Policy Regarding Airport Rates and Charges

SUMMARY: This document announces DOT and FAA policy on the fees charged

by Federally-assisted airports to air carriers and other aeronautical

users. The statement of policy was required by the Federal Aviation

Administration Authorization Act of 1994, Public Law 103-305 (August

23, 1994). While the policy stated in this document is effective

immediately, the Department is requesting further comment on the policy

adopted because of substantial industry interest in the proposed policy

and because the final policy adopted differs in several respects from

the proposal, in response to comments received on the proposal.

DATES: Comments must be received by May 4, 1995.

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

Aviation Administration, Office of Chief Counsel, Attention: Rules

Docket (AGC-10), Docket 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: On June 9, 1994, the Office of the Secretary

of Transportation (OST) and the FAA issued two related notices on the

subject of Federal policy on airport rates and charges. A notice of

proposed policy entitled ``Proposed Policy Regarding Airport Rates and

Charges'' listed and explained the principles that the Department

believes define Federal policy on the rates and fees that an airport

proprietor can charge to aeronautical users of the airport. Docket No.

27782 (59 FR 29874, June 9, 1994). Notice 94-18, a notice of proposed

rulemaking entitled ``Rules of Practice for Federally Assisted

Airports,'' proposed detailed procedures for the filing, investigation,

and adjudication of complaints against airports for alleged violation

of Federal requirements involving rates and charges and other airport-

related requirements (59 FR 29880, June 9, 1994).

The FAA Authorization Act of 1994, Public Law 103-305 (1994

Authorization Act) was signed into law on August 23, 1994. In response

to provisions in the 1994 Authorization Act that specifically address

airport rates and charges, the Department issued a supplemental notice

of proposed policy with revisions to reflect relevant provisions of the

Act. (59 FR 51835, October 12, 1994). The relevant provisions of the

1994 Authorization Act were summarized in the October 12 notice.

The 1994 Authorization Act also required that the Secretary issue

two other documents relating to airport fees and finances: first,

procedural rules for the resolution of disputes between air carriers

and airport owners and operators regarding airport fees; and second,

policies and procedures for the enforcement of Federal restrictions on

the use of airport revenue. The procedural rules are being published in

the Federal Register on the same date as this Policy Regarding Airport

Rates and Charges; the policies and procedures on revenue use and

revenue diversion will be published within the next several weeks.

Summary of Policy Statement

The policy statement being adopted retains the structure of the

proposed policy, and is organized into five general principles with

supporting guidance for each. In brief, the first principle establishes

the continued reliance on direct local negotiation between airports and

aeronautical users. The Department is available to resolve the issues

raised in a dispute when the airport and aeronautical users are unable

to resolve disputes directly.

The second principle restates the legal requirement that rates,

fees and charges to aeronautical users must be fair and reasonable,

with more detailed guidance on the practices and restrictions that

define ``fair and reasonable.'' The guidance for this principle

incorporates flexibility to deviate from the proposed policy guidance

based on agreement with aeronautical users; recognition that both

compensatory and residual pricing approaches are legitimate; standards

for the valuation of airport property in establishing rates;

prescription of the kinds of costs that can be reflected in the rate

base for aeronautical users; and guidance on subsidization of other

airports. The policy makes certain distinctions in the reasonable

accommodation of air carriers versus other aeronautical users, and does

not establish fee standards for rates and charges for nonaeronautical

users or limit the amount of revenues generated by nonaeronautical

rates and charges.

The third principle restates the legal prohibition on unjustly

discriminatory rates and charges.

The fourth principle restates the legal obligation of the airport

sponsor to maintain a fee and rental structure that makes the airport

as self-sustaining as possible. Supplemental guidance encourages the

sponsor of an airport that is not currently self-sustaining to

establish long-term goals and targets to make the airport financially

self-sustaining. While the requirement that an airport be as self-

sustaining as possible under the circumstances existing at the airport

is required by statute to be included in each sponsor's grant

assurances, and is subject to enforcement by the FAA in accordance with

its grant compliance procedures, it is not the intent of the Department

that this requirement alone be the grounds for a complaint as to the

reasonableness of an airport fee.

The fifth principle restates the basic legal requirements for the

application and use of airport revenues. Supplemental guidance on the

use of airport revenue has been deleted from the statement of policy on

airport fees, and instead will be incorporated in a separate statement

of policy on the enforcement of the revenue use provisions of the

Airport and Airway Improvement Act of 1982 and the 1994 FAA

Authorization Act.

Comments on the Notices of Proposed Policy

The Department received more than 150 comments on the Notice and

Supplemental Notice of Proposed Policy. Comments were received from all

segments of the airport community, including airport operators and

representative organizations; [[Page 6907]] associations representing

air carriers and commuter airlines; representatives of other

aeronautical businesses at airports; general aviation representatives;

representatives of airport concessionaires; aviation consultants and

law firms; and the staff of the Bureau of Economics of the Federal

Trade Commission. Many of the comments from airport operators and

representatives were similar, and all of the comments tended to focus

on certain issues. Accordingly, the following discussion of comments is

organized by issue rather than by commenter. Issues are grouped by

their applicability generally or to one of the five principles stated

in the policy. Airport proprietors and representatives who took the

same position on an issue are collectively referred to as ``airports;''

the Air Transport Association (ATA) and other air carrier commenters

are referred to as ``air carriers.'' The summary of comments is

intended to represent the general divergence or correspondence in

industry views on various issues, and is not intended to be an

exhaustive restatement of the comments received. All comments received

were considered by The Department even if not specifically identified

in this summary.

Discussion of Comments Received

The final policy statement includes an expanded introduction that

reflects the discussion below.

1. General: Scope of Policy and Procedures

A. Should the policy apply to all aeronautical users or just air

carriers?

Airports commented that policy and related procedures should apply

only to rates and charges imposed on air carriers. The policy is

mandated by Sec. 113 of the 1994 FAA Authorization Act; based on the

terms of Sec. 113, the policy should be limited to air carriers. If new

policy guidance is needed for fees assessed on other aeronautical

users, the issue should be addressed separately. The American

Association of Airport Executives (AAAE) and some individual airports

specifically objected to the inclusion of foreign air carriers.

Commenters suggested that automatic inclusion of foreign air carriers

would provide them with valuable rights ordinarily secured through

negotiation of intergovernmental agreements.

General aviation commenters stated that the Department should

provide the same rights and protections for all aeronautical tenants,

not just air carriers. However, the policy should reflect differences

in the relationships between air carriers and airports and those

between other aeronautical businesses and airports. In particular, more

access to evidentiary hearing procedures should be available to non-

carrier complainants than proposed by the Department.

In the policy adopted, the Department has continued to apply the

policy to rates and charges assessed against all aeronautical users.

Existing grant assurances obligate airport proprietors to give access

on fair and reasonable terms to all types, kinds, and classes of

aeronautical uses. However, where differences exist as a practical

matter between air carriers and other kinds of aeronautical users,

those differences have either been reflected in the guidance stated in

the policy, or the policy will be applied with sufficient flexibility

to reflect those differences. Some commenters noted that Sec. 113 of

the 1994 Authorization Act applies only to air carriers and argued that

the policy statement should be similarly limited. However, Sec. 113

relates only to the procedures for special handling of airport-airline

fee disputes; it does not define limits on the applicability of policy.

The policy adopted applies to foreign air carrier rates as well as

those imposed on domestic air carriers. The principles and guidance

contained in the policy statement are consistent with the provisions of

bilateral air service agreements, and the application of the same

policy on fair and reasonable airport fees to both foreign and U.S. air

carriers is appropriate.

B. Should the policy and procedures apply to rates excluded by

section 113?

Airports commented that the policy and implementing regulations

should clearly exclude rates and charges specifically excluded by the

statute, e.g., rates established by agreement; Congress directed that

the policies and procedures not apply to such excluded rates; in

addition, the policy should reflect Sec. 47129(f), which states that

that section shall not adversely affect the rights of any party under

any existing written agreement between an airport and air carrier or

the ability of an airport operator to meet its debt obligations.

Air carriers commented that the policy should recognize that it is

common for airports to increase fees by asserting that the increase is

a routine adjustment to a preexisting agreement, even if the agreement

does not allow for such an increase; therefore; the policy should make

clear that a dispute as to whether a fee increase is within the terms

of a contract or not should be covered by the policy to the same extent

as a fee increase imposed in the absence of any agreement.

The policy statement adopted applies to all fees charged to air

carriers for aeronautical uses, although the policy itself makes clear

that carriers and airport operators have wide latitude to agree on

alternate arrangements. The rules for implementation of the dispute

resolution procedure provided in Sec. 113 of the 1994 Authorization Act

clarify that expedited ALJ procedures will be not be applicable to

rates and charges excluded by Sec. 113. However, The Department will

consider claims that a fee is not covered by the exclusion because it

was not in fact ``imposed pursuant to a written agreement,'' even if a

written agreement is in effect. Also, claims that are not subject to

the Sec. 113 dispute resolution procedure technically may still be

brought under 14 CFR Part 13, which applies to complaints that an

airport proprietor has violated the grant assurance that rates and

charges for aeronautical users will be fair and reasonable.

C. Should the policy and procedures apply differently to different

uses of the airport facilities by air carriers?

Several airports commented that elements of the policy may be

appropriate when applied to the airfield and terminal, but would not be

appropriate if applied to other facilities leased or used by carriers

on the airport. The Department agrees, and the policy adopted makes

distinctions, where applicable, between various kinds of facilities on

the airport.

D. What airport users/tenants are included within the term

``aeronautical users''?

Airport commenters in particular stated that the term aeronautical

user was not clearly defined, and that it was not clear whether the

policy applied to certain businesses commonly found on an airport but

which arguably are not ``aeronautical'' in nature. Also,

representatives of concessionaires who commented on the proposal

conceded that concessions such as car rentals were not aeronautical

activity, but argued that the rates and charges policy and dispute

resolution procedures should apply to concessions.

The final policy statement does not substantially differ from the

proposal. The Department believes that in most cases it is immediately

clear whether a particular airport business is an aeronautical activity

or not within the definition given in the policy. Where an ambiguous

situation exists, an airport operator or airport user may contact the

FAA Office of Airport Safety and Standards, AAS-300, for a

determination. [[Page 6908]]

2. General: Proprietary Powers of Airport Operators

Airports commented that the policy adopted must preserve the

airport's right, as landlord, to set fees and charges when consensus is

not possible. If the policy establishes narrow federal standards, it

would eliminate incentives to set fees and resolve disputes at the

local level. Policies should not be so rigid as to stifle innovation

that may lead to more efficient financing and management of airport

facilities.

Airports argued that the Department especially should not allow

carriers to invoke the policy to challenge the wisdom of particular

infrastructure enhancement or airport expenditures. Such an outcome

would be perceived in the capital market as shifting management

prerogatives away from the airport and would result in higher financing

costs. The policy, airports argued, should make clear that a fee to

cover debt service for a completed project cannot be challenged as

unreasonable after the project comes on line and the debt service costs

are added to the rate base.

Airports are operated by state or local governmental entities to

meet community and national needs. Prior Department statements,

including the Government's amicus curiae brief to the Supreme Court in

Northwest Airlines v. County of Kent, Michigan (510 U.S. ______; 114

S.Ct. 855; 127 L. Ed. 2d 183 (1994) ``Kent County'') and Secretary

Pena's December 1993 letter, recognize that airport proprietors have

latitude to set fees to meet immediate and longer-term needs of

airports. Actions of state and local government are presumed at law to

be reasonable and lawful. This same presumption, the airport commenters

argued, should apply to the establishment of rates and charges, even

when imposed unilaterally by a proprietor through ordinance or

regulation. The Supreme Court, in the Kent County litigation, recently

reaffirmed the standard of reasonableness first enunciated in the

Evansville decision; this standard afforded substantial deference to

the airport proprietor. Airport commenters further argued that in

keeping with the presumption of validity, air carriers filing

complaints under Sec. 113 of the FAA Authorization Act should bear the

burden of proving unreasonableness.

ATA stated that airports possess monopoly power, which in recent

years has not been kept in check. Section 113 of the 1994 FAA

Authorization Act was enacted to respond to this potential monopoly

power by providing for active DOT involvement in airport-carrier

disputes, ATA argued, and airports should not be permitted to adopt new

fees unilaterally after failing to reach a consensus; such a policy

would give airports carte blanche to impose an unreasonable fee.

General aviation representatives commented that at hundreds of

general aviation airports operated by local governments, unreasonable

economic requirements can be imposed without effective challenge.

In light of the enactment of Sec. 113, the Department believes that

it is not at all clear that the presumption of validity normally

associated with governmental actions applies to the imposition of

airport fees on air carriers. Even before enactment of Sec. 113, some

judicial decisions recognized that the traditional presumption may not

apply in cases of airport rate-setting. See, for example, Raleigh-

Durham Airport Authority v. Delta Air Lines, 429 F. Supp. 1069, 1083

(D.N.C., 1976); New England Legal Foundation v. Massachusetts Port

Authority, 883 F.2d 157, 169 (1st Cir. 1989) (Massport II). In Kent

County, the Supreme Court applied the relatively deferential standard

of the Evansville decision in part because the parties invited its use,

and the Court noted that the Secretary had discretion to ``apply some

other formula (including one that entails more rigorous scrutiny).''

Kent County, at ______, n. 14. The policy adopted does not expressly

affirm or displace the presumption of validity that may apply to local

government actions. In response to comments relating to challenge of

project decisions, the Department considers the dispute resolution

process to apply to significant disputes actually related to fees, and

do not intend to make the process available to challenge particular

capital construction projects after the fact under the guise of

challenging the reasonableness of associated rates and charges.

3. Local Negotiation and Consultation

Air carriers requested that the final policy include a more

specific description of the information that airports are expected to

provide to carriers in connection with a fee increase, and one carrier

suggested that consultations and information exchange be required

rather than just encouraged.

Airports commented that the statement that consultations should be

conducted well in advance of changes to fees did not acknowledge that

local governments must sometimes act quickly, to avoid revenue

shortfalls or for other reasons.

The Department has included, in an appendix to the final policy

statement, a brief list of the information that the Department believes

would provide carriers the justification for a particular fee and

sufficient information to assess the reasonableness of the fee. The

information, in summary, is historic financial information for the two

years prior to the change in the fee at issue; economic, financial and/

or legal justification for the change; aeronautical cost information;

numbers of passengers and aircraft operations for the two preceding

years; and certain planning and forecasting information. The list is

general, for adaptability to different airport and local government

accounting and recordkeeping, and is not intended to include every

category of information that may be relevant to each fee dispute.

The procedural rules adopted for the resolution of airport-air

carrier fee disputes address the exchange of information. Following a

complaint under 49 U.S.C. Sec. 47129, if the airport proprietor has not

previously made that information available to carriers, the rules

provide for discovery. The Department has not acted to require

disclosure of information on a fee increase by regulation, but the

agency will reconsider that decision if experience indicates that

airports are not providing sufficient information to carriers during

consultation on fee increases.

In the statement on the timing of consultations, the Department has

inserted ``if practical'' in the language suggesting consultation well

in advance of a fee change. Finally, in response to the recommendation

by several commenters for arbitration or mediation clauses in leases,

the Department has added language encouraging the use of alternate

dispute resolution in lease and use agreements.

4. Fair and Reasonable Rates: Compensatory and Residual Costs

Methodology

Airport commenters generally supported the policy approach that

recognizes the discretion of an airport proprietor to establish

compensatory or residual methodology, or a combination of the two.

Airports also generally accepted the policy that airports could not

unilaterally impose a residual system absent carrier agreement,

although two commenters suggested that Sec. 113 gives an airport

proprietor a right to impose a residual costing methodology even absent

agreement.

Air carriers stated that the policy must deal realistically with

the fact that excessive revenues can and will be generated by an

airport's shifting of all costs to airlines and all profits to itself;

the policy should not exclude from [[Page 6909]] consideration revenues

derived from activities such as concessions and parking, which are also

the product of aviation activities. Failure to consider such revenues

to be ``aviation related,'' carriers argued, is inconsistent with the

requirement in Sec. 110 to take all airport revenue into consideration

in setting aeronautical fees.

The Department has retained the policy as proposed. The approach

requested by ATA was specifically rejected by the Supreme Court in the

Kent County decision, and Sec. 113 expressly preserves an airport

proprietor's right to use a compensatory methodology, which does not

require carrier agreement or the cross-crediting of concession

revenues. Moreover, Sec. 110 recognizes that airports may depend on

revenue generated from non-aeronautical uses for airport capital

improvements and other airport system purposes. Accordingly, the policy

adopted does not define concessions and parking as aeronautical revenue

or require the cross-crediting of concession revenue to carriers.

However, as discussed below, terminal costs and other shared costs must

be allocated fairly among aeronautical and nonaeronautical users.

5. Fair and Reasonable Rates: Allowable Capital Costs

Airports commented that capital costs allowed in the rate base

should specifically include such ``indirect'' costs as debt coverage,

cash and capital reserves, and allocation of some airport capital

expenditures, e.g., roadways, in the carrier rate base.

ATA did not comment specifically on what capital expenditures

should be allocated to aeronautical users, but expressed concerns that

airport proprietors are seeking unconstrained rights to generate

``excessive surpluses'' based on airport proprietors' assertions that

adequate reserves are necessary.

The final policy clarifies that the reserves and coverage required

in bond indentures and other debt instruments, as well as reserves to

cover normal income fluctuations and unforeseen contingencies, may be

included in the rate base. The final policy statement also clarifies

policy regarding what some commenters referred to as ``indirect''

capital expenditures, which the Department understands to refer to

airport facilities that support aeronautical use of the airport but

which also receive nonaeronautical use, such as airport roads and fire-

rescue facilities. The policy provides that costs allocable to both

aeronautical and nonaeronautical uses, or shared costs, may be included

in a particular rate base if the facility at issue supports the

aeronautical activity being charged, and the allocation to aeronautical

users is in proportion to the aeronautical purpose and use of the

facility.

For example, the costs of roadways on the airport that provide

public access to the passenger terminal could not be charged entirely

to any class of aeronautical users. However, a portion of roadway costs

could be included in the rate base for the terminal building, for

example, so long as the portion of the shared costs allocated to

terminal users does not exceed an amount that reflects the respective

aeronautical and nonaeronautical use of the same facility. The

Department does not expect the use of any particular formula for the

determination of aeronautical portion of shared costs, because the

circumstances may vary. For example, an airfield crash-fire-rescue

facility may exist primarily to support Part 121 air carrier

operations, but may actually be used primarily for landside public

emergency calls. An airport proprietor must be able to justify the

reason for the allocation used.

6. Fair and Reasonable Rates: Imputed Interest and Rate of Return

Airports argued that the final policy should expressly provide that

while the rates charged to aeronautical users cannot exceed costs of

providing services, those costs should be considered to include a

reasonable rate of return on investment; the return should apply to all

internally generated funds, regardless of source; a reasonable rate of

return would permit an airport proprietor to accumulate cash reserves,

which may be necessary as a condition of financing agreements and to

compensate a proprietor for the risk of undertaking a particular

investment; and allowance of rate of return will assure that the

Department's policy is consistent with Article 10 of the United States-

United Kingdom Air Services Agreement (``Bermuda 2''), which permits a

competent charging authority to recover a reasonable return. Airport

commenters further argued that airport proprietors should be permitted

to recover the implicit cost of capital for internally generated funds

without regard to source, aeronautical or nonaeronautical; in addition,

the rate allowed should be the highest of either the rates of return

available on the proprietor's investment at the time of the capital

expenditure (lost investment opportunity rates) or the cost of borrowed

funds available to the airport proprietor at the time of the

expenditure; rates prevailing on bonds at similarly-sized airports is

not appropriate because other airports may have different credit

ratings and, therefore, different capital costs.

ATA argued that routine inclusion of ``implied capital costs'' is

inconsistent with the concept of dedicated aviation resources; an

airport should not be allowed to collect interest for use of its own

reserves; allowance of implied capital costs is a device to generate

more revenue than is needed for airport purposes in violation of the

congressional direction that airports should not seek to accumulate

excessive reserves.

The final policy adopted by the Department continues to permit the

charge of imputed interest on the expenditure of airport funds

generated from non-aeronautical sources, but not on those generated

from aeronautical uses. While ATA is correct that all reserves must

generally be used for airport purposes, Federal law does not require

that the funds be used for aeronautical activities. Therefore, an

airport decision to fund an aeronautical activity is an investment

choice that benefits aeronautical users, and the reasonable costs of

that investment, including imputed interest, are appropriately

recoverable in the aeronautical rate base. The policy provides that the

borrowing rate, rather than interest obtainable, is the appropriate

measure of reasonable imputed interest for a public entity.

The Department does not agree with the comment that imputed

interest should be allowed for the use of funds generated by

aeronautical uses. First, a rate of return or imputed interest on the

use of aeronautical revenues is not necessary for bond coverage and

other reserves, because the policy adopted expressly allows the

establishment of such reserves as a direct cost. Second, the use of any

reserves generated from aeronautical revenues does not carry with it

any implicit cost to the airport for the use of capital, since the

reserve was generated by direct charge to users; the Department sees no

justification for an additional charge for the use of these funds for

the purposes for which they were collected.

To the extent that airports would justify a particular rate of

return policy on the basis of bilateral agreements such as Bermuda 2,

that reliance is misplaced; Bermuda 2 does not obligate the United

States to permit its airports to earn a rate of return; rather the

provision requires that each country recognize the other's authority to

permit its airports to earn a rate of return on assets, after

depreciation, to the extent provided by the domestic law of each

country. [[Page 6910]]

7. Fair and Reasonable Rates: Allowable Environmental Costs

Airport commenters stated that the proposed limitation of allowable

costs to reasonable environmental costs should be stricken; the costs

of compliance with all Federal, state, and local environmental

mandates, including clean air and clean water requirements, mitigation

required to obtain approvals for development projects, and all

expenditures for noise mitigation should be includable in the rate

base; the policy should clarify that mitigation (such as wetlands

replacement) may occur on or off airports. Also, airports argued,

because the airport proprietor is liable for noise damages, the

sponsor's judgment in developing a noise mitigation program should be

given deference. Airport commenters also argued that the limitation to

current expenditures for environmental costs should be removed;

airports should have discretion to include in the rate base reserves to

fund any future liability for cleanup of environmental contamination

likely to result from current operations.

The carrier view is that airport proprietors should not be

permitted to prefund future environmental liability for environmental

remediation, other than through documented self-insurance requirements,

subject to standard industry conventions and practices.

The final policy statement adopted by the Department adds language

clarifying that the following environmental costs, to the extent

actually incurred by the airport proprietor, will be presumed to be

reasonable costs:

Costs of complying with Federal, state, and local

environmental laws and regulations, provided that, in the case of local

requirements, such requirements are applied to other similarly situated

enterprises (to avoid possible impermissible use of airport revenues).

Mitigation requirements on or off airport associated with

airport development (for aeronautical use).

Noise mitigation pursuant to an approved Part 150 program

or other publicly-disclosed airport noise compatibility program;

Costs of insurance or self-insurance for correction or

cleanup of environmental damage. The Department agrees with carrier

comments that considerations of forward financing of environmental

cleanup costs do require some limitation on the charge to current

users, and the policy limits self-insurance costs to costs incurred

pursuant to a formal self-insurance program that meets applicable

insurance industry standards.

8. Fair and Reasonable Rates: Facilities Currently in Use

Airports asserted that the only restriction in current law is that

costs must relate to the development or improvement of an existing

airport; the restriction to the costs of facilities in use is overly

restrictive and not supported by law. Airports argued that land and

construction costs should be recoverable before a facility is in use;

the proposed policy does not even clearly permit recovery of costs for

borrowing to finance improvements until project completion, which could

lower bond ratings and postpone land acquisition, thereby increasing

project costs.

Comair praised the currently-in-use limitation on the grounds that

it would impose needed discipline on airport expansion policies that

show little regard for airline profitability.

The Department continues to believe that the traditional approach

of limiting recovery of costs to facilities in use is clear, easy to

administer, widely accepted, and supported by judicial decisions.

Accordingly, the final policy statement continues to provide that only

the costs of facilities currently in use may be included in the rate

base; financing costs incurred for construction, including debt service

and reserves, may be recovered at the time a facility comes on line.

Users may, of course, agree to incur present costs for a future

facility. The policy continues to provide that current costs of

planning for future facilities may be recovered as they are incurred.

9. Fair and Reasonable Rates: Asset Valuation

Airport comments: Airports commented that the proposed limitation

on valuation of airport property to historic cost is unduly

restrictive; is not required by existing legal interpretations; is

inconsistent with existing airport practice and Department policies; is

inconsistent with the objective of promoting efficient use of

resources; and could interfere with the successful implementation of

peak period pricing. Commenters stated that airports typically use

various asset valuation methods for their assets, including current

cost, fair market value, or the use of inflation indices (although few

individual airport proprietors claimed to be using other than

historical valuation). In addition, rates and charges for many

aeronautical assets are based on percentage of gross revenue. The use

of indices and gross revenue formulas is not generally expected to

result in rates and charges that reflect historical cost asset

valuation.

For many assets that are fully depreciated, including terminals,

the use of historic cost valuation would result in a subsidy to

carriers in the form of rental rates that did not reflect the value of

the facilities. In addition, a strict historic cost requirement could

expose airports to claims of unjust discrimination if carriers using

newer facilities are charged more than carriers using older facilities

that are fully depreciated. At a minimum, some airports urge that the

policy make clear that blending of asset values is permitted to avoid

this problem.

Further, airports claimed that the use of historic cost valuation

may distort the perception of the relative value of existing and new

facilities. A new facility may fail the test of economic feasibility

based on the disparity between fees based on historic costs of the

original facility and those based on current costs of a new facility.

Moreover, in the case of gates and other terminal facilities and other

facilities such as hangars or flight kitchens, air carriers themselves

recognize the value of the facilities by subleasing at rates higher

than historic value. A policy requiring airports to value their

facilities at historic value would allow airlines to enjoy a windfall

in the form of a differential between the market rates they can obtain

for subleases and rates paid to the airport based on historic cost. The

public interest would be better served, airports argued, if the airport

proprietor were able to capture this appreciation through market-based

rates and to apply the proceeds for the development of airport

infrastructure.

It was also argued that historic cost valuation could limit the

effectiveness of peak period pricing. If an airport is unable to

reflect the opportunity costs of its scarce assets in its rate base,

the maximum peak price that can be charged may not be enough to cause

traffic to shift away from the peak period.

The proposed historic cost requirement, in the airports' view, is

not supported in law or FAA policy. Decisional law is clear that

results, not methodology, are significant in determining

reasonableness. In addition, under the Evansville standard, a rate is

considered reasonable if based on some fair approximation of use and

not excessive in comparison with the government benefit conferred. A

rate based on the standard of ``benefit conferred'' will in most cases

be different from rate based on a facility's historic

cost. [[Page 6911]]

Airports also pointed to FAA policy statements that apparently

support alternative valuation methods. FAA's Order 5190.6A recommends

that long term leases include automatic escalation provisions based on

recognized economic indicators. In addition, the Order identifies a fee

for use of landing areas based on a specified percentage of ticket

sales to enplaning passengers as acceptable. Neither of these

methodologies would produce rates based on historic costs.

Finally, airports stated that the DOT Office of the Inspector

General (DOT/OIG) has criticized the failure of airports to obtain fair

market value for aeronautical rentals. The DOT/OIG position indicates

that use of methodologies other than historic cost is at least

permitted, if not mandated by assurances relating to maintaining a fee

and rental structure that will make the airport as self-sustaining as

possible.

Air carrier comments: Air carriers considered the concept of using

historic costs for asset valuation to be sound and consistent with

Federal law. While parties might mutually agree to another valuation

method, the policy must provide that only historic cost valuation may

be unilaterally used, to protect against rampant overcharging and

accumulation of excess surpluses by airports. Airports have access to

capital for replacement of assets without generating excess revenue

from other valuation methodologies. The use of historical cost

valuation is quickly and easily verifiable and eliminates instability

in the rate base.

FTC comments: The staff of the Bureau of Economics of the Federal

Trade Commission (FTC) submitted comments on the proposed policy, with

the caveat that the comments do not necessarily represent the views of

the Commission or of individual commissioners. FTC staff took the

position that the requirement to use historic costs will not promote

the efficient use of resources. Historic cost valuation will likely

result in prices that are below the value of airport facilities. When

prices are below the value of facilities, excess demand results. If a

community is served by two airports built at different times and fees

are based on historic costs, airlines will be attracted to the older,

lower-cost airport and avoid the newer, more expensive one. Demand at

the older airport would have to be rationed by nonprice means.

Carriers compete by offering connecting service over various hubs.

Because fees charged by hub airports are a determinant of air fares, it

is important that competition between carriers not be distorted by a

pricing system for airport services that reflects the age of

facilities, rather than true economic costs.

FTC staff recognized that airport services are not generally

produced in competitive markets. Therefore, airport proprietors might

possess monopoly market power in pricing their services. However, FTC

staff maintained that there are effective means for the Department to

regulate the pricing of airport services other than cost of service

pricing based on historic costs.

While cost-of-service regulation based on historic costs has

typically been used in the United States, FTC staff commented that this

approach has a number of defects. Failure to use a pricing system that

reflects opportunity costs could lead to greater levels of airport

capacity than is warranted by economic efficiency, as excess demand

leads to congestion and delays which in turn lead to calls for new

capacity.

Even if a cost basis other than historic costs is used, FTC staff

believed that cost-of-service regulation can be a source of economic

inefficiency. One regulatory alternative that addresses some of these

shortcomings is price-cap regulation. Under price-cap regulation, the

regulator sets a price ceiling, but the firm is free to charge any

price below this ceiling. The price ceiling is adjusted periodically by

a factor that is independent of the firm. Price cap regulation has been

used in the privatization of nationalized industries in the United

Kingdom, including airports, and in the telecommunications industry in

the United States.

Final policy statement: The final policy retains the historic

valuation principle proposed; for property other than airfield and

land, however, the policy permits airport operators to use other

valuation methods if the methodology does not result in total

aeronautical revenues exceeding total aeronautical costs and if the

methodology is applied consistently for similar facilities. If an

airport proprietor uses valuation other than historic costs for

establishing any aeronautical charge, the airport operator will be

responsible for demonstrating that the methodology is justified, upon

complaint by an air carrier or other aeronautical user. Where similar

facilities have a different historic cost basis, the cost may be

averaged across all similar facilities to produce a common rate.

The Department recognizes, as many of the airports and FTC staff

commented, that valuation based on other than historic cost may be

justifiable in certain situations. Nonetheless, we continue to believe

that the use of historic cost asset valuation methodology is consistent

with the objectives and direction of the AAIA and Public Law 103-305,

in addition to being the most widely accepted methodology under

applicable standards for both public finance accounting and ratemaking.

The financial and accounting standards issued by the Financial

Accounting Standards Board and the Government Accounting Board, which

form the basis of Generally Accepted Accounting Principles (GAAP),

prescribe historic cost valuation as the accepted accounting convention

for valuing the assets of local government enterprise functions such as

airports. The valuation of assets for purposes of an accurate financial

statement is somewhat different from the objective of establishing

lease rates, but does indicate the longstanding general acceptance of

historic cost valuation as the standard.

As recognized by commenters on both sides of the cost valuation

issue, historic cost has also been the standard for use in the

establishment of rates in regulated industries. However, as several

commenters noted, the rates charged by airport proprietors are not

perfectly analogous to public utility rates, and the Department has not

strictly applied the principles of public utility ratemaking law in

developing the policy. Nevertheless, many of the reasons for the use of

historic cost apply to both public and private enterprise activities.

Historic cost is the simplest, most direct, and easiest-to-verify

measure of cost. Moreover, in a regulatory system in which the

proprietor's revenue is limited to the costs of providing services,

historic cost valuation provides for full reimbursement of actual costs

incurred by the proprietor. The airport fee policy adopted by the

Department does limit the revenue that can be generated from

aeronautical uses to the costs of providing services, and historical

cost valuation is, therefore, both sufficient and appropriate for

determining the amount of revenue (and the limit on reasonable fees)

that can be collected for aeronautical uses. The use of an alternative

methodology such as replacement cost valuation, for example, would

generate funds in excess of past and current costs, and could result in

the accumulation of excess funds that could be used for the replacement

of the facilities being used or for any other airport purpose. The

accumulation of surplus aeronautical revenues for replacement of

facilities is not permitted by the policy adopted, which limits charges

to recovery of costs for facilities in use. Nor are the surplus funds

that [[Page 6912]] would be generated by replacement cost pricing

needed for other purposes, since aeronautical users can be charged

directly for the amounts needed to maintain debt service and coverage

reserves, working reserves for normal operations, and contingency

funds. Also, surplus funds for any airport purpose can be accumulated

from revenues generated by nonaeronautical uses, which are not covered

by the policy. In summary, historical cost valuation is the most widely

used and accepted valuation methodology; it reimburses the airport

proprietor fully for costs incurred; and it is consistent with the

policy's provision that fees charged to aeronautical users are limited

to the costs of services provided.

The Department believes that many of the impacts of historic costs

noted by airport commenters would not be as problematic as the

commenters suggest. First, historic costs would result in rents

substantially below market only where a facility has not been

renovated, reconstructed, or replaced for many years. While there are

such cases, it would be the exception for airport facilities. Second,

increased use of shorter airport leases reduces the instance of

potential windfall situations, in which a lessee who pays the airport

proprietor a historic cost-based rate is able to sublease at market

rates, because the airport proprietor can reallocate the property to

the actual user after a shorter time. Third, the policy adopted

expressly permits airport proprietors to average the historic cost

basis of all property, new and old, in the same general category (e.g.,

terminal gates). Accordingly, lessees of similar facilities can be

charged identical rates regardless of the age and original cost of each

facility. Finally, the policy should not result in any significant

disruption of existing practice. Historic cost is already the most

widely accepted basis for asset valuation; also, existing airport-air

carrier agreements and air carrier fees that were not in dispute as of

August 23, 1994, are not subject to challenge under the special

expedited procedures in any event.

That said, as airport commenters and the FTC staff noted, rates

based on historic cost can potentially result in inefficiencies and

unintended subsidies. Accordingly, the Department believes that it is

reasonable that airport proprietors, where justification exists, have

some flexibility to use an asset valuation other than historic cost for

the purpose of ratesetting. However, for overall aeronautical fees to

be consistent with the provisions of the policy, several limitations

will necessarily apply when asset valuation other than historic cost is

used to determine some rates. First, aeronautical revenues in the

aggregate cannot exceed the cost of aeronautical facilities (valued at

historic cost) and services provided, and the use of a valuation higher

than historic cost would not increase the total limit on aeronautical

revenues since the total cost of aeronautical facilities would continue

to be calculated using historic cost. Therefore, charging a market rate

not based on historic costs for one category of leased aeronautical

facility may require charging less than a full compensatory rate for

other facilities used by the same aeronautical users. Second, only

historic cost valuation will be considered reasonable for airfield

facilities and land. Any potential effects of inefficiency or subsidy

would apply particularly to terminal and other landside facilities,

which may be exclusively leased. Accordingly, the Department will

consider the possibility that a fee based on valuation other than

historic cost could be reasonable, but only with respect to facilities

other than the airfield, and only to improvements, not land. Finally,

because historic cost valuation remains the standard in both public

finance accounting and in ratemaking methodology, historic cost asset

valuation methodology will be presumed to be reasonable for facilities

other than airfield facilities and land. Subject to the general limit

on total aeronautical revenue, for facilities other than airfield

facilities and land an airport proprietor may demonstrate that an

alternate valuation methodology is justified in the circumstances

existing at the airport.

The Department believes the policy adopted represents the most

reasonable approach to valuation of airport assets, in consideration of

the comments received and the policy direction in recent legislation.

The policy applies a strict historical valuation standard to core

aeronautical use facilities, i.e., the airfield and land. For terminal

and exclusively leased areas of the airport the policy permits

flexibility in rate methodology and avoids disruption of existing

arrangements, while at the same time discouraging accumulation of

excess revenues.

The policy adopted is intended to cover the fees for use of

aeronautical facilities, and is not intended for strict application to

a transfer of assets. The policy applies the general rule that

subsequent airport proprietors will acquire the cost basis of assets

used in the rate base at the original airport proprietor's historic

cost. However, requests for approval of the transfer of airport assets

may include requests for deviation from this policy with justification.

FTC staff acknowledged that the monopoly power of airport operators

requires some pricing regulation. With respect to the use of price-cap

regulation suggested by FTC staff, such an approach does not appear to

be feasible. The examples cited by FTC staff represented monopoly or

near monopoly regimes where a cap was being set for one, or at most a

handful of firms. In contrast, there are more than 400 commercial

service airports and thousands of obligated airports that may be

subject to the airport fee policy. The Department cannot effectively

establish a separate price cap regime for each regulated entity, and it

is not clear that the benefits of a price cap regime would be available

if the Department were to develop a single industry standard formula.

In the U.K. airport context, the British determined different price-cap

values for each of the airports covered by the price cap regulation.

Finally, the U.S. Government's own experience with price cap regulation

of airports in the United Kingdom demonstrates that in order to be

effective in preventing excessive returns, price cap regulation must be

implemented with care. Among other things, it is important to assure

that the base prices relied on do not themselves reflect excessive

profits, which in turn makes it necessary to undertake a cost-of-

service evaluation of each firm's costs and revenues.

10. Fair and Reasonable Rates: Multiple Airport Systems in the Rate

Base

Airports generally commented that it is unduly restrictive to

require quantification of the benefits of the secondary airport for

inclusion of subsidy costs in the first airport's rate base; benefits

will be difficult to quantify, and should be presumed if the airport

has been designated as a reliever in the FAA's National Plan of

Integrated Airport Systems (NPIAS); also, the blending of rates of

multiple airports is an accepted current practice and should continue

to be considered reasonable.

The Airports Council International-North America (ACI-NA) requested

that common ownership not be a prerequisite of inter-airport cost

sharing. ACI-NA notes that FAA permits the transfer of AIP entitlement

funds between airports under different sponsorship; there is no reason

to impose stricter standards on the airport's own funds, as the

benefits of a reliever airport are the same regardless of ownership.

AAAE and individual operators of airport systems, including Kansas City

and the Metropolitan Washington Airports Authority, agree

[[Page 6913]] with the Department proposal that common ownership be

required, but urge that the system proprietor be given wide latitude to

blend rates.

Air carriers supported the proposed policy, arguing that while

cross-subsidization has at times been troubling, airlines have

generally been able to resolve issues at the local level. Carriers

stated that the requirement of common ownership should not be

eliminated; and commented that it is ironic that airports are

interested in subsidizing other airports and at the same time claim

insufficient funding to meet their own needs.

The Department has retained the policy as proposed, but have added

the clarification that an airport designated by the FAA as a reliever

will be presumed to confer a reasonable benefit on users of the primary

airport. The Department continues to believe that the best means to

assure that benefits of cross-subsidy are commensurate with costs is

where cross-subsidy is the result of agreement. In the absence of such

an agreement or designation by the FAA as a reliever in the NPIAS, the

Department is reluctant to presume that benefit is commensurate, and

believe it is reasonable to require that the subsidy reflect a showing

of actual benefits.

The requirement for common ownership is retained. The basis for a

reasonable fee is the compensation of the airport proprietor for the

costs of facilities and services it provides; the proprietor is not

providing facilities owned by another sponsor.

The analogy to the transfer of entitlement funds argued by airport

commenters is not persuasive. Entitlement funds are Federal funds

provided directly to the airport under special criteria for grants, and

are not subject to the same standard of reasonableness that applies by

statute to any cross-subsidy charged to aeronautical users.

11. Unjust Discrimination: Peak Pricing

Airports supported the recognition in the proposed policy that peak

pricing is not per se impermissible; peak pricing can be an effective

means of improving efficient use of existing infrastructure. FTC staff

also argued that peak pricing would promote economic efficiency and

avoid overbuilding of airport assets, and urged that rates during peak

periods be permitted to reflect opportunity costs of using scarce

resources during peak times.

ATA and the International Air Transport Association (IATA) urged

that all references to peak pricing be eliminated; in light of the

already complex issues surrounding rates and charges, the Department

should not further complicate matters by bringing in extraneous matters

in this policy statement. The Regional Airline Association (RAA)

commented that peak pricing provides a cloak for unjust discrimination

against smaller aircraft operators, since smaller aircraft are less

able to absorb the price differential on a per-seat basis; commuter

carriers are especially affected because they cannot practically use

reliever airports and must schedule during peak times to meet

connecting banks of jet operators; peak hour pricing will not expand

capacity, and airport operators favor peak pricing because expanding

capacity involves facing difficult political and environmental issues.

The National Air Transport Association (NATA) expressed concern

that peak-hour pricing language will be used by airports to justify

excessive fees to block or severely limit access by general aviation

and on-demand charter operators.

The Aircraft Owners and Pilots Association (AOPA) objected to peak

pricing, which would only serve to limit and ration capacity. Airline

scheduling practices would remain unchanged, with peak prices being

absorbed by the airlines system-wide. Noncommercial general aviation

operations could be priced out, even though general aviation does not

contribute to congestion at most airports; general aviation represents

5 to 10% of total flight operations at large hub airports and in many

instances is able to use shorter parallel runways without affecting the

long runways used by airlines.

The National Business Aircraft Association (NBAA) also opposed peak

pricing, which it argued should not be used as a substitute for

capacity enhancement, and should not be imposed with discriminatory

impact on small aircraft operators.

The Department has adopted the policy statement essentially as

proposed, although the term ``maximize'' efficient utilization of the

airport has been changed to ``enhance'' efficient utilization, a more

realistic standard. The peak pricing concept stated in the policy is

adopted from the Department's decision in the Massport PACE decision

(Order and Opinion, December 22, 1988), and represents no change in

existing Department policy. Peak pricing is specifically included in

the policy statement to clarify that the new policy language on unjust

discrimination does not affect the existing policy on peak pricing.

12. Unjust Discrimination: Charging Differential Based on Status as

Nonsignatory Carrier

Airports argue that existing practices and policy recognize an

airport proprietor's authority to establish reasonable classifications

of carriers, for example signatory and non-signatory carriers, and to

charge differential rates accordingly. This practice should not be

overturned, even if the premiums assessed result in a rate that exceeds

allocated costs.

The Department acknowledges the existing practice, and the final

policy statement clarifies that reasonable distinctions, such as

between signatory and non-signatory carriers (i.e., carriers that

respectively have and have not entered into a use agreement with the

airport proprietor), are permitted. However, the limit on recovery of

total costs would continue to apply.

13. Financially Self-sustaining: Requirement That General Aviation

Airports be Self-sustaining

General aviation commenters expressed concern that the proposed

policy did not recognize that commercial circumstances at many airports

would not support a rate structure that would both make the airport

self-sustaining and permit commercial operators at the airport to earn

a profit; the policy should not require proprietors of such airports to

adopt unreasonably high fees.

The Department agrees that the requested change is consistent with

the intent of the proposed policy. The final policy statement includes

language to clarify that Federal law does not require each obligated

airport to be self-sustaining, and that the Department recognizes that

some airports may not be able to achieve a self-sustaining condition.

14. Financially Self-sustaining: Generation of Surpluses

In general, airport comments supported the approach of the policy

statement and endorsed the treatment of Sec. 110 of the FAA

Authorization Act as a matter under revenue generation, rather than as

a matter relating to the reasonableness of fees. Airports note that

some other provisions of the policy, for example the proposed historic

cost requirement and limitation on rate of return, could hinder an

airport in becoming as financially self-sustaining as possible. ACI-NA

urged that the policy be modified to recognize that some airports may

never be able to achieve self-sustaining status and that some

aeronautical activities may be [[Page 6914]] beneficial to the public

even though they do not produce enough revenue to pay fair market

value. AAAE stated that the requirement to make the airport as self-

sustaining as possible should be treated as the paramount principle in

the review of airport fees; the remaining principles and guidance would

follow from that statutory directive.

Air carriers found the statement of the self-sustaining principle

in the proposed policy to be consistent with existing law, but urged

that the requirement to be self-sustaining be defined in a manner that

prohibited airports from accumulating massive surpluses.

Several general aviation commenters stated that the requirement to

be self-sustaining should be clarified so that airport proprietors are

not compelled to adopt unrealistic fee schedules that preclude aviation

businesses from operating profitably.

The Department has retained the policy as proposed, but have

modified the statement to clarify that an airport must only be as

financially self-sustaining as possible; that this requirement does not

permit an airport proprietor to establish fees that exceed costs

associated with aeronautical users; and that an airport proprietor's

decision to charge commercially feasible rates below what might be

required to break even does not in itself violate the requirement to be

as self-sustaining as possible. Language from Sec. 110 of the 1994 FAA

Authorization Act regarding the policy on accumulation of surplus,

which was included under the use of revenue section of the proposal,

has been moved under the self-sustaining principle in the final policy

statement.

The Department does not agree with the AAAE comment that the

requirement for an airport to be as self-sustaining as possible should

be the primary principle for determination of airport fees, and the

policy retains the general structure and emphasis of the proposed

policy.

15. Use of Airport Revenues: General Approach.

Airports commented that discussion of the use of airport revenue

should expressly refer to the grandfather provision of 49 U.S.C.

47107(b)(2); also, proposed paragraph 5.6 should be modified so that

actions listed there are not considered to be revenue diversion per se,

but only to warrant FAA inquiry about whether diversion is taking

place. Airports further requested that the policy alluded to in the

preamble--that FAA will consider accumulation of surpluses in awarding

discretionary grants--should not be implemented; that policy is not

required by Sec. 507(3) of the AAIA and would penalize airports for

preserving a sound financial position.

The City of Los Angeles Department of Airports commented that

paragraph 5.6 should be clarified to permit airport revenue to be used

to directly or indirectly influence use of the airport system, e.g.,

for promotional activity.

AAAE commented that the detailed discussion of permissible and

impermissible uses of airport revenues should be deleted from the

policy statement on rates and charges, on the grounds that Congress

mandated a separate policy statement; existing paragraphs should be

replaced with a simple statement referring to applicable law and a

separate FAA policy statement on revenue use. AAAE further requested

that the policies and procedures on revenue diversion should be issued

through notice and comment rulemaking, in keeping with the severity of

potential penalties.

Air carriers generally supported the proposal. IATA commented that

paragraph 5.6 should be modified to state that listed practices are to

be regarded as a minimum, and that more practices may be added.

The Department agrees with the AAAE recommendation to state agency

policy on use of revenue in a separate document dedicated to revenue

diversion policy, and not in the statement on airport fees.

Accordingly, much of the language in the proposal has been deleted from

the final policy statement. The policy does retain a basic statement of

the revenue use requirement and a reference to the statute, and also

the statement that the FAA may inquire into a progressive accumulation

of surplus. As noted previously, language from Sec. 110 of the 1994 FAA

Authorization Act regarding policy on accumulation of surplus, which

was included under the use of revenue section of the proposal, has been

moved under the self-sustaining principle in the final policy

statement.

FAA is issuing a separate policy statement on policies and

procedures for enforcement against illegal revenue diversion, as

required by Sec. 112 of the 1994 FAA Authorization Act. That statement

includes the practices that the Department considers to be diversion of

revenue, including the four practices listed in Sec. 112. The

Department interprets Sec. 112 as requiring the agency to define the

listed practices as diversion, if not otherwise grandfathered, and not

merely as a basis for inquiry as suggested by airport commenters. The

revenue diversion policy statement includes a separate discussion of

the ``grandfather provision'' of Sec. 511(a)(12) of the AAIA. The

statement also indicates that FAA's policy will continue to be to

consider accumulation of surplus funds as one factor militating against

award of discretionary grants.

16. Use of Airport Revenues: Policy on Accumulation of Surpluses

Airports commented that the provision that accumulation of reserves

may warrant FAA inquiry should be deleted, as should the provision

encouraging conversion of airport surplus into airport improvements,

because accumulated surpluses provide tangible benefits to airports. As

noted, AAAE requested deletion of the entire discussion of the use of

airport revenue.

Air carriers argued that an admonition that accumulation of surplus

may warrant an inquiry is not strong enough; the provision should be

modified to state that accumulation of surplus shall trigger an

investigation; encouragement of the use of accumulated surpluses to

fund non-AIP eligible projects will exacerbate the tendency of airport

proprietors to seek excessive revenues for questionable purposes.

The policy adopted includes the language in the proposal, which

reflects existing FAA practice and represents a reasonable balance

between the airport's interest in maintaining appropriate reserves and

the Government's interest in preventing unnecessary accumulation of

surplus funds.

Policy Statement Regarding Airport Fees

For the reasons discussed above, the Department adopts the

following statement of policy for airport fees charged to aeronautical

users:

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 [[Page 6915]] 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. The Department will take these differences

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

aeronautical fees.

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 aeronautical uses involving the

operation of aircraft, or providing flight support directly related to

the operation of aircraft, are considered to be aeronautical users.

In addition, 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 carrier's 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 Sec. 113 of the FAA Authorization Act of 1994

Section 113 of the Federal Aviation Authorization Act of 1994

(``Authorization Act''), 49 U.S.C. 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(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. Sections 47219(e)

and (f) specifically apply the expedited hearing procedures mandated by

Sec. 47129(b) and (c) to air carriers, but do not preclude the adoption

of policy guidance applicable to fees imposed on aeronautical users

other than air carriers.

Therefore, the Department will apply the policy guidance in the

case of a dispute over any aeronautical fee, including those described

in Sec. 47129(e) and (f).

In addition, 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.

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.

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 [[Page 6916]] fees subject to 49 U.S.C.

Sec. 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. Sec. 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. 47129 and implementing regulations. Pursuant

to the provisions of 49 U.S.C. 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 In the case of fees imposed on other aeronautical users, the

Department will first offer its good offices to facilitate parties

reaching a successful 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 is not 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 Revenues from aeronautical fees (aeronautical revenues) may

not exceed the costs to the airport proprietor of providing airport

services and facilities currently in aeronautical use (aeronautical

costs) unless otherwise agreed to by the affected aeronautical users.

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.

2.1.4 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 by agreement.

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

may be recovered from aeronautical users through 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.

2.3 In the absence of an 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.

2.3.1 Where airport proprietors have expended funds from

nonaeronautical sources to finance capital investments for aeronautical

use, the implicit capital cost of these funds may be included in the

aeronautical rate base in addition to the cost of the asset. The

Department considers it reasonable to use, as a measure of the implicit

capital cost, the rate of interest prevailing on bonds issued for a

comparable purpose at the time of the expenditure at that airport or at

another airport with similar bond rating.

2.3.2 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: [[Page 6917]]

(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 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 insurance industry

standards for self-insurance practices.

2.3.3 Airport proprietors are encouraged to establish fees with

due regard for economy and efficiency.

2.3.4 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); 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.

2.3.5 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 non-

aeronautical 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 the

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.

2.4 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.

2.4.1 Airport assets included in the rate base must be valued

according to their historic cost to the original airport proprietor.

Subsequent airport proprietors generally shall acquire the cost basis

of an asset at the original airport proprietor's historic cost.

(a) For facilities other than airfield facilities and land, an

airport proprietor may use valuation methodologies other than historic

cost valuation as set forth above, so long as total aeronautical

revenues do not exceed the total costs (based on historic costs)

included in the aeronautical rate base, and so long as the valuation

method is justified and applied on a consistent basis to comparable

facilities.

(b) Where comparable assets, e.g., two runways or two terminals,

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

airport proprietor may combine the cost basis of the comparable assets

to develop a single cost basis applicable to all such facilities.

2.4.2 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 costs of land

that facilitates the current operations of the airport.

2.4.3 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).

2.5 At all times, airport proprietors must comply with the

following practices:

2.5.1 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 of government.

2.5.2 The costs of airport development or planning projects paid

for with government grants and contributions and passenger facility

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

2.5.2(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

[[Page 6918]] 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 aeronautical fees that exceed the

airport proprietor's aeronautical costs.

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).

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 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.

Issued in Washington, DC, on January 30, 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. 95-2673 Filed 1-31-95; 3:15 pm]

BILLING CODE 4910-13-P