

more efficient means to deliver transit services.

On the other hand, others argued against using the transit program

to override State constitutional prohibitions, State and local laws and

referenda, rulings of State regulatory bodies, and local collective

bargaining agreements. This policy, they contended, has had the net

effect of depriving local transportation leaders of the flexibility to

determine to what extent privatization is in the best interest of their

local communities.

Indeed, a member of Congress commented that ``the ISTEA and prior

congressional directives have emphasized that the criteria and policies

for choosing among public and private providers should be left to local

transit agencies and community planners and that the proper role for

the Federal government should be one of neutrality on this essentially

local decision.'' The proposal, the same member noted, ``properly

reflects the emphasis on local decision-making which I and other

architects intended in the ISTEA.'' Similarly, a United States Senator

noted that ``the new language (in the Notice of Proposed Recision)

properly reflects the intent of ISTEA.'' And: ``The ISTEA emphasized

that the criteria for choosing among public and private transit

providers should be left to local transit agencies and community

officials.''

4. Review of Existing Service

The existing private enterprise policy provides that recipients

should review each route every three years to determine whether the

services in question could be more effectively provided by private

operators. FTA noted that this represented a significant burden,

particularly for major transit systems, and indicated that local

authorities should determine the frequency of any such reviews.

Those commenters opposed to this requirement contended that it is

burdensome and unnecessary, while those in favor argued that it forces

systems to review routes on a regular basis, giving private operators

an opportunity to make their case.

One transit system commenter noted that the requirement was ``oddly

redundant'' since all of its service already was provided by the

private sector, and noted that it was a burden because of the

inordinate amount of staff time required to complete the task. A

Senator stated that the agency's proposed action ``wisely reduces

burdensome paper work and other restrictive requirements, while

retaining options of private enterprise participation.''

A large transit system stated that the current requirements entail

a significant administrative burden for many transit agencies with

large and complex route structures, necessitating the diversion of

significant resources to conducting reviews on a three-year cycle.

Another transit operator stated that the requirement places an

inordinate planning burden on it, without any corresponding benefits.

Rather than such a mandated approach, this operator supported route

analysis based on local needs and considerations and noted that it

carries on an ongoing analysis of service levels required to meet

demand.

Commenters supporting this requirement, in contrast, contended that

contracting out has saved significant sums and that the three-year

review period is necessary to realize these savings, as well as for the

agency to satisfy the private enterprise provisions in the statute. One

commenter stated that the three-year review helps to ensure efficiency

and effectiveness in the delivery of transit services. Competition,

this commenter noted, requires periodic review of results. Whatever

FTA's view on three-year reviews of routes, this commenter continued,

the claim that they are burdensome is without foundation.

5. Appeal Process

The private sector circulars provide that both recipients and MPOs

should develop a process for the resolution of disputes with private

operators, with an appeal to FTA available to private operators if they

fail to resolve disputes at the local level. In the Notice, FTA

indicated that since it would be conducting regular reviews of grantee

compliance with planning requirements, a formal appeal process leading

to FTA did not appear necessary, although the agency is always

available to receive reports of planning process failures.

This aspect of the Notice did not generate much specific comment,

but appeared to be included in the general opposition to ``burdensome''

requirements on the part of some commenters, and on the other hand, to

be one of the elements that those in favor of the existing guidance

support.

One commenter noted that, in response to a Freedom of Information

Act (FOIA) request, it was provided with FTA's private sector complaint

decisions: of the twelve complaints, eight were dismissed for failure

to state a cognizable claim; two were remanded for failure to have a

local dispute process; and two included findings of violations with no

penalties imposed. This record, the commenter argued, underscores the

lack of burden created by the FTA appellate process.

IV. FTA Response To Comments

A. Procedural and Legal Adequacy of the Notice

1. Procedural Objections

Several commenters objected to the Notice as failing to meet the

rulemaking requirement of section 12(i)(3) of the FT Act: ``The

Secretary shall propose or implement rules governing activities under

this Act only in accordance with this section except for routine

matters and matters having no significant impact.'' They pointed out

that in the Notice, FTA acknowledged that the proposed recision of its

private enterprise guidance is ``a relatively significant change'';

consequently, they argued, the section 12(i)(3) rulemaking requirement

applies to this proceeding. Section 12 defines a ``rule'' as a

``statement of general or particular applicability designed to

implement, interpret, or prescribe law or policy in carrying out

provisions of this Act'' and requires the following procedures:

(i) Rulemaking procedures.

(1) Procedures.

The Secretary shall provide an agenda listing all areas in which

the Secretary intends to propose rules governing activities under

this chapter within the following twelve-month period. The Secretary

shall publish the proposed agenda in the Federal Register as part of

the Secretary's semi-annual rulemaking agenda which lists rulemaking

activities of (FTA). The Secretary shall also transmit the Agenda

required by the first sentence of this paragraph to [various

committees] on the day that the Secretary's semi-annual rulemaking

agenda is published in the Federal Register.

(2) Views.

Except for emergency rules, the Secretary shall give interested

parties not less than sixty days to participate in any rulemaking

under this chapter through submission of written data, views,

arguments with or without the opportunity for oral presentation,

except when the Secretary for good cause finds that public notice

and comment are unnecessary due to the routine nature or matter or

insignificant impact of the rule, or that an emergency rule should

be promulgated. The Secretary may extend the 60-day period if the

Secretary determines that such a period is insufficient for diligent

persons to prepare comments or that other circumstances justify an

extension of time. An emergency rule shall terminate 120 days after

the date on which it is promulgated.

(3) Limitation.

The Secretary shall propose or implement rules governing

activities under this Act only in accordance with this section

except for routine matters and matters having no significant impact.

The Secretary's most recent semi-annual agenda of rulemaking

activities was published on October 25, 1993 (58 FR 56632). As the

agenda indicates, it was based on reports submitted by the Department's

initiating offices in July 1993, five months prior to the publication

of the Notice and well before the agency had formulated its proposal.

We do not believe that the publication requirement serves to foreclose

FTA's ability to proceed with proposals to amend rules or guidance that

were developed subsequent to the most recently published agenda and

prior to the next. Moreover, as the agenda itself notes, its purpose is

to ``enable the public to be more aware of and allow it to more

effectively participate in the Department's regulatory activity.'' This

objective has been clearly met, as an extraordinarily large number of

commenters have participated in this proceeding. FTA has complied with

the public participation requirement by providing prior notice and a

60-day public comment period. FTA believes that in this proceeding it

has met the requirements of section 12(i).

Two commenters in particular objected to the path FTA has followed,

arguing that FTA should instead conduct a rulemaking proceeding under

the Administrative Procedure Act (APA), 5 U.S.C. 553, that would entail

a notice of proposed rulemaking and provide for public comment. FTA

finds this essentially semantical argument to be without merit. These

commenters identified no procedural defects in the process FTA has

followed, nor did they assert any prejudice to their ability to

meaningfully participate. In short, these commenters simply argue that

FTA's action is legally defective because it titled its November

notice, ``Notice of Proposed Recision * * *,'' instead of ``Notice of

Proposed Rulemaking.'' FTA believes that since it has followed the

notice and comment procedure of section 12(i), the labels used are

irrelevant. We note also that, although the APA requires prior notice

and comment, that requirement does not apply to a matter relating to a

Federal grant program. 5 U.S.C. 553(a)(2).

The objection of these commenters would have been more valid in the

context of the process used to adopt the current policies. In 1984 and

1986, FTA did not provide prior notice and opportunity for comment. If

these commenters believed the policies then issued in final form

without prior notice or comment to constitute a ``binding norm,'' they

could have gone to court asserting the consequent invalidity of the

1984/1986 guidance.

In the past, FTA has issued guidance in the form of statements of

policy and circulars. For example, FTA has issued circulars addressing

third-party procurement, cross-border leasing, and suspension and

debarment. Thus, FTA's 1984/1986 guidance was consistent with its

general practice.

Even if FTA wanted to use the label favored by these commenters--

thus agreeing that action to rescind the 1984/1986 guidance constitutes

rulemaking--it would have faced a certain awkwardness. Issuing a notice

of proposed rulemaking to propose the amendment of a rule generally

refers to something codified in the Code of Federal Regulations. Here,

no such target exists; accordingly, FTA judged that a proposal to

rescind the current nonregulatory guidance, especially when providing

prior notice and comment, would be appropriate and would adequately

serve the evident public interest in this issue.

2. Objections Based on the Record-

Two commenters argued that the Notice fails to state a rationale

for recision of the guidance and is thus legally defective. They cited

Motor Vehicle Manufacturers Association v. State Farm Mutual Insurance,

463 U.S. 29, 42 (1983), in which the Court held that ``an agency

changing its course by rescinding a rule is obligated to supply a

reasoned analysis for the change beyond that which may be required when

an agency acts in the first instance.'' They pointed out that FTA based

its proposal, in part, on its belief that some grant recipients have

found elements of the policy to be burdensome. They noted that in

response to a request for documents under the Freedom of Information

Act, FTA produced few such written grantee complaints. They concluded

that FTA has acted in an arbitrary and capricious manner, since it has

not supplied the ``reasoned analysis for the change'' required by State

Farm.

We note, however, that elsewhere in State Farm, which involved the

National Highway Traffic Safety Administration's (NHTSA) recision of a

passive restraint requirement for automobiles, the Court stated:

Recision of the passive restraint requirement would not be

arbitrary and capricious simply because there was no evidence in

direct support of the agency's conclusion. It is not infrequent that

the available data do not settle a regulatory issue, and the agency

must then exercise its judgment in moving from the facts and

probabilities on the record to a policy conclusion.

---Id. at 44.

The question, then, is not whether FTA has evidence in support of

its belief that grantees find the current policy burdensome. Indeed,

the Court invalidated NHTSA's finding that the passive restraint

requirement was unnecessary not because it lacked supporting evidence,

but because there was substantial evidence to contradict that finding.

Moreover, State Farm involved review of a final rule, and no court has

held that an agency proposal is somehow invalid for lack of a

sufficient record. FTA believes that the record it has developed in

this proceeding fully supports the action it is here announcing.

Here, FTA finds that the weight of the documentary evidence in its

records, including responses of grantees to complaints by private

operators, protests from labor unions representing transit workers, and

documented failures of specific privatization programs to realize cost

savings or improvements in service quality, strongly indicates that the

policy has imposed significant administrative and financial burdens on

recipients, while conferring little measurable benefit on public

transit providers and users. In addition, many comments to this docket

support FTA's judgment.

The current policy was not developed with the benefit of prior

notice and comment and is thus not due the same deference as a rule so

developed, as was the rule at issue in State Farm. In addition, the

effects of the current policy have not been the subject of scientific

study or extensive research. FTA must accordingly base its new approach

to the participation of private enterprise on its experience in

administering the current policy, on the insight developed in this

proceeding, and on recent legislation emphasizing greater local

decisionmaking such as the ISTEA amendment to section 8(i)(5) of the FT

Act. Of course, FTA has broad statutory authority in developing its

approach to implementing the private sector provisions of the FT Act,

``an administrative decision which is essentially an exercise of

discretion.'' South Suburban Safeway Lines, Inc. v. City of Chicago,

416 F.2d 535, 539 (7th Cir. 1969).

In a decision handed down a year after State Farm, the Supreme

Court emphasized the deference that must be given to an agency's

judgments within the agency's field of discretion and expertise. In

Chevron, the Court upheld an Environmental Protection Agency rule under

the Clean Air Act allowing states to treat all pollution-emitting

devices within the same industrial grouping as though they were encased

in a single ``bubble.'' Having determined that Congress had not

expressed any specific intention regarding the applicability of the

statutory provisions in question, the Court decided that the only

question on review was whether or not the agency's interpretation was a

``reasonable one'' in light of the environmental and policy objectives

of the statute. For a unanimous Court, Justice Stevens stated that

An agency to which Congress has delegated policymaking

responsibilities may, within the limits of that delegation, properly

rely upon the incumbent administration's views of wise policy to

inform its judgments. While agencies are not directly accountable to

the people, the Chief Executive is, and it is entirely appropriate

for this political branch of the Government to make such policy

choices--resolving the competing interests which Congress itself

either inadvertently did not resolve, or intentionally left to be

resolved by the agency charged with the administration of the

statute in light of everyday realities.

When a challenge to an agency construction of a statutory

provision, fairly conceptualized, really centers on the wisdom of

the agency's policy rather than whether it is a reasonable choice

within a gap left by Congress, the challenge must fail. In such a

case, federal judges--who have no constituency--have a duty to

respect legitimate policy choices made by those who do.

Id. at 865-866.

Citing Morton v. Ruiz, 415 U.S. 199, 231 (1974), the Court noted

that ``the power of an administrative agency to administer a

congressionally created * * * program necessarily requires the

formulation of policy and the making of rules to fill any gap left,

implicitly or explicitly, by Congress.'' Id. at 844.

In enacting the private enterprise provisions of the FT Act,

sections 3(e), 8(o), and 9(f), Congress did not indicate how they were

to be applied or implemented. Indeed, for the first 20 years, 1964-

1984, the private enterprise provisions were regarded as largely self

executing, as FTA issued neither formal nor informal guidance until

1984 and 1986. Instead, Congress left decisions concerning the

implementation of the provisions to the discretion of the FTA

Administrator. South Suburban at 539.

In the FT Act, Congress made it clear that decisions regarding mass

transportation services to be provided with Federal assistance are to

be made locally; indeed, section 2(b) states that one of the

fundamental purposes of the Act is

To provide assistance to State and local governments and their

instrumentalities in financing such systems, to be operated by

public or private mass transportation companies as determined by

local needs.

49 U.S.C. app. 1601(b)(3)(emphasis added).

Congress further declared that ``[i]t is the purpose of this Act to

create a partnership which permits the local community, through Federal

financial assistance, to exercise the initiative necessary to satisfy

its urban mass transportation requirements.'' 49 U.S.C. app.

1601(a)(emphasis added). This emphasis on local decisionmaking in

determining how best to serve the transportation needs of the local

area has been recognized by the courts:

The statutory scheme of (FTA) emphasizes the large role to be

played by local bodies responsible for mass transit * * *. This

reliance on the local group is consistent with the statute's

encouragement of local responsibility in urban mass transportation.

The statute does not -promote a procedure which leaves all decisions

with the Secretary (of Transportation), but rather emphasizes local

solutions to problems.

Pullman v. Volpe at 438-439.

This original congressional intent that local decisionmakers

determine the feasibility of private enterprise involvement has been

reiterated in a recent amendment to section 8(i)(5) of the FT Act made

by ISTEA, which prohibits FTA from withholding certification of a MPO

on the basis of its private enterprise policies or those of a

recipient. Section 8(i)(5) thus reinforces the fundamental statutory

principle on this issue: local decisionmakers should make the decision

as to whether transit service should be publicly or privately operated.

The recently issued joint FTA/Federal Highway Administration (FHWA)

statewide and metropolitan planning regulations (49 CFR part 613 and 23

CFR part 450) offer an appropriate vehicle for such local

decisionmaking. These regulations require a process for demonstrating

explicit consideration of and response to public views, including those

of private operators of transit service, during the planning and

program development process provided for in 23 CFR 450.212(a)(5) and

450.316(b)(1)(v). FTA believes that these processes will afford private

operators ample opportunity to express their views and comments on the

development of transit programs, while allowing local officials to

encourage the participation of private enterprise to the maximum extent

feasible.

Some commenters questioned the wisdom of FTA's proposed recision of

the current policy, stating that this action would ``cause irreparable

economic harm to the private surface transportation industry.'' They

indicated that recision would impede the statutory goal of developing

responsive and widely accessible transit services. One commenter cited

a report containing data from FTA's section 15 report showing that from

1984 to 1990, contracted revenue miles increased from 2.8 percent of

total mass transit revenue miles to 4.2 percent. However, a close

examination of the report shows both annual increases and decreases

during those years in contracted revenue miles, with no clear trend

apparent. The author notes that overall, ``the numbers indicate that

the extent of contracted bus service is relatively low and the trend

has been stable with only modest increases.'' He also acknowledges that

the report ``does not address performance areas such as safety,

reliability, and overall quality of service.'' The commenter observed

that contracted services, which he claims have been consistently shown

to produce cost savings for local transit agencies, are still a very

small share of the total market. The commenter claimed that ``the

situation would be much worse without the increase in transit services

brought about by the (current) FTA policies and guidance,'' but

provided no evidence for this assertion.

Other commenters cited reports detailing specific experiences of

transit authorities with privatization of bus routes, including one

FTA-funded demonstration project, that resulted in limited or no cost

savings and a decrease in service quality and reliability. They stated

that implementation of FTA's private sector requirements has often

placed an undue and unnecessary burden on staff because of a lack of

interest by private operators or their inability to provide the type of

services required.

Commenters opposed to the recision failed to provide substantive

evidence demonstrating that the current policy has resulted in a

significant increase in private sector involvement in the provision of

mass transit services or assisted in the development and improvement of

mass transit systems; accordingly, FTA cannot agree that recision will

cause financial harm to private operators or prevent the agency from

accomplishing its statutory mission. The evidence presented, even by

commenters opposed to the recision, indicates that the existing

requirements have been of limited effectiveness and questionable

utility in furthering private sector involvement in mass transit. FTA

therefore believes that its decision to allow local authorities to make

their own determinations concerning private enterprise involvement

without rigid Federal mandates is justified by the record before the

agency, reasonable in light of the objectives of the FT Act, and

responsive to the specific provisions of the statute.

Several commenters opposed the recision on the ground that it

represents an abrogation by FTA of its responsibility to enforce the

private sector provisions of the FT Act. They claimed that without the

current requirements, FTA will be unable to ensure the participation of

private enterprise ``to the maximum extent feasible,'' as required by

the statute.

FTA strongly disagrees. As indicated above, the available data do

not demonstrate that the current requirements are effective. In our

view, no commenter has established a causal relationship between the

implementation of the requirements and increased private enterprise

participation. On the other hand, public transit authorities have cited

specific examples of hardship or undue burdens caused by the imposition

of the existing guidance. FTA therefore believes that it is justified

in exercising its administrative and policymaking discretion by

implementing the private sector provisions in a manner consistent with

the statutory scheme and reinforced by ISTEA, i.e., through local

decisionmaking rather than through Federal mandates.

One commenter alleged that FTA did not open the comment period for

this proceeding prepared to evaluate fully and fairly all the comments

submitted, but rather with a fixed and predetermined purpose to

``paper'' its previously decided action. The commenter submitted as

evidence of FTA's prejudgment certain statements made by the

Administrator before a trade association group prior to commencement of

this proceeding, indicating that the agency found the current private

enterprise requirements inappropriate and burdensome and intended to

seek their recision. FTA finds nothing improper in the Administrator's

comments.

In Association of National Advertisers v. FTC, 627 F.2d 1151 (D.C.

Cir. 1979), cert. denied, 447 U.S. 921 (1980), the court ruled that

certain statements made by the Chairman of the Federal Trade Commission

prior to a rulemaking proceeding under the Federal Trade Commission

Improvements Act did not disqualify the Chairman from participation in

or invalidate the proceeding. The court emphasized that the Chairman's

presentation to a trade group of his views on issues later addressed in

the rulemaking was a valid exercise of his policymaking prerogatives:

``The view of a neutral and detached adjudicator is simply an

inapposite role model for an administrator who must translate broad

statutory commands into concrete social policies. If an agency official

is to be effective, he must engage in debate and discussion about the

policy matters before him.'' Id. at 1168-1169. See also, Lead

Industries Ass'n. v. EPA, 647 F.2d 1130, 1179 (D.C. Cir. 1980), cert.

denied, 449 U.S. 1042 (1980); and United Steelworkers of America v.

Marshall, 647 F.2d 1189, 1208-1210 (D.C. Cir. 1980), cert. denied, 453

U.S. 913 (1981).

Indeed, stated the court,

One cannot even conceive of an agency conducting a rulemaking

proceeding unless it had delved into the subject sufficiently to

become concerned that there was an evil or abuse that required

regulatory response. It would be the height of absurdity, even a

kind of abuse of administrative process, for an agency to embroil

interested parties in a rulemaking proceeding, without some initial

concern that there was an abuse that needed remedying, a concern

that would be set forth in the accompanying statement of the purpose

of the proposed rule.

Investigation and policy-making are integral to the total

function just as much as decisionmaking. It is appropriate and

indeed mandatory for agency heads and staff to maintain contacts

with industry and consumer groups, trade associations and press,

congressmen of various persuasions, and to present views in

interviews, speeches, meetings, conventions, and testimony * * *

Nat'l. Advertisers at 1176.

Accordingly, FTA finds that far from impairing the integrity of

this proceeding, the Administrator's remarks cited by the commenter

reflect the agency's valid concern with the current private enterprise

requirements.

B. Review of Existing Service

Circular 7005.1 provides that recipients should review each of

their routes every three years to determine whether that service could

be more effectively provided by private operators. FTA proposed to

eliminate this provision, since reports from grantees indicated that it

entails a significant administrative burden, especially for major

grantees with large and complex route structures, requiring the

devotion of substantial staff time to conducting reviews on an

arbitrary three-year cycle.

Five commenters, one representing private transit providers and

four representing public transit agencies, addressed this issue. The

commenter for the private sector termed an anomaly FTA's

characterization of three-year route review as an undue burden, since

the FT Act calls for Federal review of a grantee's planning processes

every three years. This comment confuses FTA's statutory duty to

conduct triennial reviews to ensure that transit programs comply with

Federal requirements with a nonstatutory, nonregulatory mandate that a

grantee review all routes within its system, even if use of a private

operator is not feasible on its face or if, in fact, no private

operator is available to provide service on these routes. This

commenter also indicated that three-year route review is necessary to

stimulate competition for transit services, but offered no evidence

that the provision has ever been successful in increasing competitive

bidding opportunities.

The four commenters on behalf of transit agencies supported

recision of the provision, agreeing that it requires an inordinate

amount of staff time while producing few corresponding benefits. They

emphasized that the decision of whether to put routes out to

competitive bid should be made by the local transit authority working

with the community and determined in the community's best interest. One

grantee stated that the provision was redundant, since all of its

service is already provided under contract with private operators.

Another agency objected to a Federal mandate, suggesting on-going

analyses of service to assess the cost-effectiveness and appropriate

service levels required to meet demand, with an evaluation of whether

service should be put to competitive bid based on its location, service

area, deadhead miles, ridership level, and relationship to other

services within the region. FTA agrees that use of such factors should

provide some grantees with a more rational basis for determining the

frequency of route reviews than the current mandatory three-year cycle,

which, according to the commenters, is often an empty and time-

consuming exercise.

FTA therefore concludes that the three-year reviews of service

routes provided by Circular 7005.1 should no longer be required.

Instead, FTA encourages grantees to include periodic review of route

service in the consultative process required under section 9(f) of the

FT Act (49 U.S.C. app. 1607a). Grantees should base the frequency of

these reviews on the factors cited above and any other factor a grantee

finds relevant to its local circumstances. FTA believes that route

evaluation using this process will relieve grantees of an undue

administrative burden, while resulting in competitive bidding decisions

that are based on appropriate and meaningful local factors.

C. Fully Allocated Cost Analysis

Circular 7005.1 provides that grantees should use a fully allocated

cost methodology when providing service for comparison with the costs

of potential private operators. The use of this accounting methodology

was intended to ensure that local decisionmakers have considered all

costs associated with the provision of service by a public agency.

In the Notice, FTA pointed out that the experience of many

recipients shows that in the context of their operations, the fully

allocated cost methodology is not always an appropriate gauge of the

true cost of providing a particular service; in some cases, it takes

into account costs already incurred or costs that remain fixed, such as

salaries of senior managers and other personnel who would be on the

recipient's payroll regardless of whether the service was operated by

the recipient. Similarly, FTA has interpreted the current policy to

require that recipients bid fully allocated costs when competing with

the private sector in response to a procurement solicited by a third

party. FTA now concludes that this requirement interferes with maximum

open competition by artificially restricting price competition between

recipients and private enterprise. Moreover, FTA's ``Fully Allocated

Cost Analysis Guidelines'' are set forth in a complex and lengthy

document that imposes a significant administrative burden, especially

on smaller recipients that lack adequate staff resources.

FTA proposed that in comparing public and private costs of

operating a particular service, recipients should be free to use any

reasonable accounting methodology. FTA noted that cost is but one

factor to be used in local decisionmaking and that maximum feasible

participation of private operators may depend on other factors, e.g.,

the ability to maintain quality service, operate in a coordinated

system, and provide an adequate measure of safety.

Several commenters representing private operators and the majority

of those representing public operators addressed this issue. Private

sector commenters, who overwhelmingly opposed the proposed recision,

recalled that the intent of the fully allocated cost methodology is to

measure the true cost of a transit service, taking into account the

direct cost of service as well as the portion of shared costs

attributable to the service in question. They argued that allowing

public operators to use marginal costs in comparative bid situations

results in an unfair comparison of costs, which in the majority of

situations will favor public carriers, and provides a distorted picture

of the real costs of public operators to taxpayers. They stated that

the fully allocated cost methodology is essential to evaluating the

efficiency and effectiveness of capital and operating dollars spent on

transit.

Public transit operators related, however, that practical

experience with the fully allocated cost methodology has produced less

than favorable results. Several pointed out that the FTA guidelines are

extremely complex and difficult to apply, even by trained accounting

staff. They noted that the fully allocated cost methodology is not a

normal analytical tool that has other applications. They stated that

the calculation of ``fully allocated cost'' has caused a great deal of

controversy due to differing opinions about which model truly reflects

the real world in which transit systems operate.

For instance, one grantee related that it spent $28,912 to have a

consultant develop a cost allocation model that was unusable in its

delivered form. Numerous additional staff hours were required before

the model was even marginally useful, and the model must be updated

every year through a cumbersome process. According to the grantee, the

result of this substantial investment has been more expenses due to

litigation brought against it by private providers whose opinion of how

a fully allocated cost model ought to work differed from the grantee's.

In the case of just one challenge by a private operator, the grantee

spent $19,125 to have a consultant audit cost comparisons. This figure

does not include legal fees associated with that complaint.

Some grantees complained that certain private operators have taken

advantage of the fully allocated cost requirement to thwart local

initiatives. One grantee, for example, stated that for 13 years, it

provided demand response service for 80 severely handicapped adults,

taking them from home to their worksite. A private carrier convinced

the mental health agency overseeing the program to put the service out

for bid. Because it was required to include all of its overhead costs

in the bid, the transit agency concluded that it could not compete with

the private operator and chose not to bid. The private operator then

withdrew its original bid and renegotiated a fee structure

approximately 50 percent higher than its original bid. The mental

health agency determined that it could not afford the service and

rejected the bid. As a result, a transit-dependent population, which

had for 13 years been served by the transit agency, is now without any

transit service.

One commenter for the private sector cited a report by a noted

economist who, on the basis of a study of the utilities industry,

advocates the use of a fully allocated cost methodology, since ``years

of experience in the electric power industry have shown that cost

analysis must be the same for both the buyer and the seller of

electricity.''

However, a commenter supporting the recision provided an analysis

of a specific FTA grantee privatization proposal by another economist,

who points out that the use of the FTA-mandated fully allocated cost

methodology often results in a skewed cost comparison. That methodology

requires accounting for all of the grantee's fixed costs, from

implementation of the Americans with Disabilities Act requirements to

police protection of transit property and system planning and

marketing. In contrast, private operators are not charged with

responsibility for managing a regional transportation network and

usually provide only a limited amount of bus service. They are thus

able to submit lower bids that do not necessarily reflect the actual

per-hour cost savings of privatizing service.

Many public transit agencies pointed out that even under the

current guidance, cost is only one factor that grantees may consider in

determining whether or not to privatize service. The participation of

private operators ``to the maximum extent feasible'' may also depend on

the quality, reliability, or the specialized nature of the service they

provide. Several grantees stated that, based on their own specific

local needs, even if the requirements to use the fully allocated cost

methodology and other elements of the current guidance are rescinded,

they will continue to seek proposals for transit service from private

providers.

Given the complexity and difficulty of applying the fully allocated

cost methodology and its dubious value as an analytical tool, FTA

concludes that grantees should no longer be required to use it when

comparing public and private costs of operating a particular service.

Instead, recipients should use any reasonable and generally accepted

accounting method they find appropriate under their local

circumstances. FTA believes that recision of this element will relieve

local officials of an undue administrative burden while increasing

their flexibility to determine whether service is ``to be operated by

public or private mass transportation companies as determined by local

needs,'' consistent with section 2(b) of the FT Act.

D. Local Institutional Barriers

The 1984 Policy Statement and the circulars provide that FTA will

not recognize, as acceptable limitations on private enterprise

participation, local institutional and policy constraints such as local

labor agreements or local laws or policy that call for direct operation

of mass transit service. In the Notice, FTA noted the view of many

grantees that this position unduly restricts the prerogatives of local

officials and impedes their ability to consider a broad range of

transit options. Moreover, the successful negotiation of collective

bargaining agreements often requires that transit officials be accorded

a maximum degree of bargaining flexibility.

Commenters representing the private sector objected to FTA's

proposed recision of this policy. One argued that this proposal, if

adopted, would further entrench institutional barriers, resulting in a

stifled marketplace, steadily declining ridership, and steadily

increasing costs for services. Another noted that Federal financial

assistance necessarily comes with overriding Federal conditions, such

as ADA mandates or environmental quality requirements. Generally

speaking, these commenters maintained that breaking down institutional

barriers is a necessary precondition to enabling competition to develop

new and more efficient means to deliver transit services.

Commenters for the public sector supported FTA's proposal to

recognize that there can be legitimate institutional barriers to

privatization. These commenters stated that FTA's use of the grant

program to override state constitutional prohibitions, state/local laws

and referenda, rulings of state regulatory bodies, and local collective

bargaining agreements has had the net effect of depriving local

transportation leaders of the flexibility to determine to what extent

privatization is in the best interest of their local community. Another

commenter asserted that this aspect of FTA's private enterprise

guidance, and its often vigorous implementation, has encouraged

grantees to renege on or contravene the terms of collective bargaining

agreements concluded under section 13(c) of the FT Act, which mandates

that grantees afford certain protections to transit workers.

One grantee noted that as a result of a recent State Supreme Court

ruling, the contracting out of bus routes is subject to negotiation and

binding arbitration with its labor union. Given that fixed route

service is at the core of the collective bargaining unit's work

function, the grantee stated, the union's concurrence in any decision

to privatize existing fixed route bus service is unlikely.

Another grantee stated that it was adversely affected by this

failure to recognize institutional barriers when, in 1989 and 1990, FTA

refused to make two section 9 grant awards because local requirements

in section 13(c) agreements required the successful proposer to take on

the employees of the outgoing private operators. FTA held that this

successor employer clause was unacceptable under the FT Act because the

provision limited the ability of proposers to submit competitive bids.

The issue was resolved only when Congress adopted special legislation

allowing the particular grantee's use of the successor clause.

Department of Transportation and Related Agencies Appropriations Act of

1991, Public Law 501-516, section 335, and Department of Transportation

and Related Agencies Appropriations Act of 1993, Public Law 102-388,

section 342. A review of FTA files reveals several similar instances in

which grantees were threatened with suspension or withdrawal of FTA

funds because of the existence of local institutional barriers to

private sector participation in their mass transit programs.

A commenter for the private sector noted that the congressional

action mentioned above was limited in applicability to one particular

grantee and argued that one can therefore infer congressional approval

of the overall existing policy. FTA finds that argument entirely

speculative. Congress has never specifically approved this or any other

aspect of the current private enterprise policy. Congress' intervention

in that case is instead consistent with its pattern since 1984 of

allowing FTA discretion in defining and implementing the private sector

provisions, but of curtailing the agency's action when it threatened

local officials' wide discretion in determining the feasibility of

using private operators. FTA believes, moreover, that in view of such

legal and collective bargaining impediments, the requirement that a

grantee ignore institutional barriers to private sector involvement is

not reasonable. It sometimes places grantees in the untenable position

of being required to violate State or local laws, court rulings, or the

terms of their own statutorily mandated collective bargaining

agreements in order to receive funds under the FT Act, which states

that such funds may be used to provide service ``to be operated by

public or private mass transportation companies, as determined by local

needs.'' 49 U.S.C. app. 1601(b)(3). Accordingly, this aspect of the

guidance is an unacceptable restraint on a grantee's statutory

responsibility to determine what level of private sector involvement is

feasible based on particular local factors. FTA further notes that,

like other elements of the current policy, the institutional barriers

provision does not rest on specific statutory authority, but instead

was adopted for policy reasons, without prior notice and comment.

One commenter states that FTA's proposed acceptance of

institutional barriers to private sector involvement is inconsistent

with Executive Order 12893 (January 26, 1994), which provides that

``agencies should work with State and local enities to minimize legal

and regulatory barriers to private sector participation in the

provision of infrastructure facilities and services.'' This commenter

maintains that recision would undermine this policy. The Executive

Order makes it clear, however, that encouragement of private sector

participation, like the other principles of sound infrastructure

management, is to be implemented through efficient State and local

programs. Accordingly, the Executive Order directs that Federal

agencies work with State and local entities to minimize such

institutional barriers, not to mandate that local officials overlook

them. Indeed, by stating that institutional barriers should be

minimized rather than ignored, the Executive Order recognizes that such

barriers exist and must be taken into account by local officials in

determining the feasibility of private sector involvement. FTA finds,

therefore, that recision of its current guidance concerning

institutional barriers to privatization is fully consistent with

Executive Order 12893.

FTA finds that no data demonstrate that the current policy has

resulted in increased private sector involvement and that the current

policy has curbed the ability of local communities to determine which

transit options best meet the needs of their community. FTA believes

that this recision of the previous policy will restore to local transit

officials the flexibility they need to determine to what extent

privatization is feasible without the imposition of a Federal mandate

that has often disrupted the grantmaking process and jeopardized the

balance between Federal and State/local requirements.

E. Appeal Process

The circulars provide that both recipients and MPOs should develop

a process for the resolution of disputes with private operators.

Private operators may appeal to FTA if they fail to resolve their

disputes at the local level. Pursuant to this provision, FTA has

rendered administrative decisions following an investigation of

disputes. In certain of these decisions under the current policy, FTA

has indicated that it would withhold Federal funds from grant

recipients that failed to conform to an FTA determination. In the

Notice, FTA stated that since it will be conducting regular reviews of

grantees' compliance with the planning requirements, a formal appeal

process leading to FTA does not appear necessary.

Commenters for the private sector supported a continued role by FTA

in the private sector complaint process. One commenter stated that by

proposing to do away with the appeal process, FTA is showing that it

will not enforce the statutory requirements of the FT Act. Another

noted that of the 12 private enterprise complaints brought to FTA since

the current private sector policy was adopted, eight were dismissed

outright because the grantee had committed no procedural error, two

resulted in remands to the grantee, and in all but one other case, the

grantee's decision was upheld. This, argues the commenter, ``is not a

record of heavy-handed federal interference in local decisionmaking.''

FTA agrees that the appeal process has not played a significant

role in furthering the private enterprise provisions of the FT Act. The

figures cited by this commenter reveal that the process has in fact

resulted in lengthy and cumbersome delays (FTA has taken up to two

years to decide certain matters) and has had little impact on the local

decisionmaking process or on the level of private sector involvement. A

review of FTA records indicates that in the one case in which a grantee

was cited for a violation of the private enterprise provisions and

ordered to reopen a certain route to private sector bids, no private

operator submitted a bid to provide service on the route.

FTA therefore concludes that the appeal process has been a

fruitless exercise. Periodic FTA reviews should ensure that grantees

are in compliance with the planning requirements for local

participation without needless Federal intrusion and additional

paperwork and administrative burdens on both grantees and FTA. FTA will

therefore eliminate the appeal to FTA. However, FTA notes that the

agency may investigate and take action in the case of any failure by a

grantee or MPO to follow Federal requirements. Since private enterprise

participation in the planning process is mandated by ISTEA and the new

metropolitan and statewide planning regulations (49 CFR part 613 and 23

CFR part 450), FTA will monitor and investigate any apparent failures

by grantees and MPOs to follow the procedures set out in their own

local planning process.

V. FTA's Final Action

In keeping with congressional intent that FTA carefully respect the

prerogatives of local decisionmakers with regard to the participation

of private enterprise in the provision of mass transit, FTA is

rescinding its 1984 Policy Statement (49 FR 41310, October 22, 1984),

Circular 7005.1, Chapter X of Circular 9040.1C, and Chapter IV of

Circular 9070.1C. The recision of this guidance will become effective

thirty days after publication of this notice.

FTA's recision of the current guidance is based on its judgment

that the requirements it imposes, while ineffective, have unduly

infringed on the decisionmaking authority that local officials are

entitled to exercise under the FT Act. FTA believes that this recision

is within the broad limits of its authority under the FT Act, that it

is, in fact, ``an administrative decision which is essentially an

exercise of discretion.'' South Suburban at 539. FTA's action in this

matter represents a policy choice, one it believes to be reasonable and

valid in light of its review of the agency's experience in

administering the current provisions over the past ten years and fully

within the limits of its policymaking discretion. The Supreme Court has

affirmed the authority of an agency to make policy choices within the

scope of its statutory delegation. Chevron at 865-866.

In rescinding these requirements, we emphasize that the agency

continues to support the participation of private enterprise; indeed,

we believe that the applicable requirements--the section 9(f) process

and the new section 8 planning requirements--represent a comprehensive

and thorough approach to the consideration of private enterprise at the

local level, consistent with requirements of the FT Act.

We first stress the continuing significance of the section 9(f)

process as described in FTA Circular 9030.1A, during which key

decisions regarding private enterprise participation are made. Pursuant

to chapter IV of that Circular, each recipient:

Makes available to the public information concerning the

amount of funds available under section 9 and the program of projects

that the recipient proposes to undertake with such funds;

Develops a proposed program of projects concerning

activities to be funded in consultation with interested parties,

including private transportation providers;

Publishes the proposed program of projects in sufficient

detail and in such a manner as to afford affected citizens, private

transportation providers, and as appropriate, local elected officials

an opportunity to examine its content and to submit comments on the

proposed program of projects and budget and on the performance of the

recipient; and

Affords an opportunity for a public hearing to obtain the

views of citizens on the proposed program of projects.

The Circular further provides that in preparing the final program

of projects to be submitted to the FTA, the recipient consider the

views and comments of private transportation providers and, if

appropriate, modify the proposed program of projects and budget.

The second leg of the agency's implementation of the private

enterprise provisions involves the planning regulations recently issued

jointly by FTA and the Federal Highway Administration (FHWA). Sections

1024, 1025, and 3012 of ISTEA amended the FT Act by revising section 8

to require a continuing, comprehensive, and coordinated transportation

planning process in metropolitan areas and States. ISTEA makes

fundamental changes to the traditional planning and programming

criteria for project selection in metropolitan areas. There is

heightened emphasis on environmental and intermodal values, financial

constraint in plans and transportation improvement programs (TIPs), and

greater public participation in local decisionmaking. Moreover, the

rules are designed to facilitate State and local compliance with the

Clean Air Act conformity requirements for nonattainment areas through

the development and adoption of the plans and TIPs.

In addition, the statewide planning regulation requires that States

consider all modes of transportation--surface, air, water--in

developing plans and programs that can serve all areas of a State

efficiently and effectively. Implementing ISTEA, the rule calls for

public participation in statewide planning and programming and for

State agencies to more closely coordinate their efforts with all other

interested parties, public and private.

Thus, with FHWA, FTA has amended the metropolitan planning

regulations at 23 CFR part 450 and has issued new statewide planning

regulations to carry out the directives of ISTEA. These rules apply to

all MPOs serving urbanized areas with a population of at least 50,000,

State transportation agencies, and publicly operated transit agencies.

The rules provide for the development of transportation plans and TIPs

and for the selection of projects to be funded under title 23 U.S.C.

and the FT Act in metropolitan areas and States. Because of the

significance of these new rules, FTA and FHWA are undertaking a

comprehensive outreach effort to explain the new requirements to

States, metropolitan planning organizations, transit operators, and

private entities.

Sections 450.316(b) and 450.212 of the metropolitan planning rule

set out detailed and extensive requirements regarding public

participation in the development of transportation plans by statewide

agencies and MPOs. These provisions require that private operators be

provided with timely information about transportation issues and an

opportunity to comment throughout the transportation planning process.

They also require that interested parties be provided with access to

technical and policy information used in the development of plans and

TIPs, as well as open public meetings where matters related to transit

programs are being considered.

In short, under this framework the private enterprise provisions

now involve a dual effort: first, at the local transit system level by

means of the section 9(f) consultative process discussed above, and

second, at the expanded metropolitan planning level, which through the

ISTEA and its implementing regulations has become the critical point

where transportation decisions will be made.

FTA believes that the section 9(f) and section 8 requirements will

provide an adequate basis for the finding required under section 3(e)

before FTA may provide financial assistance to a public body for the

operation of service that competes with or supplements service provided

by an existing mass transportation company, i.e., that the program of

projects required to be developed by MPOs by section 8 provides for the

participation of private enterprise to the maximum extent feasible.-

FTA's findings will be based on such criteria as the efforts a

grantee or MPO has made to notify and consult with the private sector

in its section 8 or section 9(f) planning process; the effect of public

mass transit service proposals on existing private mass transit

operators; and any other steps or processes the grantee or MPO has

taken to encourage private sector involvement. FTA believes that such

factors will allow it to determine whether the program developed under

section 8 involves the private sector ``to the maximum extent

feasible,'' given particular local circumstances, both in connection

with grant making sections 3, 9 and 18.

Sections 450.316(b) and 450.212 provide that before submitting a

proposed program of projects to FTA for certification, a State or MPO

must assure that citizens, affected public agencies, representatives of

transportation agency employees, private providers of transportation

and other interested parties have been given full and open access to

the decisionmaking process. In ISTEA Congress signaled its intent that

FTA should defer to the local decisionmaking process with regard to the

participation of private enterprise by adding the following to section

8(i)(5):

The Secretary shall not withhold certification under this

section based upon the policies and criteria established by a

metropolitan planning organization or transit grant recipient for

determining the feasibility of private enterprise participation in

accordance with section 8(o) of the Federal Transit Act.

Accordingly, in making a finding under section 3(e) when making a

specific grant, FTA will rely on its previous certification of the

transportation planning process developed under section 8, unless it

has noted deficiencies in that process related to private enterprise

participation. In addition, FTA will conduct periodic Federal planning

management reviews to ensure that all the planning requirements of

section 8 are being met by recipients of FTA funds. Furthermore, FTA

will monitor compliance with the private enterprise provisions of the

FT Act as part of the annual audits and triennial reviews mandated by

section 9.

Dated: April 21, 1994.

Gordon J. Linton,

Administrator.

[FR Doc. 94-10057 Filed 4-25-94; 8:45 am]

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