Proposed Policy Regarding Airport Rates and Charges

SUMMARY: This document proposes a significant revision of the Policy

Regarding Airport Rates and Charges published with request for comment

on February 3, 1995. The proposed policy retains the structure and

basic approach of the February 3 policy statement, but the strict

requirement for equality of fees and costs based on historic cost

valuation of assets would be limited to the airfield portion of an

airport, and the policy would permit substantial flexibility in the

establishment of fees for other aeronautical facilities. The revision

reflects public comments received on the February 3 policy statement.

This notice announces two public meetings on the proposed policy and

reopens the comment period until October 23, 1995.

DATES: Comments must be received by October 23, 1995.

ADDRESSES: Comments should be mailed, in quadruplicate, to: Federal

Aviation Administration, Office of Chief Counsel, Attention: Rules

Docket (AGC-10), Dockets No. 27782, 800 Independence Avenue SW.,

Washington, DC 20591. All comments must be marked: ``Docket No.

27782.'' Commenters wishing the FAA to acknowledge receipt of their

comments must include a preaddressed, stamped postcard on which the

following statement is made: ``Comments to Docket No. 27782.'' The

postcard will be date stamped and mailed to the commenter.

Comments on this Notice may be examined in room 915G on weekdays,

except on Federal holidays, between 8:30 a.m. and 5 p.m.

FOR FURTHER INFORMATION CONTACT: John Rodgers, Director, Office of

Aviation Policy, Plans and Management Analysis, Federal Aviation

Administration, 800 Independence Ave. SW., Washington, DC 20591,

telephone (202) 267-3274; Barry Molar, Manager, Airports Law Branch,

Office of the Chief Counsel, Federal Aviation Administration, 800

Independence Avenue SW., Washington, DC 20591, telephone (202) 267-

3473.

SUPPLEMENTARY INFORMATION: Section 113 of the FAA Authorization Act of

1994, Public Law 103-305 (1994 Authorization Act) signed into law on

August 23, 1994, 49 U.S.C. 47129, required the Secretary of

Transportation to issue standards or guidelines for use in determining

the reasonableness of an airport fee. After notice and opportunity for

public comment, on January 30, 1995, the Office of the Secretary of

Transportation (OST) and the FAA issued a ``Policy Regarding Airport

Rates and Charges,'' and requested further public comment on the

interim policy as published. Docket No. 27782 (60 FR 6906, February 3,

1995). The comment period on the interim policy closed on May 4.

Comments Received

More than 125 comments were received in response to the February 3

request for comment, including comments received after the close of the

comment period. The Department considered all comments, including the

late-filed comments. Because the Department is proposing a

substantially revised policy statement and publishing the statement for

an additional comment period, the Department will include in this

supplemental notice only a brief discussion of public comments received

on the February 3 policy statement, and will not address the comments

in detail at this time. When a final policy statement is published in

the Federal Register, the Department will include a comprehensive

response to public comments received on both the February 3 interim

policy and this proposed revision.

Summary of Proposed Changes and Response to Significant Issues

Raised

1. Valuation of Assets for Ratesetting Purposes.

The interim policy requires valuation of all airport land and

airfield assets at historic cost to the original airport proprietor (

Para. 2.4.1). The airport proprietor may use other valuation methods

for other assets, but total aeronautical revenue may not exceed total

aeronautical cost, based on historic cost asset (HCA) valuation, absent

agreement (Para 2.4.1(a)).

Aeronautical users filing comments supported the interim final

policy's approach to asset valuation.

Airport operators uniformly criticized the treatment of asset

valuation. They argued that, inter alia, the combination of the HCA

valuation requirement and the total cost cap will disrupt their current

practices in leasing nonairfield facilities; will underfinance smaller

airports that are unable to use debt-financing to fund capital

replacement and improvement; and will cause signatory carriers to pay

more than non-signatory carriers under certain residual lease and use

agreements. They also argued that the HCA requirement is inconsistent

with Sec. 47129's prohibition on setting rates; is inconsistent with

Departmental policies on financial self-sustainability of airports; and

is inconsistent with an airport proprietor's Constitutional right to

earn a reasonable return on investment.

While airport commenters prefer elimination of the HCA valuation

requirement for all assets, most (the City of Los Angeles being the

primary exception) stated that retention of the HCA valuation

requirement for the airfield would be acceptable, because HCA valuation

for the airfield reflects common industry practice.

The Department proposes to revise the policy by limiting the HCA

valuation requirement in proposed Para. 2.5.1 to airfield assets and by

eliminating the total HCA cost cap for aeronautical facilities (Para.

2.4.1(a) of the interim policy). Airfield assets would be defined in

the applicability section of the policy statement to include runways,

taxiways, nonexclusively leased aprons, land associated with these

facilities, and land acquired and held to assure compatibility with

airfield operations. If the latter land were developed for compatible,

nonairfield uses, the land would be removed from the airfield rate

base.

In addition, further guidance would be given on the way airfield

land may be included in the rate base (proposed Para. 2.5.1(a)). The

cost of land acquired with debt could be included in the rate base by

charging all debt service expenditures to the airfield cost center. The

cost of land acquired with internally generated funds or donated by the

airport proprietor could be recovered by amortization. A new paragraph

2.5.1(b) is proposed to clarify that, while HCA valuation must be used

to establish total airfield costs, airport operators may, to enhance

the efficient use of the airfield, allocate costs using a reasonable

and not unjustly discriminatory methodology that departs from a pro

rata division of HCA costs.

A new paragraph 2.6 would be added, providing that fees for other

aeronautical services and facilities could be established by any

reasonable methodology. As discussed below, the policy would provide

for FAA scrutiny

[[Page 47013]]

of accumulation of surplus funds attributable to aeronautical revenues,

however. The Department does not intend this possible scrutiny to

function as an indirect reinstatement of the HCA cost cap.

The proposed revision to the policy is intended to carry out the

Department's mandate to adopt a policy that assures that airport fees

are reasonable while avoiding unnecessary disruption to long-standing,

well-accepted pricing practices, especially for nonairfield assets.

For nonairfield facilities, which may be priced according to any

reasonable method, our experience suggests that effective competition

generally exists. Fees for such facilities are generally established by

agreement between the airport proprietor and aeronautical user based on

negotiations. Formal administrative complaints over fees for

nonairfield facilities have in almost all instances involved

allegations of unjust discrimination--not allegations that nonairfield

fees were excessive. Moreover, since 1989, all of those complaints not

still pending have been dismissed following investigation. Based on

these considerations, we propose to rely on the discipline of

competition, in the first instance, rather than detailed prescriptions

of permissible charging practices to assure that fees for nonairfield

facilities meet the requirements of reasonableness contained in

statutes, grant agreements and applicable international aviation

agreements. However, the policy would explicitly preserve the authority

of the FAA to investigate the accumulation of aeronautical surpluses.

For airfield assets--runways and taxiways--there is greater risk

that airport proprietors may enjoy locational monopoly power. The HCA

requirement for these assets would guard against any abuse of monopoly

power and would conform to general industry practice.

The HCA valuation requirement does not conflict with the statutory

prohibition on setting the airport fee. The valuation of airfield

assets is but one element in setting a fee. Even with the HCA valuation

requirement, the airport proprietor has substantial latitude with

respect to those other elements.

Further, the HCA valuation requirement does not amount to a

regulatory taking of property. The HCA valuation requirement allows the

airport proprietor to fully recover its costs of providing airfield

facilities. HCA valuation is one of the methods that has been found

reasonable, and hence constitutional, by the courts.

Finally, many of the arguments against the HCA requirement for the

airfield were considered and rejected by the Department in its decision

on the Los Angeles International Airport (LAX) landing fee dispute. See

pages 19-26, Order 95-6-36 (June 30, 1995).

2. Applicability to Airfield and Non-Airfield Assets

As noted above, the Department proposes to modify the interim

policy to eliminate the total HCA cap on aeronautical revenues and to

permit nonairfield fees to be set according to any reasonable method.

In keeping with this change, the provision in the policy requiring that

aeronautical revenues not exceed aeronautical costs (Para. 2.1 of the

interim policy) would be narrowed to apply to airfield revenues and

costs (Proposed para. 2.2). Similarly, the provision specifying in

detail the costs that may be included in the rate base (Proposed Para.

2.4) would be modified by adding an exception for nonaeronautical fees

determined by other reasonable means as provided in proposed Para. 2.6.

The Department relies on market forces in the leasing of nonairfield

facilities to assure that aeronautical revenues, averaged over time,

will approximate costs, including the airport's capital investment

needs. However, it is unrealistic to expect the market to produce fees

that exactly equal costs for each particular user during every

accounting period.

3. Charging Imputed Interest on Investment of Surplus Aeronautical

Revenues

The interim policy provides that airport proprietors could include

in the aeronautical rate base the implicit cost of capital (imputed

interest) of funds generated from nonaeronautical sources and invested

in capital assets for aeronautical use (par. 2.3.1). The interim policy

further provides that the Department considers it reasonable to use the

rate of interest prevailing at the time of the expenditure on bonds

issued by the airport proprietor or another airport with a similar bond

rating.

Airport commenters objected to this provision on a number of

grounds. They argued that by precluding interest on surpluses generated

from aeronautical revenues, the policy creates an incentive to invest

such aeronautical surpluses in nonaeronautical assets. They further

argued that it will be difficult, if not impossible, in most cases to

trace a surplus to nonaeronautical sources. In addition, they argue

that an interest rate based on their borrowing costs is unreasonably

low, and that a reasonable rate of interest should be based on what the

airport proprietor could earn on alternative investments.

Airport users did not object to this provision.

After reviewing the comments and in light of the other revisions to

the policy relating to fees for nonairfield services and facilities,

the Department proposes to modify the provision on imputed interest.

The new provision would permit the airport proprietor to include in the

rate base imputed interest on all funds invested in aeronautical

facilities except those generated from airfield operations and funds

acquired through issuance of debt when debt service costs are also

included in the rate base. In addition, the policy would no longer

specify a particular interest rate as reasonable. This approach is

consistent with our decision to provide greater flexibility in

establishing nonairfield fees. As promulgated, the interim policy could

be read as limiting the assessment of an imputed interest charge on

nonairfield assets such as terminals and hangars. With the additional

flexibility proposed in this supplemental notice for nonairfield fees,

it is possible that fees could include an element of imputed interest

that would be inconsistent with the interim policy's limitation on

imputed interest. By narrowing the scope of the provision on imputed

interest (Proposed Para. 2.4.1) to funds generated by the airfield, the

Department would avoid a potential internal conflict in the policy. In

addition, the new approach would reduce the potential disincentives to

investing funds in aeronautical, rather than nonaeronautical assets.

Under the revised proposal, the airport proprietor could not charge

imputed interest on funds generated from fees charged for the use of

the airfield. The policy and legal considerations for this limitation

are discussed below, in connection with the issue of allowing a return

on investment.

With respect to commenters' concerns over the ability to trace the

source of funds, we note that in the recent decision on LAX landing

fees, the Department stated that, under the Administrative Procedure

Act, a carrier complaining about inclusion of imputed interest in the

rate base would bear the burden of proving that the airport proprietor

was claiming imputed interest on aeronautical surpluses. Under this

ruling, an airport proprietor need not trace the source of internally

generated funds to claim imputed interest. However, if the airport

proprietor has data available that would enable a complainant to trace

the funds, that data should be disclosed during fee

[[Page 47014]]

negotiations or in connection with a fee dispute resolution proceeding.

4. Return on Investment.

The interim policy does not provide for the inclusion of a separate

return on investment in the aeronautical rate base.

Airport commenters generally objected to this omission. They argued

that a return on investment represents the cost of providing capital

for the airport and retaining that investment in use as an airport.

They further argued that the failure to allow a rate of return would

amount to an unconstitutional taking of property. In addition, they

argued that by not allowing a rate of return in the aeronautical rate

base, the policy provides incentives for airports to invest internally

generated funds in nonaeronautical assets. They also argued that a rate

of return is necessary to assure that airport proprietors have adequate

revenue to meet debt service coverage obligations and maintain adequate

cash reserves to protect against contingencies and unexpected declines

in activity and revenue.

Airport users do not object to the approach of the interim policy

statement on this issue.

The proposed revisions would permit airport proprietors to use any

reasonable, not unjustly discriminatory method to establish nonairfield

fees. Fees established by negotiation, for example, may well include a

reasonable profit margin for the airport proprietor.

With respect to a publicly-owned airfield, no separate rate of

return would be allowed, although imputed interest might be included in

the rate base in some circumstances. This treatment of the airfield is

justified by the nature of the airfield asset and by the Federal

government's historic role and interest in airport development.

A publicly-owned airfield is a public asset operated for the

benefit of the general public. Moreover, since the enactment of the

first Federal airport aid program in 1946, the overwhelming

preponderance of Federal assistance has been applied to finance

airfield development. The purpose of this assistance has been to

promote and assure the growth, safety and efficiency of the national

air transportation system, not to assist airport sponsors in developing

profit-making facilities. In this regard, we note that the AAIA

specifically prohibits an airport proprietor from including the Federal

share of projects in the airport's rate base. The Department considers

this prohibition to reflect a Congressional intent to limit the public

airport proprietor's ability to employ facilities financed in part with

Federal assistance as a means to generate a profit. Finally, with the

exception of Los Angeles, whose landing fees were found to be

unreasonable in part, we are not aware of any public airport operator

that has sought to include a rate of return in its airfield rate base.

In contrast, nonairfield assets such as hangars and terminal gates,

are usually leased on an exclusive-use basis. The lease rates reflect

the value to the tenant of having an exclusive right to use the

particular facility leased. In addition, hangars are ineligible for

Federal funding. Eligible terminal development is limited to public

use, nonrevenue producing areas--not those which would typically be the

subject of an exclusive, or even preferential use lease. In addition,

terminal development has constituted a relatively small share of

overall Federal airport assistance over the years. Thus, for

nonairfield aeronautical facilities, the possibility of earning a

profit from Federally financed assets is a de minimis concern.

Finally, under the proposed policy, a public airport proprietor may

recover its full costs, including the cost of its actual investment in

the airfield. In addition, the policy allows the airport proprietor to

add the cost of meeting debt-service coverage requirements and

reasonable reserves to the rate base. Therefore, a separate rate of

return allowance is not needed to meet these requirements for publicly

owned airports. A private owner could earn a reasonable return on

investment.

5. Applicability to General Aviation Airports

Airport commenters generally objected to the application of the

policy to general aviation airports. They argued that Sec. 47129

precludes the Department from adopting airport fee policies applicable

to general aviation airports, since that section directs the Secretary

to establish policies to be applied in disputes between air carriers

and airports. They also argued that the total HCA cap would pose a

hardship for most general aviation airports, where nonaeronautical

revenues are insignificant and cannot be relied on to generate surplus

funds to finance replacement and improvement of airport assets.

Airport users did not specifically address this issue.

The Department does not propose to exclude general aviation

airports from the scope of the policy. However, we propose to modify

the policy statement to clarify that in situations not covered by

Sec. 47129, the policy would be applied by the FAA in its role as

administrator of the AIP program, under which the agency must satisfy

itself that an applicant for grants is in compliance with its

assurances, but does not provide a forum for adjudicating disputes

between private parties.

While Sec. 47129 mandates the promulgation of standards relating to

airport fees charged to air carriers, it does not prohibit the

development of airport fee policies for other airports. Section 511 of

the AAIAct, 49 U.S.C. 47107(a) requires the Department to receive

satisfactory assurances that, inter alia, each airport receiving a

grant will be available for public use on reasonable terms without

unjust discrimination. This provision is not limited to air carrier

airports. Moreover, Sec. 519(a) of the AAIAct, 49 U.S.C. 47122

authorizes the Department to take action we ``consider necessary to

carry out'' the AAIA. Under these provisions, the Department has

authority to issue a policy on reasonable and nondiscriminatory airport

fees applicable to general aviation airports.

The Department is aware of the differences between general aviation

airports and airports receiving extensive air carrier services. As we

noted in publishing the interim policy, we will take these differences

into account in applying the policy. Moreover, the potential adverse

impact on general aviation airports of the revenue cap would be

eliminated by our proposal to eliminate that cap.

6. Applicability Where an Agreement Exists

Airport commenters generally requested that we modify the policy to

exclude fees established by agreements with users. They argued that the

limitations in Sec. 47129 (e)(1) and (f)(1) preclude the application of

the policy to fees established by agreement. They also argued that fees

established by agreement generally represent a mutual exchange of

benefits to both parties. A determination of unreasonableness by the

Department would disturb this exchange and provide a windfall to the

airport user who challenged the fee.

The Department does not intend to fully exclude fees set by

agreement from the scope of the policy. However, we propose to modify

the policy statement to clarify that if the FAA reviews a fee set by

agreement, the FAA will not act as a forum for adjudication of contract

disputes between private parties.

As noted above, the AAIA provides authority for establishing a

policy that applies to all airport fees imposed on aeronautical users,

including fees established by agreement. In addition, many bilateral

aviation agreements include a commitment by the United

[[Page 47015]]

States that airport fees charged to foreign airlines will be

reasonable. An airport and individual aeronautical user or users cannot

by private agreement waive the obligations of the AIP grant assurances,

which are designed to protect the public, not just private interests.

Similarly, they cannot waive the United States' obligations to foreign

governments. Moreover, it is possible that an agreement that is

reasonable, and even beneficial in its impact on the parties could have

an unreasonable or unjustly discriminatory impact on nonparty airport

users.

7. Applicability to Users Other Than U.S. Air Carriers

Airport commenters generally request us to limit the applicability

of the policy to U.S. air carriers and foreign air carriers. A few

commenters also request that we exclude fees charged to foreign air

carriers from the scope of the policy and from the applicability of the

expedited hearing procedures in 14 CFR Part 302, subpart F. They argue

that Sec. 47129 by its terms precludes us from adopting policies and

procedures to determine the reasonableness of fees other than those

fees charged to air carriers that are not otherwise excluded from

Sec. 47129 by its terms. They further argue that the methods used to

establish fees to non-carrier aeronautical users do not readily lend

themselves to application of the policy.

The Department does not propose to limit the applicability of the

policy to fees imposed on U.S. and foreign air carriers. However, we

propose to modify the policy statement to clarify that in situations

not covered by Sec. 47129, the policy would be applied by the FAA in

its role of administrator of the AIP program in carrying out the

agency's obligation to satisfy itself that an applicant for grants is

in compliance with its assurances, not in the role of a forum for

adjudicating a dispute between private parties. The Department also

intends to apply the procedures mandated by Sec. 47129, including the

procedures governing refunds, to foreign air carriers in the same way

we apply it to U.S. air carriers.

As noted above, the AAIA provides authority for establishing a

policy that applies to all airport fees imposed on aeronautical users,

including fees imposed on foreign air carriers and noncarrier

aeronautical users. In addition, many bilateral aviation agreements

include a commitment by the United States that airport fees charged to

foreign airlines will be reasonable.

The Department recently considered the applicability of Sec. 47129

to foreign air carriers in the decision on the reasonableness of LAX

landing fees. The Department concluded that Sec. 47129 allows foreign

airlines to obtain retrospective relief and to file complaints. The

Department pointed out that the United States' obligations to give

nondiscriminatory treatment to foreign carriers generally precluded us

from denying foreign air carriers a remedy available to U.S. carriers

absent a bar to granting foreign air carriers that remedy. Order 95-6-

36 at 53-56. For the reasons stated in its consideration of the issue

in the LAX case, the Department will continue to consider complaints

filed by foreign air carriers under the terms of Sec. 47129.

8. Limits on Aeronautical Surplus

The Department proposes to modify the policy to eliminate the total

HCA cap on aeronautical revenue and to provide that nonairfield fees

may be established by any reasonable means. In providing this

flexibility, the Department is in no respect waiving the requirements

in statute, AIP grant assurances and, where applicable, international

aviation agreements. The use of negotiated rates or rates based on an

objective determination of fair market value creates the opportunity

for the generation of surplus aeronautical revenues in any given year.

The Department proposes to rely generally on market discipline to

prevent the generation of aeronautical revenues that, over time, exceed

aeronautical costs. Based on this reliance, we are not proposing an

alternative cap on fees imposed for aeronautical services and

facilities other than the airfield. However, to address the remote

chance that the market mechanism may break down, we propose to add a

provision on revenue generation specifying that the accumulation of

surpluses attributable to aeronautical revenue may warrant an inquiry

into the reasonableness of the aeronautical fees (proposed Para.

4.2.1).

Public Meetings

In order to facilitate the submission of public and industry

comment, and to ensure that agency staff has the best opportunity to

understand the positions of commenters and the scope of industry

practice on this complex subject, the Department will hold at least two

informal public meetings on the proposed policy. The meetings will be

structured to permit informal discussion among the various interested

parties rather than simply delivery of prepared comments for the

record. Notice of the time, date, and location of the meetings will be

published separately in the Federal Register.

Proposed Policy

Accordingly, the OST and the FAA propose to revise the Policy

Regarding Airport Rates and Charges as follows:

Policy Regarding the Establishment of Airport Rates and Charges

Introduction

It is the fundamental position of the Department that the issue of

rates and charges is best addressed at the local level by agreement

between users and airports. By providing guidance on standards

applicable to airport fees imposed for aeronautical use of the airport,

the Department intends to facilitate direct negotiation between the

proprietor and aeronautical users and to minimize the need to seek

direct Federal intervention to resolve differences over airport fees.

Applicability of the Policy

A. Scope of Policy

Under the terms of grant agreements administered by the FAA for

airport improvement, all aeronautical users are entitled to airport

access on fair and reasonable terms without unjust discrimination.

Therefore, the Department considers that the principles and guidance

set forth in this policy statement apply to all aeronautical uses of

the airport. The Department recognizes, however, that airport

proprietors may use different mechanisms and methodologies to establish

fees for different facilities, e.g., for the airfield and terminal

area, and for different aeronautical users, e.g., air carriers and

fixed-base operators. Various elements of the policy reflect these

differences. In addition, the Department will take these differences

into account if we are called upon to resolve a dispute over

aeronautical fees or otherwise consider whether an airport sponsor is

in compliance with its obligation to provide access on fair and

reasonable terms without unjust discrimination.

B. Aeronautical Use and Users

The Department considers the aeronautical use of an airport to be

any activity that involves, makes possible, is required for the safety

of the operations of, or is otherwise directly related to, the

operation of aircraft. Aeronautical use includes services provided by

air carriers related directly and substantially to the movement of

passengers, baggage, mail and cargo on the airport. Persons, whether

individuals or businesses, engaged in

[[Page 47016]]

aeronautical uses involving the operation of aircraft, or providing

flight support directly related to the operation of aircraft, are

considered to be aeronautical users.

Conversely, the Department considers that the operation by air

carriers or foreign air carriers of facilities such as a reservations

center, headquarters office, or flight kitchen on an airport does not

constitute an aeronautical activity subject to the principles and

guidance contained in this policy statement with respect to

reasonableness and unjust discrimination. Such facilities need not be

located on an airport. A carriers decision to locate such facilities

is based on the negotiation of a lease or sale of property.

Accordingly, the Department relies on the normal forces of competition

for commercial or industrial property to assure that fees for such

property are not excessive.

C. Applicability of Section 113 of the FAA Authorization Act of 1994

Section 113 of the Federal Aviation Authorization Act of 1994

(``Authorization Act''), 49 U.S.C. Sec. 47129, directs the Secretary of

Transportation to issue a determination on the reasonableness of

certain fees imposed on air carriers in response to carrier complaints

or a request for determination by an airport proprietor. Section 47129

further directs the Secretary to publish final regulations, policy

statements, or guidelines establishing procedures for deciding cases

under Sec. 47129 and the standards to be used by the Secretary in

determining whether a fee is reasonable. Section 47129 also provides

for the issuance of credits or refunds in the event that the Secretary

determines a fee is unreasonable after a complaint is filed. Section

47129(e) excludes from the applicability of Sec. 47129 a fee imposed

pursuant to a written agreement with air carriers, a fee imposed

pursuant to a financing agreement or covenant entered into before the

date of enactment of the statute (August 23, 1994), and an existing fee

not in dispute on August 23, 1994. Section 47129(f) further provides

that Sec. 47129 shall not adversely affect the rights of any party

under existing air carrier/airport agreements or the ability of an

airport to meet its obligations under a financing agreement or covenant

that is in effect on August 23, 1994.

The Department does not interpret Sec. 47129 to repeal or narrow

the scope of the basic requirement that fees imposed on aeronautical

users be reasonable and not unjustly discriminatory or to narrow the

obligation on the Secretary to receive satisfactory assurances that,

inter alia, airport sponsors will provide access on reasonable terms

before approving AIP grants. Moreover, the Department does not

interpret sections 47129 (e) and (f) to preclude the Department from

adopting policy guidance to carry out the Department's statutory

obligation to assure that aeronautical fees are being imposed at AIP-

funded airports in a manner that is consistent with the obligation to

provide airport access on reasonable terms. Likewise, in the case of

airports receiving international service, these provisions do not

preclude us from carrying out any international obligations for

assuring that airport fees charged to foreign airlines are reasonable.

Therefore, the Department will apply the policy guidance in all

cases in which we are called upon to determine if an airport sponsor is

carrying out its obligation to make the airport available on reasonable

terms, including instances covered in Sec. 47129 (e) and (f).

However, as the statute provides, a dispute over matters described

by Sec. 47129 (e) and (f) will not be processed under the procedures

mandated by Sec. 47129. Rather those disputes will be processed under

procedures applicable to airport compliance matters in general. In

addition, the Department will take into account the existence of an

agreement between air carrier and airport operator, if one exists, in

making a determination.

D. Components of Airfield

The Department considers the airfield assets to consist of runways,

taxiways, ramps or aprons not leased on an exclusive use basis and land

associated with these facilities. The Department also considers the

airfield to include land acquired for the purpose of assuring land-use

compatibility with the airfield, if the land is included in the rate

base associated with the airfield under the provisions of this policy.

Principles Applicable to Airport Rates and Charges

1. In general, the Department relies upon airport proprietors,

aeronautical users, and the market and institutional arrangements

within which they operate, to ensure compliance with applicable legal

requirements. Direct Federal intervention will be available, however,

where needed.

2. Rates, fees, rentals, landing fees, and other service charges

(``fees'') imposed on aeronautical users for aeronautical use of

airport facilities (``aeronautical fees'') must be fair and reasonable.

3. Aeronautical fees may not unjustly discriminate against

aeronautical users or user groups.

4. Airport proprietors must maintain a fee and rental structure

that in the circumstances of the airport makes the airport as

financially self-sustaining as possible.

5. In accordance with relevant Federal statutory provisions

governing the use of airport revenue, airport proprietors may expend

revenue generated by the airport only for statutorily allowable

purposes.

Local Negotiation and Resolution

1. In general, the Department relies upon airport proprietors,

aeronautical users, and the market and institutional arrangements

within which they operate, to ensure compliance with applicable legal

requirements. Direct Federal intervention will be available, however,

where needed.

1.1 The Department encourages direct resolution of differences at

the local level between aeronautical users and the airport proprietor.

Such resolution is best achieved through adequate and timely

consultation between the airport proprietor and the aeronautical users.

Airport proprietors should engage in adequate and timely consultation

with aeronautical users about airport fees.

1.1.1 Airport proprietors should consult with aeronautical users

well in advance, if practical, of introducing significant changes in

charging systems and procedures or in the level of charges. The

proprietor should provide adequate information to permit aeronautical

users to evaluate the airport proprietor's justification for the change

and to assess the reasonableness of the proposal. For consultations to

be effective, airport proprietors should give due regard to the views

of aeronautical users and to the effect upon them of changes in fees.

Likewise, aeronautical users should give due regard to the views of the

airport proprietor and the financial needs of the airport.

1.1.2 To further the goal of effective consultation, Appendix 1 of

this policy statement contains a description of information that the

Department considers would be useful to the carriers and other

aeronautical users to permit meaningful consultation and evaluation of

a proposal to modify fees.

1.1.3 Airport proprietors should consider the public interest in

establishing airport fees, and aeronautical users should consider the

public interest in consulting with airports on setting such fees.

[[Page 47017]]

1.1.4 Airport proprietors and aeronautical users should consult and

make a good-faith effort to reach agreement. Absent agreement, airport

proprietors are free to act in accordance with their proposals, subject

to review by the Secretary or the Administrator on complaint by the

user or, in the case of fees subject to 49 U.S.C. 47129, upon request

by the airport operator, or, in unusual circumstances, on the

Department's initiative.

1.1.5 To facilitate local resolution and reduce the need for direct

Federal intervention to resolve differences over aeronautical fees, the

Department encourages airport proprietors and aeronautical users to

include alternative dispute resolution procedures in their lease and

use agreements.

1.1.6 Any newly established fee or fee increase that is the subject

of a complaint under 49 U.S.C. 47129 that is not dismissed by the

Secretary must be paid to the airport proprietor under protest by the

complainant. Unless the airport proprietor and complainant agree

otherwise, the airport proprietor will obtain a letter of credit, or

surety bond, or other suitable credit instrument in accordance with the

provisions of 49 U.S.C. 47129(d). Pending issuance of a final order

determining reasonableness, an airport proprietor may not deny a

complainant currently providing air service at the airport reasonable

access to airport facilities or services, or otherwise interfere with

that complainant's prices, routes, or services, as a means of enforcing

the fee, if the complainant has complied with the requirements for

payment under protest.

1.2 Where airport proprietors and aeronautical users have been

unable, despite all reasonable efforts, to resolve disputes between

them, the Department will act to resolve the issues raised in the

dispute.

1.2.1 In the case of a fee imposed on one or more air carriers or

foreign air carriers, the Department will issue a determination on the

reasonableness of the fee upon the filing of a written request for a

determination by the airport proprietor or, if the Department

determines that a significant dispute exists, upon the filing of a

complaint by one or more air carriers or foreign air carriers, in

accordance with 49 U.S.C. Sec. 47129 and implementing regulations.

Pursuant to the provisions of 49 U.S.C. Sec. 47129, the Department may

only determine whether a fee is reasonable or unreasonable, and may not

set the level of the fee.

1.2.2 The Department will first offer its good offices to help

parties reach a mutually satisfactory outcome in a timely manner.

Prompt resolution of these disputes is always desirable since extensive

delay can lead to uncertainty for the public and a hardening of the

parties' positions. Air carriers and foreign air carriers may request

the assistance of the Department in advance of or in lieu of the formal

complaint procedure described in 1.2.1.; however, the 60-day period for

filing a complaint under Sec. 47129 shall not be extended or tolled by

such a request.

1.2.3 In the case of fees imposed on other aeronautical users,

where negotiations between the parties are unsuccessful and a complaint

is filed alleging that airport fees violate an airport proprietor's

federal grant obligations, the Department will, where warranted,

exercise the agency's broad statutory authority to review the legality

of those fees and to issue such determinations and take such actions as

are appropriate based on that review.

1.3 Airport proprietors must retain the ability to respond to

local conditions with flexibility and innovation. An airport proprietor

is encouraged to achieve consensus and agreement with its airline

tenants before implementing a practice that would represent a major

departure from this guidance. However, the requirements of any law,

including the requirements for the use of airport revenue, may not be

waived, even by agreement with the aeronautical users.

Fair and Reasonable Fees

2. Rates, fees, rentals, landing fees, and other service charges

(``fees'') imposed on aeronautical users for the aeronautical use of

the airport (``aeronautical fees'') must be fair and reasonable.

2.1 Federal law does not require a single approach to airport

financing. Rates may be set according to a ``residual'' or

``compensatory'' rate-setting methodology, or any combination of the

two, or according to a new rate-setting methodology, as long as the

methodology used is applied consistently to similarly situated

aeronautical users and as otherwise required by this policy. Airport

proprietors may set rates for aeronautical use of airport facilities by

ordinance, statute or resolution, regulation, or agreement.

2.1.1 Aeronautical users may receive a cross-credit of

nonaeronautical revenues only if the airport proprietor agrees.

Agreements providing for such cross-crediting are commonly referred to

as ``residual agreements'' and generally provide a sharing of

nonaeronautical revenues with aeronautical users. The aeronautical

users may in turn agree to assume part or all of the liability for non-

aeronautical costs, or an airport proprietor may cross-credit

nonaeronautical revenues to aeronautical users even in the absence of

such an agreement, but an airport proprietor may not require

aeronautical users to cover losses generated by nonaeronautical

facilities except by agreement.

2.1.2 In other situations, an airport proprietor assumes all

liability for airport costs and retains all airport profits for its own

use in accordance with Federal requirements. This approach to airport

financing is generally referred to as the compensatory approach.

2.1.3 Airports frequently adopt charging systems that employ

elements of both approaches.

2.2 Revenues from fees imposed for use of the airfield (airfield

revenues) may not exceed the costs to the airport proprietor of

providing airfield services and airfield assets currently in

aeronautical use (airfield costs) unless otherwise agreed to by the

affected aeronautical users.

2.3 The ``rate base'' is the total of all aeronautical costs that

may be recovered from aeronautical users through fees charged for

providing aeronautical services and facilities (aeronautical fees).

Airport proprietors must employ a reasonable, consistent, and

``transparent'' (i.e., clear and fully justified) method of

establishing the rate base and adjusting the rate base on a timely and

predictable schedule.

2.4 Except as provided in paragraph 2.6 below or by agreement with

aeronautical users, costs that may be included in the rate base

(allowable costs) are limited to all operating and maintenance expenses

directly and indirectly associated with the provision of aeronautical

facilities and services (including environmental costs, as set forth

below); all capital costs associated with the provision of aeronautical

facilities and services currently in use, as set forth below; and

current costs of planning future aeronautical facilities and services.

In addition, a private, equity owner of an airport can include a

reasonable return on investment.

2.4.1 The airport proprietor may include in the aeronautical rate

base, at a reasonable rate, imputed interest on funds used to finance

capital investments for aeronautical use, except to the extent that the

funds are generated by fees charged for the use of airfield assets and

airfield services. However, the airport proprietor may not include in

the rate base imputed interest on funds obtained by debt financing if

the debt-service costs of those funds are also included in the rate

base.

[[Page 47018]]

2.4.2 Airport proprietors may include reasonable environmental

costs in the rate base to the extent that the airport proprietor incurs

a corresponding actual expense. All revenues received based on the

inclusion of these costs in the rate base are subject to Federal

requirements on the use of airport revenue. Reasonable environmental

costs include, but are not necessarily limited to, the following:

(a) the costs of investigating and remediating environmental

contamination caused by aeronautical operations at the airport at least

to the extent that such investigation or remediation is required by or

consistent with local, state or federal environmental law, and to the

extent such requirements are applied to other similarly situated

enterprises;

(b) the cost of mitigating the environmental impact of an airport

development project (if the development project is one for which costs

may be included in the aeronautical users' rate base), at least to the

extent that these costs are incurred in order to secure necessary

approvals for such projects, including but not limited to approvals

under the National Environmental Policy Act and similar state statutes;

(c) the costs of aircraft noise abatement and mitigation measures,

both on and off the airport, including but not limited to land

acquisition and acoustical insulation expenses, to the extent that such

measures are undertaken as part of a comprehensive and publicly-

disclosed airport noise compatibility program; and

(d) the costs of insuring against future liability for

environmental contamination caused by current aeronautical activities.

Under this provision, the costs of self-insurance may be included in

the rate base only to the extent that they are incurred pursuant to a

self-insurance program that conforms to applicable standards for self-

insurance practices.

2.4.3 Airport proprietors are encouraged to establish fees with

due regard for economy and efficiency.

2.4.4 The airport proprietor may include in the rate base amounts

needed to fund debt service and other reserves and to meet cash flow

requirements as specified in financing agreements or covenants (for

facilities in use), including but not limited to debt-service coverage;

to fund cash reserves to protect against the risks of cash-flow

fluctuations associated with normal airport operations; and to fund

reasonable cash reserves to protect against other contingencies.

2.4.5 The airport proprietor may include in the rate base capital

costs in accordance with the following guidance, which is based on the

principle of cost causation:

(a) Costs of facilities directly used by the aeronautical users may

be fully included in the rate base, in a manner consistent with this

policy. For example, the capital cost of a runway may be included in

the rate base used to establish landing fees.

(b) Costs of airport facilities used for both aeronautical and

nonaeronautical uses (shared costs) may be included in a particular

aeronautical rate base if the facility in question supports the

aeronautical activity reflected in that rate base. The portion of

shared costs allocated to aeronautical users should not exceed an

amount that reflects the aeronautical purpose and proportionate

aeronautical use of the facility in relation to nonaeronautical use of

the facility, unless the affected aeronautical users agree to a

different allocation. Aeronautical users may not be allocated all costs

of facilities that are used by both aeronautical and nonaeronautical

users unless they agree to that allocation.

2.5 Airport proprietors must comply with the following practices

in establishing the rate base, provided, however, that one or more

aeronautical users may agree to a rate base that deviates from these

practices in the establishment of those users' fees.

2.5.1 In determining the total costs that may be recovered from

fees for the use of airfield assets, public use roadways, and

associated land in the rate base, the airport proprietor must value

them according to their historic cost to the original airport

proprietor. Subsequent airport proprietors generally shall acquire the

cost basis of such assets at the original airport proprietor's historic

cost, adjusted for subsequent improvements.

(a) Where the land associated with airfield facilities and public

use roadways was acquired with debt-financing, the airport proprietor

may include such land in the rate base by charging all debt service

expenditures incurred by the airport proprietor, including principal,

interest and debt service coverage. If such land was acquired with

internally generated funds or donated by the airport proprietor the

airport proprietor may include the cost of the land by amortization.

Upon retirement of the debt or completion of the amortization, the land

may no longer be included in the rate base.

(b) The airport proprietor may use a reasonable and not unjustly

discriminatory methodology to allocate the total airfield costs among

individual segments of the airfield to enhance the efficient use of the

airfield, even if that methodology results in fees charged for a

particular segment that exceed that segment's pro rata share of costs

based on HCA valuation.

2.5.2 Where comparable assets, e.g., two runways or two terminals,

were built at different times and have different costs, the airport

proprietor may, at its option, combine the cost basis of the comparable

assets to develop a single cost basis applicable to all such

facilities.

2.5.3 The costs of facilities not yet built and operating may not

be included in the rate base. However, the debt-service and other

carrying costs incurred by the airport proprietor during construction

may be capitalized and amortized once the facility is put in service.

The airport proprietor may include in the rate base the cost of land

that facilitates the current operations of the airport.

2.5.4 The rate base of an airport may include costs associated

with another airport currently in use only if: (1) The proprietor of

the first airport is also the proprietor of the second airport; (2) the

second airport is currently in use; and (3) the costs of the second

airport to be included in the first airport's rate base are reasonably

related to the aviation benefits that the second airport provides or is

expected to provide to the aeronautical users of the first airport.

(a) Element no. 3 above will be presumed to be satisfied if the

second airport is designated as a reliever airport for the first

airport in the FAA's National Plan of Integrated Airport Systems

(NPIAS).

(b) If an airport proprietor closes an operating airport as part of

an approved plan for the construction and opening of a new airport,

reasonable costs of disposition of the closed airport facility may be

included in the rate base of the new airport, to the extent that such

costs exceed the proceeds from the disposition.

2.6 For other facilities and land not covered by Paragraph 2.5.1,

the airport proprietor may use any reasonable methodology to determine

fees, so long as the methodology is justified and applied on a

consistent basis to comparable facilities, subject to the provisions of

paragraph 4.2.1 below.

2.6.1 Reasonable methodologies may include, but are not limited

to, historic cost valuation, direct negotiation with prospective

aeronautical users, or objective determinations of fair market value.

[[Page 47019]]

2.7 At all times, airport proprietors must comply with the

following practices:

2.7.1 Indirect costs may not be included in the rate base unless

they are based on a reasonable, transparent cost allocation formula

calculated consistently for other units or cost centers within the

control of the proprietor.

2.7.2 The costs of airport development or planning projects paid

for with federal government grants and contributions and passenger

facility charges (PFCs) may not be included in the rate base.

(a) In the case of a PFC-funded project for terminal development,

for gates and related areas, or for a facility that is occupied by one

or more carriers on an exclusive or preferential use basis, the fees

paid to use those facilities shall be no less than the fees charged for

similar facilities that were not financed with PFC revenue.

Prohibition on Unjust Discrimination

3. Aeronautical fees may not unjustly discriminate against

aeronautical users or user groups.

3.1 Unless aeronautical users agree, aeronautical fees imposed on

any aeronautical user or group of aeronautical users may not exceed the

costs allocated to that user or user group under a cost allocation

methodology adopted by the airport proprietor that is consistent with

this guidance.

3.1.1 The prohibition on unjust discrimination does not prevent an

airport proprietor from making reasonable distinctions among

aeronautical users (such as signatory and non-signatory carriers) and

assessing higher fees on certain categories of aeronautical users based

on those distinctions (such as higher fees for non-signatory carriers,

as compared to signatory carriers).

3.2 A properly structured peak pricing system that allocates

limited resources using price during periods of congestion will not be

considered to be unjustly discriminatory. An airport proprietor may,

consistent with the policies expressed in this policy statement,

establish fees that enhance the efficient utilization of the airport.

3.3 Relevant provisions of the Convention on International Civil

Aviation (Chicago Convention) and many bilateral aviation agreements

specify, inter alia, that charges imposed on foreign airlines must not

be unjustly discriminatory, must not be higher than those imposed on

domestic airlines engaged in similar international air services and

must be equitably apportioned among categories of users. Charges to

foreign air carriers for aeronautical use that are inconsistent with

these principles will be considered unjustly discriminatory or unfair

and unreasonable.

3.4 Allowable costs--costs properly included in the rate base--

must be allocated to aeronautical users by a transparent, reasonable,

and not unjustly discriminatory rate-setting methodology. The

methodology must be applied consistently and cost differences must be

determined quantitatively, when practical.

3.4.1 Common costs (costs not directly attributable to a specific

user group or cost center) must be allocated according to a reasonable,

transparent and not unjustly discriminatory cost allocation formula

that is applied consistently, and does not require any air carrier,

foreign air carrier or other aeronautical user group to pay costs

properly allocable to other users.

Requirement to be Financially Self-Sustaining

4. Airport proprietors must maintain a fee and rental structure

that in the circumstances of the airport makes the airport as

financially self-sustaining as possible.

4.1 If market conditions or demand for air service do not permit

the airport to be financially self-sustaining, the airport proprietor

should establish long-term goals and targets to make the airport as

financially self-sustaining as possible.

4.1.1 Airport proprietors are encouraged, when entering into new

or revised agreements or otherwise establishing rates, charges, and

fees, to undertake reasonable efforts to make their particular airports

as self sustaining as possible in the circumstances existing at such

airports.

(a) Absent agreement with aeronautical users, the obligation to

make the airport as self-sustaining as possible does not permit the

airport proprietor to establish fees for the use of the airfield that

exceed the airport proprietor's airfield costs.

(b) For those facilities for which this policy permits the use of

fair market value, the Department does not construe the obligation on

self-sustainability to compel the use of fair market value to establish

fees.

4.1.2 At some airports, market conditions may not permit an

airport proprietor to establish fees that are sufficiently high to

recover aeronautical costs and sufficiently low to allow commercial

aeronautical services to operate at a profit. In such circumstances, an

airport proprietor's decision to charge rates that are below those

needed to achieve self-sustainability in order to assure that services

are provided to the public is not inherently inconsistent with the

obligation to make the airport as self-sustaining as possible in the

circumstances.

4.2 In establishing new fees, and generating revenues from all

sources, airport owners and operators should not seek to create revenue

surpluses that exceed the amounts to be used for airport system

purposes and for other purposes for which airport revenues may be spent

under 49 U.S.C. 47107(b)(1), including reasonable reserves and other

funds to facilitate financing and to cover contingencies. While fees

charged to nonaeronautical users may exceed the costs of service to

those users, the surplus funds accumulated from those fees must be used

in accordance with Sec. 47107(b).

4.2.1 The Department assumes that the limitation on the use of

airport revenue and effective market discipline for aeronautical

services and facilities other than the airfield will be effective in

holding aeronautical revenues, over time, to the airport proprietor's

costs of providing aeronautical services and facilities, including

reasonable capital costs. However, the progressive accumulation of

substantial amounts of surplus aeronautical revenue may warrant an FAA

inquiry into whether aeronautical fees are consistent with the airport

proprietor's obligations to make the airport available on fair and

reasonable terms.

Requirements Governing Revenue Application and Use

5. In accordance with relevant Federal statutory provisions

governing the use of airport revenue, airport proprietors may expend

revenue generated by the airport only for statutorily allowable

purposes.

5.1 Additional information on the statutorily allowed uses of

airport revenue is contained in separate guidance published by the FAA

pursuant to Sec. 112 of the FAA Authorization Act of 1994, which is

codified at 49 U.S.C. Sec. 47107(l).

5.2. The progressive accumulation of substantial amounts of

airport revenues may warrant an FAA inquiry into the airport

proprietor's application of revenues to the local airport system.

[[Page 47020]]

Issued in Washington, DC, on August 21, 1995.

Federico Pena,

Secretary of Transportation.

David R. Hinson,

Administrator, Federal Aviation Administration.

Appendix 1--Information for Aeronautical User Charges Consultations

The Department of Transportation ordinarily expects the

following information to be available to aeronautical users in

connection with consultations over changes in airport rates and

charges:

1. HISTORIC FINANCIAL INFORMATION covering two fiscal years

prior to the current year including, at minimum, a profit and loss

statement, balance sheet and cash flow statement for the airport

implementing the charges.

2. JUSTIFICATION. Economic, financial and/or legal justification

for changes in the charging methodology or in the level of

aeronautical rates and charges at the airport. Airports should

provide information on the aeronautical costs they are including in

the rate base.

3. TRAFFIC INFORMATION. Annual numbers of terminal passengers

and aircraft movements for each of the two preceding years.

4. PLANNING AND FORECASTING INFORMATION

(a) To the extent applicable to current or proposed fees, the

long-term airport strategy setting out long-term financial and

traffic forecasts, major capital projects and capital expenditure,

and particular areas requiring strategic action. This material

should include any material provided for public or government

reviews of major airport developments, including analyses of demand

and capacity and expenditure estimates.

(b) Accurate, complete information specific to the airport for

the current and the forecast year, including the current and

proposed budgets, forecasts of airport charges revenue, the

projected number of landings and passengers, expected operating and

capital expenditures, debt service payments, contributions to

restricted funds, or other required accounts or reserves.

(c) To the extent the airport uses a residual or hybrid charging

methodology, a description of key factors expected to affect

commercial or other nonaeronautical revenues and operating costs in

the current and following years.

[FR Doc. 95-22354 Filed 9-7-95; 8:45 am]

BILLING CODE 4910-13-P