# Policy Regarding Airport Rates and Charges

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URL: https://www.frixlaw.com/law-library/documents/fr%3A96-15687

## Record

- **Collection:** Federal Register
- **Document type:** Notice
- **Published:** June 21, 1996
- **Citation:** 61 FR 31993

## Text

[[Page 31994]]

DEPARTMENT OF TRANSPORTATION

Office of the Secretary

Federal Aviation Administration

[Docket No. 27782]
RIN 2120-AF90

Policy Regarding Airport Rates and Charges

AGENCY: Department of Transportation, Office of the Secretary and
Federal Aviation Administration.

ACTION: Policy statement.

-----------------------------------------------------------------------

SUMMARY: This document announces Department of Transportation
(``Department'') policy on the fees charged by Federally-assisted
airports to air carriers and other aeronautical users. The statement of
policy (``Final Policy'') was required by the Federal Aviation
Administration Authorization Act of 1994, Public Law 103-305 (August
23, 1994). This statement of policy replaces in its entirety the
statement of policy published in the Federal Register on February 3,
1995 (``Interim Policy''). This statement of policy incorporates a
substantial modification in the approach of the Interim Policy to
determining the reasonableness of fees for facilities other than the
airfield and public use roadways. In other respects, the approaches of
the two policies are similar. The Department proposed the referenced
modification in a notice published in the Federal Register on September
8, 1995 (``Supplemental Proposed Policy''). The Final Policy is not
significantly revised from that proposed in the September 8 notice.

DATES: This policy is effective June 19, 1996. This agency action is a
statement of policy that relaxes restrictions imposed on airport
proprietors by the Interim Policy. The Final Policy does not itself
impose additional burdens on airlines and other airport users and does
not require airport proprietors to impose such burdens.

FOR FURTHER INFORMATION CONTACT: David L. Bennett, Director, Office of
Airport Safety and Standards, Federal Aviation Administration, 800
Independence Ave. SW., Washington, DC 20591, telephone (202) 267-3053;
Barry L. 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:

Summary of Policy Statement

The Final Policy requires that fees for the use of the airfield and
public-use roadways be established on the basis of costs, and it
provides detailed guidance on how costs are to be determined and
applied to establish fees. Airfield assets must be valued at their
historic cost to the original airport proprietor (``HCA value''). The
cost-of-service approach is comparable to common practice in setting
fees for regulated public utilities. This approach also reflects the
nearly universal practice of establishing fees for the use of the
airfield at commercial service airports. Even when airfield fees are
set by agreement, the agreement usually reflects a cost-of-service
approach. The terms of such agreements generally govern how costs will
be calculated.
In formulating the Final Policy, the Department has considered and
recognized as reasonable practices that have generally been accepted by
industry participants as producing reasonable results. The Final Policy
does not seek to disturb those practices. In the case of the airfield
and public use roadways, industry practice--HCA-based fees--is the
approach supported by aeronautical users as most beneficial to them.
For other facilities and services, the Final Policy adopts a different
approach.
For those other aeronautical facilities, the Final Policy permits
fees to be set by any reasonable method. Fees for such facilities and
services are generally established through direct negotiations with
individual users. In these negotiations, cost, as defined for
reasonable airfield fees, is usually but one of a number of
considerations affecting the fees. In the Department's experience, this
negotiating process has in almost all cases produced reasonable and
non-controversial results. The Department expects that these
negotiations will continue to produce reasonable results in all but
exceptional situations. The Department has, therefore, adopted a more
flexible approach to nonairfield fees to preserve the discretion of
airport proprietors and aeronautical users to negotiate the terms for
using nonairfield facilities.
The Final Policy also reflects the Department's preference for
direct negotiation of fee issues between airport proprietors and
airport users. Accordingly, the first of the five fundamental
principles listed in the Final Policy states the Department's
preference for direct negotiation and resolution. In addition, most of
the detailed guidance on establishment of airfield fees need not be
followed if airfield users have agreed to a different practice.
The Final Policy retains the structure of the Supplemental Proposed
Policy and the Interim Policy. The Final Policy begins with a statement
of applicability, and is then organized into five general principles
with supporting guidance for each.
As noted above, the first principle states the Department's
preference for direct local negotiation between airport proprietors and
aeronautical users.
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 detailed guidance applies for the
most part to fees charged to aeronautical users for airfield facilities
and public-use roadways. For other aeronautical facilities, the policy
permits fees to be established using any reasonable methodology.
Department oversight of these fees focuses on monitoring for
progressive accumulation of surplus aeronautical revenue. For the
airfield and public-use roadways, the policy incorporates, among other
things, the following: flexibility to deviate from the policy guidance
based on agreement with airfield users; recognition that both
compensatory and residual pricing approaches are legitimate; standards
for the valuation of airfield property; prescription of the kinds of
costs that can be reflected in the airfield rate base; and guidance on
subsidization of other airports. The Final Policy makes certain
distinctions in the reasonable accommodation of air carriers versus
other aeronautical users. The Final Policy does not establish standards
for fees paid by nonaeronautical users or limit the amount of revenues
generated by nonaeronautical fees.
The third principle restates the legal prohibition on unjustly
discriminatory rates and charges. Guidance identifies some practices
that are required to avoid unjust discrimination and some practices
that not considered to be unjustly discriminatory.
The fourth principle restates the legal obligation to maintain a
fee and rental structure that makes the airport as self-sustaining as
possible under the circumstances existing at the airport. 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. The self-sustainability
requirement must be included in each sponsor's grant assurances
pursuant to statute and is

[[Page 31995]]

subject to enforcement by the FAA in accordance with its grant
compliance procedures. However, the Department will not consider on the
merits a complaint as to the reasonableness of an airport fee based
solely on alleged non-compliance with the self-sustainability
requirement. A complaint about compliance with the self-sustainability
requirement would be considered by the FAA under its administrative
complaint procedures.
The guidance under this principle provides that the Department may
investigate the reasonableness of aeronautical fees in a case of
progressive accumulation of surplus aeronautical revenue.
The fifth principle restates the basic legal requirements for the
application and use of airport revenues. Supplemental guidance has been
proposed in the Notice of Proposed Policy and Procedures Concerning the
Use of Airport Revenue published at 61 FR 7134 (February 26, 1995).
Finally, the Department is willing to consider arguments that
specific provisions of the policy should not apply to a particular
airport fee due to unusual circumstances in the context of a proceeding
to review that fee. See Los Angeles International Rates Proceeding
(``LAX I''), Order 95-6-36, at 16 (June 30, 1995); Second Los Angeles
International Airport Rates Proceeding (``LAX II''), Order 95-12-33, at
15 (December 22, 1995).

Background

Two federal statutes have long imposed a reasonableness requirement
on the fees charged aeronautical users by airports. When an airport
accepts Federal grant money for an airport improvement, it must give
certain assurances, including the assurance that the airport will be
available for public use on fair and reasonable terms without unjust
discrimination. Section 511 of the Airports and Airways Improvement Act
of 1982, (``AAIA''), recodified as 49 USC Sec. 47107. This assurance
includes an obligation to charge aeronautical users of the airport only
reasonable fees. Similarly, section 113(b) of the Federal Aviation Act,
the Anti-Head Tax Act, recodified as 49 USC Sec. 40116, allows a
publicly-owned airport authority to collect only reasonable landing
fees and charges from airlines using airport facilities. See Northwest
Airlines v. County of Kent (``Kent County''), 114 S.Ct. 855 (1994).
These statutes, however, do not authorize the Department to regulate
the reasonableness of fees charged non-aeronautical users.
Airport fees and revenues are subject to other legal requirements
as well. Section 511 of the AAIA also bars airports, except for certain
grandfathered airports, from diverting airport revenue to nonairport
purposes. 49 USC Sec. 47107(b). Section 511 also requires each airport
to provide assurances that the airport will maintain a fee schedule
that will make the airport as self-sustaining as possible under the
circumstances existing at the airport. 49 USC Sec. 47107(a)(13). In
addition, the Chicago Convention and many of the United States'
bilateral air services agreements obligate the United States to ensure
that airports charge foreign airlines the same fees as the U.S.
airlines that operate similar services.
On June 9, 1994, the Office of the Secretary of Transportation
(``OST'') and the Federal Aviation Administration (``FAA'') issued two
related notices on the subject of Federal requirements for airport
rates and charges. The Department took this action largely in order to
better implement its responsibility to enforce the reasonable fee
requirements. 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 fees and other airport-related requirements.
Docket No. 27783 (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. Section
113 of that legislation, 49 U.S.C. Sec. 47129, specifically addresses
airport fees. Section 47129 directs the Secretary of Transportation
(``Secretary'') to determine whether an airport fee imposed on an air
carrier is reasonable, upon written request by the airport proprietor
or upon complaint filed by an affected carrier within 60 days after the
carrier receives written notice of the establishment or increase of the
fee. 49 USC Sec. 47129(a)(1). An airport fee subject to section 47129
``may be calculated pursuant to either a compensatory or residual fee
methodology'' or a combination thereof. 49 U.S.C. Sec. 47129(a)(2).
Further, in determining the reasonableness of a fee, the Department
``may only determine whether the fee is reasonable or unreasonable and
shall not set the level of the fee.'' 49 USC Sec. 47129(a)(3).
Section 47129 also directs the Secretary to publish in the Federal
Register final regulations, policy statements or guidelines
establishing (1) procedures for acting on written requests or
complaints; and (2) ``the standards or guidelines that shall be used *
* * in determining under [section 47129] whether an airport fee is
reasonable.'' 49 USC Sec. 47129(b)(1),(2).
Pursuant to 49 USC 47129(e), the section does not apply to : (1) a
fee imposed pursuant to a written agreement with air carriers; (2) a
fee imposed ``pursuant to a financing agreement or covenant entered
into prior to the date of enactment of [section 47129];'' or (3) any
other existing fee not in dispute on the date of enactment. In
addition, nothing in section 47129 shall adversely affect: (1) the
rights of any party under an existing written agreement between an air
carrier and the airport proprietor; or (2) the ability of the airport
to meet its obligations under a financing agreement, or covenant that
is in force on the date of enactment. 49 USC Sec. 47129(f).
In response to provisions in the 1994 Authorization Act, the
Department issued a supplemental notice of proposed policy with
revisions to reflect relevant provisions of that legislation. Docket
No. 27782 (59 FR 51835, October 12, 1994).
After reviewing all comments received in response to the notices,
the OST and the FAA, on January 30, 1995, issued a ``Policy Regarding
Airport Rates and Charges,'' the Interim Policy, and requested further
public comment. Docket No. 27782 (60 FR 6906, February 3, 1995). Two
airport owners are seeking judicial review of the Interim Policy. City
of Los Angeles et al. v. U.S. Department of Transportation et al., D.C.
Cir. Nos. 95-1188 and 95-1190 (argued March 4, 1996).
After reviewing the comments received in response to the February 3
request for comments, the OST and the FAA published on September 8,
1995 a supplemental notice of proposed policy, the Supplemental
Proposed Policy. Docket No. 27782 (60 FR 47012).
The procedural rules required by section 47129(b)(1) were published
in the Federal Register on the same date as the Interim Policy. Docket
No. 49830 (60 FR 6919, February 3, 1995). The 1994 Authorization Act
also required that the Secretary issue a statement of policies and
procedures for the enforcement of Federal restrictions on the use of
airport revenue. On February 20, 1996, the FAA

[[Page 31996]]

issued a Notice of Proposed Policy and Procedures Concerning the Use of
Airport Revenue. Docket No. 28472 (61 FR 7134, February 26, 1996).

Comments on the Supplemental Proposed Policy

The Department received more than 50 comments on the Supplemental
Proposed Policy. Comments were received from almost all segments of the
aviation community, including: airport operators and representative
organizations; associations representing U.S. and foreign air carriers
and commuter airlines; representatives of other aeronautical businesses
at airports; general aviation representatives; a representative of
airport concessionaires; individuals with experience in airport
operations; and a law firm. In addition, the Department held two public
meetings to solicit public input on the Supplemental Proposed Policy.
Verbatim transcripts of the meetings have been included in the docket
of this proceeding.
The two major US representative organizations for airport
operators--Airport Operators Council International/ North America
(``ACI'') and American Association of Airport Executives (``AAAE'')--
filed joint comments. Many individual airport operators endorsed the
joint comments of their representative organizations, but some larger
airport operators commented independently. Many airport operators'
comments were similar, and all of the comments tended to focus on a
common group of issues.
On the airline side, the Air Transport Association of America
(``ATA'') and Regional Airline Association (``RAA'') filed joint
comments. These comments and those of the International Air Transport
Association (``IATA'') also tended to focus on the same issues and
generally took the same position.
Accordingly, the following discussion of comments is organized by
issue, not by commenter. Issues are discussed in the order they arise
in the Final Policy. Airport proprietors and their representatives who
took the same position on an issue are collectively referred to as
``airport proprietors.'' ATA/RAA and IATA are referred to as
``carriers'' when the organizations took common positions. The summary
of comments is intended to represent the general divergence or
correspondence in industry views on various issues. It 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.
After the comment period closed, ACI/AAAE filed reply comments to
the comments filed by ATA/RAA. ATA/RAA in turn objected to the reply
comments. ATA/RAA requested that the Department reopen the comment
period to allow for the filing of reply comments generally, if we
accepted the ACI/AAAE reply. The Department has accepted the reply
comments for the record. However, we determined that reopening the
comment period was not necessary because ACI/AAAE's reply comments were
largely repetitions of arguments presented in earlier comments. In no
case are the reply comments the sole basis for any decision.
In addition to specific changes noted in the discussion of the
issues, the Department has made editorial changes throughout the Final
Policy to enhance readability and clarity.

The Department's Authority to Regulate Aeronautical Fees

As noted above, airports have been required by two Federal
statutes--the AAIA and the Anti-Head Tax Act--to charge only reasonable
fees to aeronautical users. The Department has the responsibility for
enforcing these requirements, and the courts have held that a
Department decision on the reasonableness of an airport fee is entitled
to substantial deference. Kent County, 114 S.Ct. at 864, n. 14; New
England Legal Foundation v. Massachusetts Port Authority, 883 F.2d 157,
169 (1st Cir. 1989). Section 113 of the 1994 Reauthorization Act,
codified as 49 USC Sec. 47129, requires the Department to resolve
significant disputes over the reasonableness of new or increased
airport fees on an expedited basis. In that statute Congress also
required the Secretary to establish standards for determining the
reasonableness of an airport fee. Congress did not limit the
Secretary's discretion in any way, except by stating that the
Department may not actually set an airport fee.
Given the statutory authority vested in the Secretary, we find that
we are empowered both to adopt the guidelines contained in this Final
Policy and, in cases heard under section 47129, to examine the fee
methodology used by an airport. See LAX I, Order 95-6-36 at 14-15.
ACI/AAAE argue that we must give an airport's fee judgments a
presumption of validity, since the decisions of state and local
governments are normally entitled to such a presumption. The Final
Policy, however, gives airport proprietors substantial discretion in
establishing a fee structure. In addition, the airlines challenging an
airport fee have the burden of proof. LAX I, Order 95-6-36 at 17-18. We
do not agree that we should include an additional presumption in favor
of airport judgments on fees in the final Policy. There is a
substantial Federal interest in ensuring that aeronautical users pay
only reasonable fees, as shown by Congress' directive that we determine
on an expedited basis whether such fees are reasonable when carriers
file complaints against new or increased airport fees that meet the
jurisdictional requirements of section 47129. Congress' requirements
that we publish guidelines for determining the reasonableness of
airport fees further indicates that we should carefully examine an
airport's fee methodology without presuming that the airport's judgment
is likely to be correct.
We also note that we did not use such a presumption in the two LAX
cases or in our earlier investigation of fees charged by the
Massachusetts Port Authority (``Massport'') under its PACE program.
Investigation into Massport's Landing Fees, FAA Docket 13-88-2, Opinion
and Order (December 22, 1988) (``Massport Order''), aff'd New England
Legal Foundation v. Massachusetts Port Authority, 883 F.2d 157 (1st
Cir. 1989).

1. Applicability to General Aviation and Foreign Air Carriers

The Supplemental Proposed Policy would apply to aeronautical uses
of any airport, including a general aviation airport. However, the
Department proposed to take into account differences in methodologies
and mechanisms that airport proprietors may use to charge for different
facilities and for different category of users. Proposed Applicability
of Policy, section A. The Department also proposed that, at airports
where fees high enough to achieve self-sustainability would be too high
to permit viable commercial operations, the Department would not object
to lower fees to assure that the public had access to commercial
aeronautical services. Proposed para. 4.1.2. In the explanatory
statement, the Department proposed to add language clarifying that in
situations not covered by section 47129, the FAA would apply the policy
in its role as administrator of grants under the Airport Improvement
Program (``AIP''), assuring that an AIP grant applicant is in
compliance with its grant assurances. The FAA would not provide a forum
for resolving private disputes.
Airport proprietors: Airport proprietors generally oppose
application of the policy to general aviation airports and to general
aviation facilities. ACI/AAAE consider the Supplemental

[[Page 31997]]

Proposed Policy to be an improvement over the interim policy. However,
a policy is not needed for general aviation airports and facilities
because section 47129 was enacted to respond to airline concerns. If
the Department disagrees, ACI/AAAE prefer a separate policy.
Some individual airport proprietors argue that the terms of section
47129 preclude adoption of a policy applicable to any fees except those
charged to air carriers and not otherwise excluded by the terms of
section 47129. The provisions of section 47129 indicate a belief by
Congress that, to minimize the adverse effects of Departmental
involvement, certain aeronautical fees should be completely exempt from
challenge. Others argue only that such an extension is unwise, based on
the differences between commercial service and general aviation
airports.
In addition, some airport proprietors object to the application of
the policy and the expedited procedures to complaints brought by
foreign air carriers on the same grounds.
General aviation: The Aircraft Owners and Pilots Association
(``AOPA'') explicitly objects to exclusion of general aviation airports
from the scope of the policy, and the National Air Transportation
Association (``NATA'') supports applying at least some elements of the
policy to general aviation airports.
Other commenters: One individual commenter observed that at many
compensatory airports, general aviation pays less than its allocated
costs and is subsidized by airlines and their passengers, who suffer
congestion caused by these below-cost fees.
The Final Policy: The Final Policy statement applies to general
aviation airports and fees charged to general aviation users. However,
in response to the comments, we have exercised our discretion to
further limit the circumstances in which we will consider a complaint
about the reasonableness of fees imposed at a general aviation airport.
In addition, the Department reaffirms its earlier decision that foreign
air carriers have the same rights as U.S. air carriers under section
47129.
As noted in the preamble to the Supplemental Proposed Policy, the
Department has ample authority under other provisions of the Airport
and Airway Improvement Act of 1982, as amended (``AAIA'')--49 USC
Secs. 47107(a), 47122--to adopt policies and guidance defining
reasonable fees to be charged by general aviation airports and for
general aviation use of commercial service airports. We find nothing in
the statute that exempts fees imposed for general aviation uses of any
airport from the requirement that airport proprietors charge all
aeronautical users reasonable and not unjustly discriminatory fees. The
commenters have not provided any other persuasive reason for using one
set of standards to judge the reasonableness of landing fees charged to
air carriers and a different set of standards to judge the
reasonableness of landing fees charged to other users.
However, as noted previously, the Department recognizes that
airport proprietors, especially proprietors of general aviation
airports, may use different methods for setting fees for general
aviation users than those commonly used for setting fees paid by
airlines. The Department reiterates its commitment to apply the policy
flexibly in evaluating general aviation fees. The narrowing of the
detailed guidance on establishing fees to the airfield and public-use
roadways should itself provide increased flexibility to general
aviation airports over the Interim Policy.
Even as to the airfield, the Department does not anticipate that
application of the policy will be unduly burdensome. The Department
understands that many general aviation airports operate at a loss,
calculated according to generally accepted accounting principles. By
definition, such airports are not generating excessive surpluses. The
Department would not expect such airports to increase their losses by
paying for sophisticated cost allocation and accounting systems to
prove that they are losing money. Similarly, the Department understands
that many airport proprietors apply a single charge, e.g., a fuel
flowage fee, to general aviation users for their use of all
aeronautical facilities. The Department does not intend to disturb this
practice. Further, a charge that covers the cost of providing
nonairfield facilities would be evaluated under paragraph 2.6 of the
Final Policy, as discussed below.
The Department notes the concern that general aviation users are
being subsidized by other users at many airports. The Department
emphasizes that an airport proprietor generally may not charge any
aeronautical user or user group more than its allocated costs based on
a reasonable, transparent and not unjustly discriminatory cost
allocation methodology. Our general approach in this policy is to
refrain from disturbing common and non-controversial industry practice.
Therefore, the Department will not object when an airport proprietor
charges particular user groups less than their allocated costs, if
other aeronautical users are not required to finance the shortfall. The
applicable Federal requirements do not compel airport proprietors to
set fees so high that they become a financial bar to the use of the
airport.
The Department is making three modifications to the Final Policy in
response to concerns raised in the comments. First, we will strengthen
the language of the applicability section that distinguishes the FAA's
role in processing complaints about general aviation fees from the
Department's role in processing complaints under section 47129. Second,
because the threat of unreasonably high fees is remote at most general
aviation airports, the Final Policy provides that the FAA will not
ordinarily undertake an investigation of the reasonableness of a
general aviation airport's fees absent evidence of a progressive
accumulation of surplus aeronautical revenues. The general aviation
airport segment of the industry should not be burdened with the cost of
developing sophisticated accounting systems to address a problem that
will occur, rarely, if at all. An allegation of unjust discrimination
would be considered by the FAA in accordance with the Final Policy.
Third, proposed par. 3.4.1 would require common costs to be allocated
``according to a reasonable, transparent and not unjustly
discriminatory cost allocation formula'' that meets the conditions
specified in that paragraph. Because many smaller airports cannot
afford to develop sophisticated cost allocation formulae, the reference
to ``cost allocation formula'' is being modified to ``cost allocation
methodology.'' If the airport proprietor elects to develop a cost
allocation formula, the formula must meet the conditions specified in
that paragraph.
As to the application of the policy to foreign airlines, the
relevant statutes make it clear that the policy must apply equally to
U.S. and foreign airlines. First, we are adopting the Final Policy
primarily because Congress directed us in 49 USC Sec. 47129 to
establish guidelines or standards for determining the reasonableness of
a new or increased airport fee in cases heard under that statute. The
Department analyzed the statute's applicability and determined in LAX I
that 49 USC Sec. 47129 must be read as giving foreign airlines the same
right as U.S. airlines to file complaints and obtain relief. Order 95-
6-36 at 53-56. We reaffirmed that determination in LAX II. Order 95-12-
33 at 52. Since section 47129 is the principal basis for the adoption
of the Final Policy, the Final Policy must apply to foreign airlines.
Even if Section 47129 did not cover foreign airlines, the Final
Policy would

[[Page 31998]]

have to govern the assessment of the reasonableness of fees charged to
foreign airlines. The airport grant statute specifically requires the
Department to obtain assurances from each airport sponsor obtaining
federal funds that the airport will not unjustly discriminate against
any aeronautical user. 49 USC Sec. 47107(a)(1). This provision requires
an airport to charge foreign airlines the same fees as similarly
situated U.S. airlines. In addition, the United States' obligation
under many international agreements to ensure that foreign airlines are
treated the same as U.S. airlines would require us to adopt the same
standards for determining the reasonableness of airport fees, whether
the fees are paid by U.S. airlines or foreign airlines, even if
Congress had not enacted 49 USC Sec. 47129.
Several airport parties now object to the Department's adoption of
procedural rules allowing foreign airlines to obtain an expedited
investigation under section 47129. However, only the City of Los
Angeles objected to the inclusion of foreign airlines during the
rulemaking proceeding that led to adoption of the Rules of Practice for
airport rates and charges cases. 59 FR 53380, 53383 (October 24, 1994);
60 FR 6919 (February 3, 1995). At that time, the Department determined
as a matter of discretion that foreign airlines should have the ability
to request an expedited investigation, even though it assumed that they
did not have such rights under section 47129. The Department's later
decision that foreign airlines are covered by 49 USC Sec. 47129 means
that foreign airlines by statute have the same procedural rights as
U.S. airlines.

2. Applicability to Fees Set by Agreement

Section 47129(e), 49 USC Sec. 47129(e), provides that the section
does not apply, inter alia, to fees imposed pursuant to a written
agreement with air carriers. Section 47129(f), 49 USC Sec. 47129(f),
provides , inter alia, that the section shall not adversely affect the
rights of parties to an existing agreement between an air carrier and
airport proprietor.
In the applicability section of the Supplemental Proposed Policy,
the Department stated that section 47129 did not repeal or narrow the
scope of the reasonableness requirement for airport fees. The
Department proposed to apply the policy in the case of a dispute over
the reasonableness of any aeronautical fee. However, disputes over
matters described in sections 47129 (e) and (f) would not be processed
under the procedures mandated by section 47129. In the explanatory
statement, the Department proposed to take into account the existence
of any agreement between U.S. and foreign air carriers and the airport
proprietor in making its determination of reasonableness.
The comments: Airport proprietors generally argue that the policy
should not apply to fees set by agreements with carriers. ACI/AAAE
argue that application of the policy to such fees would frustrate the
direction given by Congress and would adversely affect airports that
rely on agreements that produce steady and predictable revenue flows.
ACI/AAAE and individual airport commenters also argue that the
Department is legally barred from applying the policy to fees set by
agreement because sections 47129(e) and (f) limit the application of
all section 47129, not just the provisions governing the expedited
procedures. ACI/AAAE refer to numerous court decisions overturning
agency actions that have not properly adhered to statutory exceptions.
Other commenters did not address this issue.
The Final Policy: The Final Policy applies to fees set by
agreement, to the extent discussed below. We do not interpret section
47129 to preclude an investigation of fees set by agreement or the
application of the policy in such an investigation. However, in keeping
with our policy of encouraging direct negotiation of fees, the
Department does not expect to investigate routinely fees set by
agreement. Moreover, the Department has decided not to consider
complaints about the reasonableness of fees set by agreement if filed
by parties to the agreement. The Final Policy is modified to reflect
this decision.
However, we do not believe that Congress intended to deprive non-
party carriers of the opportunity to have their airport fees reviewed
by the FAA, solely because the fees are included in an agreement
between the airport proprietor and other airlines. While section 47129
directed the Secretary to establish a policy on reasonable fees, the
Secretary already had authority to publish such a policy. Section 47129
did not repeal this authority or the underlying requirement of
reasonableness. The existence of an agreement may be a critical factor
in evaluating the reasonableness of a fee, but section 47129 does not,
by its terms, exempt fees set by agreement from the requirement of
reasonableness.
However, the Department agrees that section 47129(e) was enacted to
preclude carriers from improving on their bargain by bringing an
administrative complaint after they have reached agreement with an
airport proprietor. That outcome would be unfair to airport proprietors
who bargain in good faith. The threat of a complaint could discourage
airport proprietors from putting forward their best offers in
negotiations. The Department is reluctant to interpret section 47129(e)
in a way that would discourage effective negotiations.
Complaints about fees charged to non-parties to the agreement
brought by non-parties to the agreement would be considered under
provisions of the policy applicable to non-signatory carriers, if
significant, as discussed below under the heading ``Charges to Non-
Signatory Carriers.'' By giving notice that non-parties may challenge
fees imposed on them by agreement, the Department expects that airport
proprietors and airport users will be able to achieve reasonable
results in their negotiations and obviate a full investigation and
determination of reasonableness by the Department.

3. Applicability to Fees Imposed Pursuant to Financing Agreements

Section 47129(e)(2), 49 USC Sec. 47129(e)(2), provides that the
section does not apply to fees imposed pursuant to a financing
agreement or covenant entered into before the date of enactment of the
statute (August 23, 1994). Section 47129(f)(2), 49 USC
Sec. 47129(f)(2), provides that the section shall not adversely affect
the ability of an airport proprietor to meet its obligations under a
financing agreement or covenant in effect on August 23, 1994.
In the applicability section of the Supplemental Proposed Policy,
the Department stated that section 47129 did not repeal or narrow the
scope of the reasonableness requirement for airport fees. The
Department proposed to apply the policy in the case of a dispute over
the reasonableness of any aeronautical fee. However, disputes over
matters described in sections 47129 (e) and (f) would not be processed
under the procedures mandated by section 47129. The treatment of
financing agreements was not otherwise discussed in the Supplemental
Proposed Policy.
However, in its order setting for hearing under section 47129,
carrier complaints against fees imposed by the Puerto Rico Port
Authority, the Department further interpreted the financing agreement
exceptions. Puerto Rico Ports Authority Rates Proceeding, Order 95-4-6
(April 3, 1995). The Department stated that:

[I]n order to successfully invoke the exception in subsection
(e)(2), the airport must show more than generalized language in a
financing

[[Page 31999]]

agreement as the source of the imposition of the fee upon the air
carrier. The airport must demonstrate that the agreement specifically
required the airport to increase directly the fees to air carriers or
that it so circumscribed other alternatives that the airport had to
impose a new fee or to increase an existing fee. Order 95-4-6 at 13.

The Department explained that this interpretation of section
47129(e)(2) was necessary so that the provision would not make the
statute a nullity. Id. at 12.
The comments: Airport proprietors urge the Department to revise its
interpretation of section 47129(e) to recognize generalized rate
covenant language. The airport proprietors argue that Congress was well
aware of the broad terms of typical rate covenants and drafted section
47129(e)(2) to cover the typical situation. They further argue that the
legislative history makes clear that section 47129(e)(2) was enacted to
avoid disrupting existing financing agreements.
The airport proprietors also argue that their preferred
interpretation will not render section 47129 a nullity. They assert
that airport proprietors do not routinely invoke a rate covenant as a
justification for a fee increase. Doing so would signal dire financial
circumstances. Further, if an airport proprietor must raise fees to
comply with a rate covenant, it will not single out airlines or other
aeronautical users, but will raise the fees for all airport users.
Other commenters did not address this issue.
The Final Policy: The Department will not modify the interpretation
of the financing agreement exceptions. As noted in Order 95-4-6, the
airport proprietors' preferred interpretation could turn section
47129(e)(2) into the proverbial exception that swallows the rule.
Moreover, the Department's interpretation does not threaten to
disrupt existing financing agreements. Under the Final Policy, debt-
service expenses, including reasonable amounts for debt-service
coverage, may be included in the rate-base. In an investigation into
the reasonableness of a fee, the airport proprietor is free to show
that a challenged fee is needed to meet debt-service expenses
associated with a general rate covenant. However, the airport
proprietor may not rely on a general rate covenant to invoke section
47129(f)(2) as a procedural bar to an investigation of the
reasonableness of the disputed fee. See, Order 95-4-6 at 13.

4. Definition of Exclusive/Nonexclusive use Aprons for HCA Valuation

The Supplemental Proposed Policy proposed that airfield assets
would be valued using the HCA valuation methodology. Proposed par.
2.5.1. Airfield assets would include ramps or aprons not leased on an
exclusive use basis and associated land. Proposed Applicability,
Section D.
The comments: The State of Alaska, which operates most public
airports in Alaska, expressed concern that the HCA valuation
requirement for aprons might adversely affect its charging practices.
The State's lease lots typically abut the side of a public-use apron
and include a portion of the apron for exclusive aircraft parking.
Treating the lease lots as a non-exclusively leased apron subject to
the HCA valuation requirement would devastate the airport system's
revenue situation.
The Department did not receive any other comments on this issue.
The Final Policy: No modification to the Supplemental Proposed
Policy is required to address the concerns of the commenter. As
described in the comments, the portion of the apron included in each
lease lot is available for exclusive use. Accordingly, this portion of
the apron and the remainder of the lease lot would be considered
exclusively leased, even though the remainder of the apron is a public-
use facility.
The Department has, however, decided to modify the definition to
avoid potential confusion. We are modifying the provision to exclude
from the definition of airfield assets an apron or ramp which is the
subject of a preferential, as well as an exclusive lease or use
agreement.
Aprons or ramps that are treated as airfield assets are subject to
the general HCA valuation requirement. In contrast, the airport
proprietor may use any reasonable method to establish the fee for any
other apron or ramp. The Department originally proposed this disparate
treatment because exclusively leased facilities have more in common
with terminals and other aeronautical facilities than with runways and
taxiways. In particular, their use and the fees for their use are
ordinarily the subject of individual negotiations.
On further consideration of the issue, the Department has concluded
that the preferential use agreements are as likely as exclusive use
agreements to be the result of individual negotiations and to give rise
to the characteristics that make a ramp or apron more like a terminal
than a runway. Many lease and use agreements may provide for only
preferential use. The Department is therefore modifying the Final
Policy to exclude from the definition of airfield assets, aprons and
ramps that are subject to a preferential or exclusive lease or use
agreement.

5. Cross Crediting Aeronautical Users With Nonaeronautical Revenues

The Supplemental Proposed Policy proposed that aeronautical users
be entitled to a cross-credit of nonaeronautical revenues only if the
airport proprietor agrees, and that the airport proprietor could agree
to a cross-credit even if aeronautical users do not agree to cover
nonaeronautical losses. Proposed para. 2.1.1. The Supplemental Proposed
Policy also proposed that the airport proprietor could not require
aeronautical users to cover nonaeronautical losses, except by
agreement. Id.
Airport proprietors: Airport proprietors did not address this
issue.
Carriers: IATA argues that cross-crediting should be required based
on the policy on airport fees set forth by the International Civil
Aviation Organization (``ICAO''), laid down in the Statements by the
Council to Contracting States on Charges for Airports and Air
Navigation Services (ICAO Doc. 9082/4). IATA argues that cross-
crediting satisfies the ICAO principle of cost-relatedness, because
airport users bring customers to the airport through their operations.
General aviation: AOPA supports mandatory cross-crediting because
nonaeronautical businesses thrive due to the ready-made market for
their services. AOPA also argues that the Supreme Court's decision in
Kent County does not preclude the Department from requiring cross-
crediting.
Other commenters: One law firm involved in public finance objects
to the proposed requirement that aeronautical users agree to cover
nonaeronautical losses. This commenter argues that the proposal is
inconsistent with the airport proprietor's right to set fees
unilaterally by ordinance or regulation established elsewhere in the
policy. The proposal is also inconsistent with the airport proprietor's
unconditional right to employ a residual methodology established by 49
USC Sec. 47129(a)(2), according to this commenter.
The Final Policy: The Department is adopting Paragraph 2.1.1, as
proposed.
The Department will not require cross crediting of nonaeronautical
revenues to aeronautical users, because section 47129 does not permit
us to do so. Section 47129(a)(2) preserves the discretion of airport
proprietors to use

[[Page 32000]]

the compensatory methodology. The essence of the compensatory
methodology is that fees to aeronautical users reflect the costs of
serving them with no cross-crediting of nonaeronautical profits or
losses.
Moreover, it would be unfair to require airport proprietors to
share nonaeronautical profits with aeronautical users, if we did not
also require aeronautical users to share nonaeronautical losses with
airport proprietors. The aeronautical users requesting cross-crediting
have not indicated that they are willing to accept such a requirement.
More importantly, they have not identified a legal basis for imposing
cross-crediting.
By authorizing the residual methodology, section 47129(a)(2) does
not authorize unilateral increases in aeronautical charges to cover
nonaeronautical losses. The Department is not aware of any airport
proprietor who, at the time of enactment, charged aeronautical users to
cover aeronautical losses without the aeronautical users' agreement to
do so. No airport proprietor has asserted a unilateral right to do so
in this proceeding docket.
Moreover, one of the fundamental concepts of reasonableness is that
users should not, without their consent, be burdened with paying for
facilities they do not benefit from or use. The law firm's proposal
clearly conflicts with this concept.

6. Rate of Return

The Supplemental Proposed Policy did not propose a separate rate of
return to be earned by public entities for airfield facilities and
public-use roadways. However, the Department recognized that permitting
airport proprietors to use any reasonable methodology to determine the
fees for other facilities (proposed para 2.6) might allow an airport
proprietor to earn a reasonable rate of return for those facilities.
The Department also proposed to allow private equity owners of airports
to earn a reasonable return on investment in airfield facilities and
public-use roadways. Proposed para. 2.4.
Airport proprietors: Airport proprietors argue that they are
entitled to earn a rate of return on investment in all facilities,
including the airfield. ACI/AAAE point out that public utilities are
compensated for forgoing the opportunity to charge market prices by
including a rate of return in their rates. The City of Los Angeles and
the Port Authority of New York and New Jersey (``PANYNJ'') argue that
the denial of a rate of return amounts to an unconstitutional taking of
property. The PANYNJ also argues that a rate of return is needed to
provide for accumulation of cash reserves for investment, to compensate
for the risks of those investments, and to meet cash-flow tests of bond
indentures.
Carriers: ATA/RAA did not specifically address this issue. IATA
prefers allowing airport proprietors a reasonable return on investment,
in lieu of an allowance for imputed interest and reasonable reserves.
General aviation: General aviation commenters did not address this
issue.
Other commenters: One individual argues that imputed interest is
the functional equivalent of a return on investment. This commenter
asks the Department to clarify whether a privately-owned airport may
include both imputed interest and a return on investment in the
airfield rate base.
The Final Policy: The Final Policy does not authorize a separate
rate of return for public airport owners. In addition, a new paragraph
2.4.1(a), prohibiting a private equity owner of an airport from
charging for both imputed interest and a rate of return on its equity
investment in the airfield, is added to the Final Policy.
The Final Policy allows public airport proprietors to include an
imputed interest charge in fees for the airfield and public-use
roadways. Therefore, a separate return on investment is not justified,
and would run counter to traditional concepts of reasonableness. As
discussed below under ``Application of HCA Requirement to Airfield and
Public Use Roadways,'' the imputed interest charge compensates the
airport proprietor for the opportunity costs of its investment in the
airfield. The imputed interest charge, therefore, serves the function
of a return on investment. In addition, as discussed below, a state or
municipal airport proprietor does not have the same entitlement to a
return on investment under the Constitution as a private investor.
The Final Policy follows the approach of the Supplemental Proposed
Policy for publicly-owned airports. Proprietors of publicly-owned
airports may charge imputed interest on their airfield investments in
accordance with the Final Policy. However, allowing an airport
proprietor to include an imputed interest charge and a return on
investment in its rates could allow for a double recovery of the
airport proprietor's capital costs. Therefore, proprietors of publicly-
owned airports may not charge an additional rate of return on
investment.
Private equity owners may include a reasonable return on equity
investment. Para 2.4. However, under new paragraph 2.4.1, they may not
include an imputed interest charge on this investment as well. This new
provision is intended to avoid possible double recovery of capital
costs by a private equity owner.
In light of other provisions in the Final Policy, the Department
does not agree with the PANYNJ's claim that a separate allowance for a
return on investment is needed to provide for accumulation of reserves
to fund capital projects or to meet cash-flow requirements in financing
agreements. The imputed interest charge will provide cash flow for
these purposes, and the Final Policy allows the airport proprietor to
impose reasonable charges to met cash-flow requirements in financing
agreements. Para. 2.4.4.

7. Imputed Interest

The Supplemental Proposed Policy proposed to allow the airport
proprietor to charge imputed interest, at a reasonable rate, on funds
invested in the airfield, with two exceptions. First, imputed interest
could not be charged on funds obtained by debt-financing, if the debt-
service costs are included in the rate base. Second, imputed interest
could not be charged on funds generated by fees charged for the use of
airfield assets and airfield services. The Supplemental Proposed Policy
did not propose a specific imputed interest rate. Proposed para. 2.4.1.
Airport proprietors: With one exception, airport proprietors argued
that imputed interest should be allowed on all internally generated
funds invested in the airfield, including funds derived from airfield
revenues. ACI/AAAE and many individual airports argue that the proposed
limitation will encourage airport proprietors to borrow funds for
airfield investment, rather than use internally generated funds.
Borrowing may be the most expensive way to obtain financing. One
airport proprietor asserts that the Supplemental Proposed Policy is
inconsistent with its own long-standing practice, and it argues that
the distinction is arbitrary.
In addition, one airport proprietor noted that the Department's
approach could be troublesome due to the difficulty of tracing the
source of internal funds invested in the airfield. This airport
proprietor noted that requiring airport proprietors to trace the source
of funds would make them unable, as a practical matter, to charge
imputed interest whenever funds could not be traced.
Carriers: Carrier commenters generally object to allowing airport
proprietors to charge imputed interest

[[Page 32001]]

on any investment made with surplus aeronautical revenues. ATA/RAA
argue that the imputed interest allowance serves only to permit the
accumulation of excess revenues. According to ATA/RAA and USAir, the
Supplemental Proposed Policy would allow airport proprietors to force
carriers to first invest in the airport (by paying fees in excess of
costs) and then to pay interest on that forced investment through the
imputed interest charge. ATA/RAA argue that the U.S. Government
strenuously objected to this practice when it was attempted at Heathrow
Airport. ATA/RAA further argue that public airport operators (state or
city governments or authorities) do not have the same profit motives as
private businesses. Therefore, they do not need the financial incentive
of imputed interest to trigger investments in the airfield.
IATA also argues that an imputed interest charge serves only to
generate surplus aeronautical revenues. Elsewhere in its comments,
however, IATA supports allowing airport proprietors to earn a
reasonable rate of return on investment.
ATA/RAA and IATA also argue that if imputed interest is allowed,
the Department should provide guidelines for the computation of
interest. ATA supports use of an airport's bond interest investment
rate based on the following reasoning. Interest rates are in part
determined by the risk of the investment, and investments that are
riskier than airport capital projects might generate higher interest
rates. However, by law, public airport proprietors must apply airport
revenue to the capital or operating costs of the airport. Given this
legal limit on the airport proprietor's investment options, the airport
proprietor should not be able to claim a higher imputed interest rate
base on alternative investments that are theoretically available.
General aviation: General aviation commenters did not address this
issue.
Other commenters: One individual commenter suggests that imputed
interest is in practical terms the same as a profit or payment for lost
income. The commenter argues that lost income is not a cost. This
commenter also suggests that the imputed interest charge is a device
for airports to circumvent the prohibition on charging depreciation for
Federally-financed assets.
The Final Policy: The Department is adopting the provision of the
Supplemental Proposed Policy, as proposed. The Department's approach
strikes a reasonable balance between legitimate concerns of airport
users, on the one hand, and airport proprietors, on the other.
Airport proprietors do have discretion to choose where on the
airport to invest surpluses generated by aeronautical fees, as well as
nonaeronautical fees. In choosing between two investment options,
airport proprietors have an incentive to select the option that
provides more revenue for reinvestment in the airport. Barring an
imputed interest charge on all funds invested in the airfield would
encourage airport proprietors to invest elsewhere on the airport, and
would thereby defeat the Department's long-range objective of assuring
adequate investment in airport airfield capacity.
However, the carriers' concerns have some justification. Under the
Final Policy, airfield fees potentially could generate revenues in
excess of an airport proprietor's cash needs. This excess may arise
from various sources: imputed interest charges; allowances for various
reserves; debt-service coverage charges; or simply financial
performance that exceeds the projections on which airfield fees are
based. There is merit to the carrier position that charging imputed
interest on funds derived from airfield revenues could require airfield
users to finance airfield investment twice: once in the form of the
excess revenue that their otherwise reasonable fees generate and once
in the form of the imputed interest charge on the investments made with
that revenue. For this reason, the policy does not permit airport
proprietors to charge imputed interest on funds that are attributable
to airfield operations.
However, the carriers' argument that airport proprietors may not
charge imputed interest on any investment in the airfield goes too far.
This argument would deny the airport proprietor any compensation for
the opportunity costs of its investment in the airfield.
The Department recognizes that disallowing imputed interest on sums
attributable to airfield fees may encourage airport proprietors to
invest elsewhere on the airport. However, the impact on choice of
investments should be less pronounced than disallowing all imputed
interest. The limit on imputed interest could also encourage bond
financing for airfield investment, but the limit would apply only in
the absence of an agreement to the contrary. If an airport proprietor
can persuade airfield users that charging imputed interest is less
costly than borrowing to finance airfield improvements, the airport
proprietor is free to impose an imputed interest charge by agreement.
The Department's approach to imputed interest is consistent with
the position taken by the U.S. government regarding airport fees at
Heathrow. In that dispute, the U.S. government did not object to
landing fees set to provide a reasonable rate of return on investment,
or to the application of that return to new capital projects. Rather,
the U.S. government objected to financing new capital development at
the London airports by: (1) directly including the full capital costs
of projects under construction in the rate base and (2) charging a rate
of return for those projects before they came on-line.
The Department will not provide further guidance on a reasonable
rate for assessing imputed interest at this time. In many cases, a rate
based on the airport proprietor's own interest rate on borrowed funds
may be reasonable. However, the airport proprietor's borrowed-fund rate
may be but one of a number of relevant factors in determining a
reasonable rate of interest. A policy that defines the borrowing rate
as the only reasonable rate would not allow for consideration of these
factors. In the event of a complaint, the Department would expect the
airport proprietor to justify the reasonableness of its imputed
interest rate. The Department would not accept an imputed interest rate
that is justified solely as a device to recover a depreciation charge
for the Federal share of grant-funded facilities.
As we noted in the explanatory statement to the Supplemental
Proposed Policy (60 FR 47013), under the Administrative Procedure Act,
a carrier complaining about charging imputed interest on funds
generated by airfield fees would bear the burden of proving the source
of funds. The airport proprietor need not trace the funds in order to
claim imputed interest. However, if the airport proprietor has data
available that would enable a complainant to trace the funds, that data
should be disclosed during the fee negotiations or during a proceeding
to resolve a fee dispute.

8. Limitation of Airfield Rates to Land and Facilities Currently in Use

The Supplemental Proposed Policy proposed that, absent agreement,
airport proprietors may include in the rate base all capital costs
associated with the provision of airfield facilities and services
currently in use and current costs of planning future aeronautical
facilities and services. Proposed para. 2.4. The Supplemental Proposed
Policy further proposed that the costs of facilities not yet built and
operating could not be included in the rate base. However, debt service
and carrying costs of an asset under construction

[[Page 32002]]

could be capitalized and amortized when the asset is put in service. In
addition the airport proprietor could include in the rate base the
costs of land that facilitates current operations of the airport.
Proposed para. 2.5.3.
Airport proprietors: Airport proprietors consider these provisions
unduly restrictive and inconsistent with the public interest. ACI/AAAE
comment that the prohibition on expensing interest payments during
construction is inconsistent with current practice of some airports. In
addition, ACI/AAAE and individual airport commenters argue that
applying the in-use provision to acquisition of land for future runway
development will encourage airport proprietors to delay land
acquisition as long as possible. This delay could drive up the cost and
reduce the availability of land as development encroaches on the
airport.
The City of Chicago points out that land for future development may
be funded with AIP grants under circumstances outlined in the FAA's
Airport Improvement Program (AIP) Handbook, FAA Order 5100.38A, Para.
603 (October, 1989). According to Chicago, Paragraph 603 demonstrates
that land acquisition for future development is appropriate in certain
circumstances.
The Port of Portland suggests that the currently-in-use language
may not reflect current industry practice for another reason. Portland
notes that at the request of the carriers, it is amortizing a terminal
upgrade at Portland International Airport for longer than the useful
life of the project to lessen the cost impact on carriers. Portland
requests that the policy permit this approach at the discretion of the
airport proprietor. This commenter also requests clarification on how
the term ``currently'' would be applied in different situations.
Airport Users: Airport users did not address this issue.
Other commenters: A law firm specializing in public debt-financing
asserts that many public airport proprietors are precluded by local law
from capitalizing interest during construction. Such entities would be
effectively precluded from financing new facilities, because the policy
would not permit the expensing of construction financing and interest.
This commenter recommends that the policy allow interest during
construction and the cost of land for future development to be included
in the rate base.
The Final Policy: The Department is modifying the Final Policy to
permit an airport proprietor to show, on an individual basis, that it
is reasonable to allow the costs of land acquired for future airfield
development to be included in the rate-base, if the conditions of FAA
Order 5100.38A are met, and if the airfield development is included in
the airport proprietor's currently effective five-year capital
improvement plan. The circumstances listed in FAA Order 5100.38A
include rising land costs, encroachment on available land by
incompatible uses, and the probable unavailability of land for airport
use in the future. The provision on construction interest is adopted
without modification. In addition, the Final Policy does not allow an
airport proprietor unilaterally to depreciate an asset for longer than
its projected useful life.
In addressing this subject, the Department must strike a balance
between conflicting concerns. On the one hand, when fees are based on
cost, it is generally unreasonable to charge users for facilities they
do not benefit from or use. Based on this principle, current users
generally should not be charged, as a cost item, the capital costs of
projects not yet in operation. Of course, this principle does not
preclude assessment of reasonable imputed interest charges just because
the proceeds of those charges might fund future capital projects. On
the other hand, the policy should not work a financial hardship on
airport proprietors or unduly interfere with cost-effective airport
expansion by precluding timely acquisition of property needed for
future airport development.
In addition, the restriction on charging for facilities not yet in
use is effectively limited to airfield facilities. Moreover, the
restriction does not apply in the case of agreements with airfield
users. If the airport proprietor can persuade airfield users that it is
less expensive in the long run to deviate from the Final Policy, the
airport proprietor is free to do so by agreement. Likewise if users
request a depreciation period that is longer than an asset's useful
life, the airport proprietor may agree to it. In these circumstances,
an additional modification to the policy is not warranted.
The comments on charging for future facilities address two distinct
issues. The first is the treatment of construction interest. As to
interest paid during construction, the Department is not modifying the
approach proposed in the Supplemental Proposed Policy. This approach is
commonly used in determining the reasonableness of rates, and permits
the airport proprietor to fully recover all construction interest
costs, once the facility is in use.
The comments have not persuaded us that this approach will cause a
substantial hardship in the industry. ACI/AAAE have not alleged that
the practice of expensing interest is wide-spread. Moreover, landing
fees at most airports are set by agreement. Under the terms of
Paragraph 2.4 of the Final Policy, construction interest may be
expensed if users have agreed. Similarly, the law firm comment
regarding legal restrictions on capitalizing interest does not state
that such local restrictions are wide-spread, and does not explain the
basis for them. It is not clear that local laws that prohibit the
capitalization of interest would permit the direct expensing of
interest, because direct expensing would be more burdensome to users.
Moreover, airport proprietors themselves have not raised legal
restrictions to capitalizing interest as a serious concern.
The second issue is the treatment of land acquired for future
development. On this issue, some modification to the Supplemental
Proposed Policy is in order. As the FAA has recognized in administering
the AIP program, when the factors specified in paragraph 603 of Order
5100.38A are present, it may be prudent to acquire and hold land for
future development. Moreover, there may be circumstances in which such
a land acquisition cannot be carried out if the costs are not included
in the current airfield rate-base. However, based on the standard of
reasonableness, the Department must be careful not to burden unduly
present users with the costs of land acquired for future development.
Therefore, the Department is modifying the final policy to permit an
airport proprietor to show that the inclusion of the costs of land
needed for future airfield development is reasonable, if the factors
specified in FAA Order 5100.38A are present, and if the airfield
development is included in the airport's currently effective five-year
capital investment program. The latter condition is intended to assure
that the land being acquired will actually be used for airfield
development. This condition should also increase the likelihood that
the airport users paying for the land will actually benefit from its
purchase. The Department would decide the reasonableness of charging
for the cost of land for future development on an individual basis. In
reviewing the reasonableness, the Department would consider, among
other factors, the feasibility and costs of alternative means of
financing the land acquisition.
The Department will not permit airport proprietors to depreciate an

[[Page 32003]]

airfield asset for longer than its useful life, absent user agreement.
Such a policy would force airfield users who never used or benefited
from the asset in question to pay for a share of its costs. As noted,
however, the airport proprietor may provide for a longer amortization
period by agreement with airfield users.
In addition, the Department does not consider further guidance on
the meaning of ``currently in use'' to be necessary at this time. The
meaning of the term should in ordinary circumstances be self-evident--
in use during the period when the charge is in effect. See, LAX II,
Order 95-12-33 at 50-51. There may be circumstances in which the
application of the phrase is not straight-forward, and the Department
will address those situations if they arise.

9. Allowance For Environmental Costs

The Supplemental Proposed Policy proposed that an airport
proprietor could include the costs of environmental mitigation and
remediation to the extent it incurs a corresponding actual expense.
Proposed para. 2.4.2. The Supplemental Proposed Policy also proposed
that the airport proprietor could charge for the costs of insuring
against future liability for environmental contamination. However, the
costs of self-insurance could be included in the rate-base only if
incurred pursuant to a self-insurance program that conforms to
applicable standards for self-insurance practices. Proposed para.
2.4.2(d).
The comments: One airport proprietor has requested that the
Department provide additional flexibility to charge for environmental
cleanup costs. It suggests that if an activity is expected to generate
predictable environmental cleanup costs, e.g., operation of a fuel tank
farm, today's airport users may be reasonably charged for those costs,
even if the cleanup occurs in the future.
Other commenters did not address this issue.
The Final Policy: The Department will not modify the provisions on
allowable environmental costs. The commenter's concern is already
addressed by the provision of the Final Policy governing reasonable
reserves.
If the use of the airfield today generates predictable
environmental remediation expenses in the future, the principle of cost
causation would allow, if not encourage, the airport proprietor to
charge today's users for those expenses. The policy need not be
modified to permit this result.
The policy already permits the airport proprietor to include in the
airfield rate base amounts needed to fund debt service and other
reserves and to fund reasonable cash reserves to protect against other
contingencies. Para. 2.4.4. This provision is sufficiently broad to
permit the funding of reserves for predictable costs of environmental
remediation caused by current operations. However, if an airport
proprietor establishes a reserve for this purpose, the Department would
expect the reserve to be separately identified. In reviewing the
reasonableness of the reserve, the Department would consider, inter
alia, whether the reserve applies to activities that industry
experience has shown generate future environmental remediation costs;
and whether the reserve reflects industry experience in costs of
remediation. Arbitrary reserves or reserves to fund unknown future
potential liability would not be acceptable. The latter would be
subject to the provision on self-insurance.

10. Debt-Service Coverage

The Supplemental Proposed Policy proposed that the airport
proprietor could include in the rate base, inter alia, amounts ``needed
to fund debt service and other reserves and to meet cash flow
requirements as specified in financing agreements or covenants (for
facilities in use), including, but not limited to, debt-service
coverage.'' Proposed para. 2.4.4.
In the LAX II proceeding, the parties disputed the meaning of the
term ``needed'' as it appeared in the Interim Policy. Airport parties
argued that the coverage was ``needed'' if financing agreements
included a debt-service coverage requirement and if the airport was
seeking to recover a share of coverage reflecting the airfield's pro
rata share of outstanding debt. Carriers argued that no coverage charge
would be ``needed'' if the airport's net cash revenues from nonairfield
sources were large enough to satisfy the airport's coverage obligation.
Comments on the Supplemental Proposed Policy were due before the
Department addressed this issue in the final decision in the LAX II
proceeding. Order 95-12-33 (December 22, 1995).
The comments: In this proceeding, several airport proprietors, but
no airlines, filed comments on the issue. The Massachusetts Port
Authority (``Massport'') argues that debt-service coverage should be
permitted in the rate base in proportion to the allowable debt service
for the airfield, regardless of whether an agreement governing airfield
fees exists. Massport has adopted compensatory rates by resolution, not
by agreement. Massport, Los Angeles and the City of San Francisco argue
that the carrier position in LAX II--that coverage is not a cost and
therefore cannot be included in the rate base absent agreement--is
inconsistent with the terms of proposed paragraph 2.4.4 and with the
Department's explanatory statement. Massport argues that the Department
clearly signaled its intention that debt-service coverage could be
included in the rate base even though it is not a cost in the
traditional accounting sense.
Massport, Los Angeles and San Francisco also dispute the carrier
position that debt-service coverage is needed only if revenues from
other sources are insufficient to meet coverage requirements. These
commenters argue that this approach amounts to mandatory residual
treatment of debt-service coverage; therefore this approach is
inconsistent with the airport proprietor's right to adopt a
compensatory fee methodology. Massport argues that by using the term
``needed,'' the Department sought to tie the amount of debt-service
coverage allowed in the rate base to the terms of applicable bond
documents.
Massport further argues that compensatory airports should not be
compelled to give a refund or credit to carriers for debt-service
coverage, but should be permitted to use the coverage for any lawful
purpose. Massport argues that under the terms of its Trust Agreement,
Massport devotes the debt-service coverage charge to its Improvement
and Extension fund, which finances the costs of airfield improvements.
Los Angeles also argues that many airports that include debt-
service coverage in the rate base retain the coverage funds for
discretionary purposes.
Other commenters did not address this issue.
The Final Policy: The Department is modifying paragraph 2.4.4 so
that it allows airport proprietors to include amounts reasonably needed
to meet debt-service coverage requirements. We are not changing the
proposed policy on debt-related charges insofar as it allows airports
to include charges for debt-service expense.
We are modifying the provision on debt-service coverage charges to
address the ambiguity created by the provision of the Interim Policy
(which was not resolved in the Supplemental Proposed Policy) and to
clarify the Department's position on such charges. When the Department
considers charges for debt-service coverage, the Department will not
limit its inquiry to determining whether the charge is limited to the
airfield's pro rata share of the airport's

[[Page 32004]]

overall debt-service coverage requirement. The Department instead will
consider a number of factors.
Debt-service coverage is different from debt-service expense, an
airport capital cost. Debt-service expense refers to the payment of
interest and financing charges and the repayment of principal. Debt-
service coverage, in contrast, is a cash flow requirement, not an
expense.
Airport bonds typically require that the airport's net cash
receipts exceed its debt-service expense by 25 to 50 percent, at a
minimum. Many airports include charges for debt-service coverage in
their landing fee calculations. However, as shown by the record in LAX
II, their use of funds generated by debt-service coverage is almost
always subject to substantial restrictions. Typically the airport must
refund (or roll over) the funds obtained under the coverage charge if
they were not needed during the year for which they were paid, or the
airport proprietor must use the funds for capital projects benefiting
the airlines. See, LAX II, Order 95-12-33 at 45. Not all airports
impose such a charge. For example, the landing fees charged at LAX from
July 1993 through June 1995 included no debt-service coverage charge.
See Order 95-12-33 at 42.
Airlines have not objected to charges for debt-service expense, but
the airline complainants in LAX II objected to Los Angeles' charge for
debt-service coverage, as outlined above.
We are modifying the provision on debt-service coverage charges to
permit reasonable amounts needed to meet debt-service coverage
requirements, with due regard to the characteristic of a bond coverage
requirement as a minimum requirement that must be met or exceeded at
all times. In future airport fee cases involving a charge for debt-
service coverage, we will determine whether the charge is permissible
on the basis of the facts in the case. In considering the
reasonableness of such a charge, the Department may consider a number
of factors. For example, in LAX II, the Department found that Los
Angeles' debt-service coverage charge was unreasonable since the record
showed that the airfield's net cash revenues greatly exceeded the
airfield's share of the airport's debt-service coverage obligation.
Given that evidence, the Department did not have to address the
airlines' claim that the charge was unreasonable because the airport's
overall net cash revenues would satisfy the airport's coverage
obligation without the inclusion of an additional charge in the landing
fee rate base.
Another factor likely to be considered will be whether carriers
using the airport receive any benefit from a debt-service coverage
charge. For example, the airport may show that the inclusion of the
charge improves the airport's credit rating and therefore reduces the
airport's overall debt expense. The airport proprietor might show,
instead, that the restrictions on the airport's use of the funds may
ensure that the funds are used only for projects benefiting the
airlines. An airport proprietor's commitment to refund or roll over
unneeded funds in the year following payment also would be relevant to
determining the reasonableness of the charge.
We are unwilling in this proceeding to adopt more specific
standards for determining the reasonableness of a debt-service coverage
charge, in part because the comments do not give us an adequate basis
for resolving the issue. The Department will therefore resolve the
airports' ability to impose a debt-service coverage charge on a case by
case basis. The decision will be governed by whether the particular
charge challenged is reasonable.

11. Allowance For Reasonable Reserves, Definition of Reasonable

The Supplemental Proposed Policy proposed that the airport
proprietor may include in the rate base ``reasonable cash reserves'' to
protect against contingencies other than those listed in the policy.
Proposed para. 2.4.4. The Department did not propose to further define
reasonable reserves.
The comments: ATA/RAA do not object to reasonable reserves for
short term fluctuation in revenues or for other emergencies. They are
concerned that, without more detailed guidance, airport proprietors
will be able to establish reserves well in excess of actual needs. ATA/
RAA suggest that the policy allow reserves of no more than one month's
average revenue, unless the users agree to a higher reserve or the
airport proprietor shows that special circumstances justify one.
IATA opposes the allowance of a reserve as a separate cost item. It
urges the Department to limit fees to the airport's total costs plus
``a reasonable return on assets (before tax and interest charges) to
contribute toward necessary capital improvements,'' based on ICAO Doc.
9082/4, pp. 3-4.
Other commenters did not address this issue.
The Final Policy: The Department is adopting the provision of the
Supplemental Proposed Policy without modification.
The Department is not persuaded that a more specific definition for
reasonable reserves is needed or appropriate for national application.
The requirement that reserves be reasonable is intended to prevent
arbitrary requirements. The Department would expect the airport
proprietor to be able to justify its decision on reserve requirements
if a dispute arose.
However, defining a reasonable reserve requirement for any
particular airport depends largely on the financial and operating
circumstances of the airport at the time the airport proprietor
establishes the reserve. A uniform definition for reasonable reserves
would unduly limit both the airport proprietor's flexibility to tailor
its reserve requirements to meet those circumstances and the
Department's flexibility to consider those circumstances in reviewing a
fee.

12. Allocation of Shared Costs

The Supplemental Proposed Policy proposed that capital costs of
facilities used by aeronautical and nonaeronautical users could be
allocated to those aeronautical users who use the shared facility in a
proportion that reflects the aeronautical purpose and proportionate
aeronautical use. Proposed para. 2.4.5(b). Roadways would also be
subject to the HCA valuation requirement. Proposed Para. 2.5.1(b).
Airport Proprietors: ACI/AAAE request clarification that
notwithstanding the valuation requirement for public-use roadways, the
Department is not mandating a particular cost allocation formula for
determining the aeronautical portion of roadway costs.
The City of Chicago expresses concern that an allocation based
strictly on use could be difficult to implement for some airports and
could be burdensome. The City of Chicago urges the Department to modify
the policy to explicitly provide more flexibility in cost allocation or
to at least interpret the existing provisions of the policy as flexibly
as we did in the LAX I decision.
Airport users: Airport users did not address this issue.
Other commenters: One individual suggested that, to minimize the
risk that airports are improperly allocating costs to the airfield cost
center, the Department should establish criteria for defining cost
centers. This commenter suggests that the Final Policy require that any
facility that generates revenue be defined as a cost center. In
addition, the policy should require that if the facilities generate
substantial revenue by direct charges, the full costs should be

[[Page 32005]]

covered by those charges. Under this approach, roadway costs would be
assigned to a landside access cost center apart from the terminal.
Further, the costs in this cost center would be recovered entirely from
parking garages and lots, rental car companies and commercial
limousine, van and taxi operators.
The Final Policy: The Department is not modifying the provisions of
the Supplemental Proposed Policy in response to the comments. However,
consistent with the decision in LAX II, the Department is modifying the
provision to apply to allocation of costs of shared services as well as
shared facilities.
The Supplemental Proposed Policy did not propose allocation of
shared capital costs based strictly on use. Rather, it proposed
consideration of both purpose and proportionate use of the shared
facility. This provision of the Supplemental Proposed Policy is being
adopted as proposed. The Department determined in LAX II that the
possible difficulty of quantifying purpose is not a reason to allocate
shared costs based solely on use. LAX II, Order 95-12-33 at 24.
Accordingly, no change in the Final Policy is needed to accommodate
Chicago's concern.
In reviewing the reasonableness of an allocation, the Department
would consider, among other things, whether the allocation had a
rational basis and was supported by factual evidence in the record. In
addition, the Department would not preclude an airport proprietor from
using a reasonable method of allocation just because another method
might produce a more precise result. Id. at 33.
We will not adopt the suggestion of the commenter that airport
proprietors be required to adopt a separate landside access cost
center, which is not funded at all by charges to the aeronautical
users. The airport proprietor has discretion in defining cost centers
other than the airfield, so long as its cost allocations are
reasonable, transparent and not unjustly discriminatory.
Furthermore, the Department specifically determined, in LAX I, that
an airport proprietor may allocate a portion of access road costs to
the airfield. Order 95-6-36 at 31. As the Department found in LAX I,
carriers, other aeronautical businesses and their customers use (or
benefit from) terminal area access roadways. Id. Airport proprietors
may reasonably allocate a share of roadway costs to the carriers and
other aeronautical users. The commenter's proposal would not assure
that all passengers who use the roadways are charged for that use--
directly or through the charges they pay to commercial enterprises.
Many passengers are dropped off by private vehicles that pay no charge
for the using the roadways.
In addition, given the Department's reliance on local
decisionmaking, the Department is not prepared to dictate how shared
roadway costs are allocated to the carriers, so long as the basic
requirements of the policy are met. The share allocated to aeronautical
use must reflect the purpose and proportionate use of the facility, and
the allocation methodology must be reasonable, transparent and not
unjustly discriminatory.
Finally, the Supplemental Proposed Policy was silent on the
treatment of the costs of shared services. As a result of the
deliberations in LAX II, the Department has concluded that there is no
reason to treat these costs differently than the costs of shared
facilities. Therefore, the applicable provisions of the Final Policy
are being modified to apply to services and facilities.

13. Asset Valuation, Limiting HCA Valuation to Airfield and Eliminating
the Aeronautical HCA Cost Cap

The Interim Policy required that airport assets included in the
aeronautical rate base be valued at historic cost to the original owner
(``HCA value''), absent agreement to the contrary. Para. 2.4.1.
However, the Interim Policy further provided that, for facilities other
than airfield and all airport land employed in providing aeronautical
use, other reasonable valuation methods could be used, so long as total
aeronautical revenues do not exceed total aeronautical costs, based on
HCA accounting. Para. 2.4.1(a).
The Supplemental Proposed Policy proposed to limit the HCA
requirement to airfield assets and public use roadways, and to
eliminate the HCA cost cap for total aeronautical revenues. Proposed
para. 2.5.1. For other aeronautical assets, the Supplemental Proposed
Policy would permit the airport proprietor to use any reasonable
methodology to establish fees, so long as the methodology is applied on
a consistent basis to comparable facilities and is justified. Proposed
para. 2.6.1. However, the Department proposed that the progressive
accumulation of substantial amounts of surplus aeronautical revenue may
warrant an FAA inquiry into whether aeronautical fees are consistent
with the airport proprietor's obligations to make the airport available
on fair and reasonable terms. Proposed para. 4.2.1.
Airport proprietors: Airport proprietors support the proposed
modifications. Among other reasons, these commenters assert that the
change would eliminate concerns regarding valuation of tenant-built
facilities that revert to the airport proprietor. Further, this
proposed modification will address a number of additional concerns of
ACI/AAAE, including the following: inconsistency between HCA valuation
of nonairfield facilities, on the one hand, and industry practices and
local laws and regulations, on the other; potential windfalls for
airport tenants that sublease aeronautical facilities; higher landing
fees paid by signatory airlines at some residual airports; and
inconsistency of the HCA cost cap with the requirement that airports be
as self-sustaining as possible, as interpreted by the Office of
Inspector General (``OIG'').
Airport proprietors further assert that application of the HCA cap
to general aviation airports would be particularly burdensome, as those
airports as a class have limited nonaeronautical revenue streams.
Airport commenters dispute the carrier claims that terminal
facilities should be treated like the airfield because airport
proprietors possess market power. ACI/AAAE note that they accepted HCA
valuation for airfield facilities reluctantly because the policy would
not disrupt existing practices. Airport proprietors point out that
terminal facilities are typically leased on preferential or exclusive
use basis. They argue that the facilities are, therefore, more
analogous to hangars and cargo facilities than to public use airfields.
They further argue that airports compete with each other for
designation as international gateways and as airline hub locations and
for origin and destination (``O&D'') traffic. The airport proprietors
note that initiation of low-fare service at a given airport can draw
O&D passengers from other airports in the region.
ACI/AAAE assert that recent increases in airport charges to
carriers do not show airport market power and do not show that airport
proprietors lack incentives to manage airports efficiently. Factors
contributing to increases include the following: compliance with
federal mandates and noise mitigation projects; expansion necessitated
by increases in passenger activity and airline hubs; replacement of
passenger terminals constructed 30-45 years ago; and construction and
financing by airport proprietors of airport facilities that had been
financed previously by the airlines directly. As evidence that airports
face real-world pressures to reduce airline costs, one airport
proprietor points to its decision to refinance airport revenue bonds to

[[Page 32006]]

reduce debt-service expense and thereby reduce airline rates and
charges.
Another airport proprietor argues that elimination of the HCA cap
will facilitate using price to allocate scarce resources efficiently.
Finally, one airport proprietor suggests that, if the HCA valuation
requirement is limited to the airfield and public use roadways,
references in paragraphs 2.3, 2.4.1, 2.4.2, 2.4.4, 2.4.5, 2.5, 2.5.1,
2.5.3 and 2.7 should be changed to ``airfield/public use roadway rate
base.''
Carriers: Carriers argue that the Interim Policy's provisions
governing asset valuation are needed to protect against the
exploitation of locational monopoly power by airport proprietors in
pricing ``essential facilities.'' Essential facilities are not limited
to the airfield and include facilities for baggage, cargo and passenger
handling. ATA/RAA contend that airport proprietors exercise monopoly
power in pricing airport facilities in addition to the airfield,
because of the airports' locational advantages and the barriers to
entry of new competitive airports. In addition, ATA/RAA contend that
carriers' investments in airport facilities often preclude them from
relocating when an airport proprietor imposes excessive fees. ATA/RAA
point to dramatic increases in fees at Los Angeles, Orlando, El Paso
and Allentown as evidence of the existing monopoly power of airports.
Carriers argue that, without clear guidelines providing a
foundation for negotiations, the policy will not promote direct
resolution of disputes. In addition, it will be difficult for airport
users to justify the burden of analyzing the airport's cost and revenue
calculation to prepare a legal challenge to nonairfield fees.
The past absence of complaints over fees does not provide a basis
for relying on effective competition, according to ATA/RAA. They argue
that, in the past, negotiations were successful because there was a
balance of power between airport proprietors and airport users. Airport
proprietors needed airport user support for their financial bond
issues. Airport users needed airport proprietors' cooperation to
develop needed airport facilities. That balance has been disturbed at
many airports, which can successfully issue bonds without carrier
support. In addition, the claimed airport monopoly power was
constrained by a number of other factors, including: common use of HCA
valuation and residual agreements; and the expectations of airlines and
airports that fee disputes would be resolved in Federal court.
The carriers argue that the threat of investigation of sustained
accumulation of aeronautical surpluses will not curtail abuse of
monopoly power. Rather, the policy would encourage airports to
overallocate costs to aeronautical cost centers other than the airfield
so as to show break-even in accounting terms. This problem is
compounded by the lack of record-keeping requirements. ATA/RAA are
particularly concerned that airport proprietors will overallocate the
costs of municipal services provided to the airport. IATA argues that
the Department's decision to retain authority to investigate an
accumulation of aeronautical surpluses is an implicit admission that
reliance on negotiation and effective competition is doomed to fail.
The carriers also argue that the Interim Policy properly balances
the interests of airport users and airport proprietors. The carriers
assert that the overall cap on aeronautical revenues based on HCA costs
protects carriers from abuse of monopoly power. Within the overall cap,
the Interim Policy provides ample flexibility to airport proprietors to
price individual facilities.
ATA/RAA also argue that the concerns expressed by ACI/AAAE in their
earlier comments on the Interim Policy are misplaced. ATA/RAA argue
that, if the HCA requirement is inconsistent with a state or local law,
the state or local law is preempted. USAir asserts that airports may
prevent airport tenants from earning windfalls by exercising their
rights to approve subleases. USAir is also prepared to assume the risk,
as a signatory carrier, that, under a residual system, it would be
required to pay higher fees under the Interim Policy than non-
signatories.
ATA/RAA also assert that the Supplemental Proposed Policy will
permit airport proprietors to generate surplus revenues from
aeronautical activities. To the extent that the surpluses are used for
capital investment, current users would be required to pay for future
capital assets, in contravention of the policy and the position of the
U.S. government in the dispute with the United Kingdom over Heathrow
airport user fees. The carriers also argue that the prohibition on
diversion of airport revenue is not sufficient to prevent unjustified
accumulation of surplus airport revenues. ATA/RAA point to the findings
of a Congressional investigation that airport revenue diversion is
wide-spread and that airport proprietors increasingly view financially
successful airports as a potential source of funds to alleviate general
budgetary shortfalls.
IATA also argues that the Supplemental Proposed Policy would be
inconsistent with the ICAO policy that all airport charges are to be
set in relation to the costs of facilities and services provided,
citing ICAO Doc. 9082/4. As IATA points out, the ICAO guidelines permit
the airport proprietor to earn a reasonable return. IATA argues that
the approach of the Supplemental Proposed Policy to pricing of
nonairfield assets will permit airport owners to establish fees
according to arbitrary and unreasonable standards.
General Aviation: While the NATA does not recommend that the
Department establish accepted charging practices for facilities leased
by aviation businesses, the NATA disagrees with the Department's
assertion that disputes over charges for nonairfield assets focus on
unjust discrimination. For the NATA members negotiating leases, the
level of their fees, rather than unjust discrimination, is the area of
disagreement. Therefore, the NATA recommends that proposed paragraph
2.6 be expanded to outline areas for consideration in establishing
fees. The NATA acknowledges that each negotiation presents unique
circumstances. However, the NATA suggests that the Final Policy
identify as relevant the following considerations: physical variables
of the airport and leasehold; functional variables of the airport and
leasehold; and economic variables of the area served by the airport.
The AOPA asserts that the Interim Policy balanced the needs of
airport operators and users. It argues that the approach of the
Supplemental Proposed Policy could lead to unreasonable fees. The AOPA
is not persuaded that effective competition exists for nonairfield
aeronautical assets. Further, neither possible investigation of
accumulation of aeronautical surpluses, nor the limitations on use of
airport revenue adequately protect against excessive fees.
Other commenters: Two individual commenters object to limiting the
HCA requirement to the airfield. They argue that doing so will allow
airports to generate substantial surpluses.
The Final Policy: The Department is following the approach of the
Supplemental Proposed Policy on this issue. However, we are adding a
provision specifying that, if an airport proprietor bases nonairfield
fees on cost, the airport proprietor must follow the policy guidance on
allocation of shared costs (Paragraph 2.4.5). This addition will assure
that, when a cost-based methodology is employed, shared costs will be
treated consistently across all

[[Page 32007]]

cost centers. In addition, we are modifying proposed paragraph 3.1.1
governing allocation of costs among users and user groups to conform to
the Final Policy's approach to nonairfield fees.
The approach of the Final Policy is justified by differences
between airfield assets and public-use roadways, on the one hand, and
other aeronautical assets, including passenger terminals, on the other.
The airfield and the public-use roadways are common use facilities, and
their use is more or less fungible. Generally speaking no single user
derives more or less benefit from a particular use. To the extent that
this general principal does not hold true during peak times at
congested airports, the Final Policy allows for reasonable and not
unjustly discriminatory peak-pricing systems. Otherwise, a detailed,
cost-based definition of reasonableness is appropriate for such
fungible assets and would not disturb industry practices or prevent
airport proprietors from allocating resources efficiently.
In contrast, other facilities are generally leased on an exclusive
or preferential use basis. In addition, such facilities, including
terminals, are much less fungible. For example, carriers typically take
responsibility for outfitting their passenger terminal areas and can
reasonably be expected to view that responsibility as an opportunity
for promotion. The value of gates to carriers may depend in part on
their location in the terminal or the intensity of their use. Other
non-terminal facilities may be perceived by users to have different
values based on a variety of factors, including the following:
proximity to runways and taxiways; source of construction financing;
ownership of improvements at the end of lease terms; and expected use
of facilities, including rights to exclusive or preferential use. A
requirement that revenues from these facilities not exceed an amount
determined by a cost-based formula could prevent these differences from
being fully recognized in establishing fees. A policy that gives
preeminence to the free play of negotiation and exchange of benefits to
assure that fees for nonairfield facilities are reasonable would permit
these differences to be fully recognized and would continue current
industry practices. Accordingly, the latter approach is preferable.
The record contains numerous examples of nonairfield fees set on a
basis other than HCA valuation. For example, in the public meeting on
the Supplemental Proposed Policy held in Washington, DC, all of the
airport proprietors testified that they use methods other than HCA
valuation for at least some nonairfield facilities. Supplemental
Proposed Policy Regarding Airport Rates and Charges, Public Meeting
(October 17, 1995), (``October 17 Public Meeting'') Transcript pp. 31-
33, 36-37, 39, 79-80, 81. Further, in their comments on the Interim
Policy, ACI/AAAE reported that some airports establish fees for leased
property by competitive bid or solicitation, often by operation of
state law. Comments of ACI and AAAE in response to the Policy Regarding
Airport Rates and Charges, Docket No. 27782 (``ACI/AAAE May 4
Comments'') at 6 (May 4, 1995). Their comments also provided other
examples of nonairfield facilities that are priced on some other basis
than HCA valuation. Id. 12-13. The limited evidence to the contrary
offered by the carriers is insufficient to overcome that offered by the
airport proprietors. See, October 17 Public Meeting Tr., pp. 77-78.
Thus the record demonstrates that requiring HCA valuation for all
aeronautical facilities would substantially disrupt current practices
that have not been the subject of complaints.
The Interim Policy was intended to preserve that flexibility for
establishing rates for nonairfield facilities. Our experience under the
Interim Policy, however suggests that the Interim Policy had altered
the status quo. For example, in their comments on the Interim Policy,
ACI/AAAE reported instances in which airlines informed an airport
proprietor that the maximum rental payments it could require must be
based on historic costs. ACI/AAAE May 4 Comments at 24-25. In one case,
a carrier had agreed to a new hangar lease at rates exceeding HCA rates
but then refused to execute the agreement following publication of the
Interim Policy. An airport proprietor also testified to concerns that
HCA valuation would be used as the starting point for all negotiations
under the Interim Policy. Supplemental Proposed Policy Regarding
Airport Rates and Charges, Public Meeting (September 20 1995),
(``September 20 Public Meeting'') Docket No. 27782, Transcript at 23-
25.
The carriers' claims that airport proprietors exercise monopoly
power in pricing essential aeronautical facilities are not supported by
the Department's experience. Many U.S. carriers have benefited from
airports' competition with each other to be the location of
aeronautical facilities, including facilities for passenger and cargo
hubs. Moreover, as ATA/RAA themselves argue, in their objections to the
treatment of imputed interest, publicly-owned airports do not operate
under the same profit motive as private investors. Public airports are
operated, for the most part, as public facilities to serve the public
good by enhancing local access to the national air transportation
system. Airport proprietors generally seek to improve air services for
their communities. This objective would be frustrated by charging
exorbitant fees for aeronautical facilities. There may be isolated
exceptions to this general rule. However, the Department is not
prepared to require the vast majority of airports to change their
methods of doing business to address the extraordinary situation. In
the extraordinary situation, the Department would consider airline
complaints concerning significant disputes through an expedited
administrative procedure (14 CFR Part 302). Other cases would be
processed under the FAA's investigative and enforcement procedures (14
CFR Part 13).
The Supplemental Proposed Policy did not propose to permit every
method for establishing fees for nonairfield assets, but only any
reasonable method. Users are still free to demonstrate that in the
circumstances of a particular airport, a particular method is
unreasonable. For example, users may demonstrate that the method is not
justified in the circumstances or applied on a consistent basis.
As we noted in publishing the Supplemental Proposed Policy, our
decision to take a flexible approach to the pricing of nonairfield
facilities is based in part on the relative lack of disputes between
carriers and airport proprietors over the reasonableness of fees for
such facilities, even those deemed essential by the carriers. The
widespread acceptance of these industry practices indicates their
reasonableness and general fairness. By relying on industry practices
in formulating our policy, the Department is fulfilling the Supreme
Court's expectation that the Department would in large measure base its
standards for reasonable airport fees on the relevant facts and
circumstances of the industry. Kent County, 114 S.Ct. at 863, 864 n.
14. We are not persuaded by carriers' arguments that this experience is
unreliable.
First, while residual agreements have been common in the industry,
so were compensatory agreements. A 1984 Congressional Budget Office
study reported that 42 percent of large hub airports (10 out of 24) and
42 percent of medium hub airports employed a compensatory approach to
rate-setting. Financing U.S. Airports in the 1980s, Congressional
Budget Office (April 1984). The Kent County litigation stemmed in part
from the airport proprietor's decision to continue its

[[Page 32008]]

historic compensatory approach to landing fees.
Second, based on the comments and testimony in this docket, airport
proprietors commonly use methods other than HCA valuation to establish
fees for passenger terminal, cargo handling and other ``essential''
nonairfield facilities, as discussed above.
Third, the examples of airport bond financing cited by the carriers
do not show that airport proprietors are readily able to obtain debt-
financing for nonairfield facilities without carrier agreement. Denver
International Airport involved construction of an entire airport in
conjunction with the closure of Denver's then existing air carrier
airport. Moreover, Denver was unable to maintain investment grade
status for the bonds. The Grand Rapids experience involved bond
financing for a new runway. Under the Final Policy, runways must be
priced based on HCA valuation, absent agreement by the users.
Likewise, the examples of airports that have dramatically raised
fees cited by the carriers (Los Angeles, El Paso and Allentown) do not
support the claim that airport proprietors exercise market power in
establishing fees for nonairfield facilities. First, all three examples
involved landing fees, which remain subject to the HCA valuation
requirement and detailed guidance of the policy. Second, the conversion
from residual to compensatory methodology accounts for much of the
increase at two of the airports (Los Angeles and El Paso). ATA/RAA's
other example, Orlando, has not yet established new fees. ATA/RAA
relies on a projection of what Orlando might do when existing
agreements lapse. Moreover, it assumes that the airport will convert
from a residual to a compensatory methodology. October 17 Public
Meeting Transcript at 38. The selection of either methodology has been
deemed reasonable by Congress through enactment of section 47129(a)(2).
Finally, the Department is not convinced that the threat of
judicial review of fees for nonairfield facilities was a significant
factor in preventing excessive charges. Relatively few airline/airport
disputes over airport fees have been resolved by litigation. Of those
few, only one or two did not involve charges for use of the airfield.
In these circumstances, it is doubtful that the threat of litigation
would have proved a significant deterrent to abuse of monopoly power,
assuming that power existed.
We have also concluded that, on balance, the approach of the
Interim Policy could have additional undesirable results outlined by
ACI/AAAE in their joint comments. For example, if market-based rates
exceed HCA-based rates, the Interim Policy would have allowed airlines
through their subleasing to enjoy the additional revenue, but would
have effectively precluded airport proprietors from earning that
additional revenue. Thus, that additional revenue would have been
unavailable for investment in the national airport system. At a time
when Federal resources for airport infrastructure investment are
severely strained, we are loathe to restrict unduly the ability of
airport proprietors to generate funds for such investment.
The Department agrees that the threat of a Department investigation
of accumulation of surplus aeronautical revenue by itself may not be a
perfect check against unreasonably high fees for nonairfield
facilities. However, we are not relying solely, or even primarily, on
this threat. Rather, in our experience, the market generally functions
to prevent excessive charges, and airport proprietors have not
routinely imposed unreasonably high fees for nonairfield, aeronautical
facilities. Moreover, the limitations on the use of airport revenue,
including the actions mandated by section 112 of the Reauthorization
Act, diminish one possible incentive to generate excessive surplus
aeronautical revenue--use of the surplus to fund general governmental
activities. At this time, we are not prepared to impose rigid industry-
wide pricing criteria for nonairfield facilities to address speculative
concerns about a few airports. In explicitly reserving our right to
investigate, the Department is signaling its intention to act in those
rare situations where intervention would be appropriate. Further, we
are signaling our intent to consider the reasonableness of nonairfield
fees over the long term and not on the basis of a single year's
results. We are, of course, prepared to revisit this issue if
experience shows that our approach is not effective in preventing
contention, controversy, and unreasonable practices in the pricing of
nonairfield aeronautical facilities.
For these reasons, we expect that pricing of nonairfield
aeronautical facilities and services under the Final Policy will
produce results consistent with the policy guidance that aeronautical
charges should not produce unreasonable returns.
The Final Policy merely allows airport proprietors to continue
current pricing practices that have not resulted in excessive charges.
Our policy on this issue is consistent with the position of the
U.S. government in the dispute over landing fees at Heathrow. In that
case, the U.S. government did not argue that the British Airports
Authority and (later) BAA plc were not entitled to earn any surplus.
Rather, the objections stemmed from circumstances that are unlikely to
arise in the United States.
The BAA establishes fees each year following consultation with the
users, but without their agreement. The BAA imposed separate landing
fees, aircraft parking charges and passenger terminal charges. During
the period in dispute, BAA had unilaterally increased its airport user
charges at Heathrow to finance on a pay-as-you-go basis substantial new
capital improvements at London's Heathrow and Gatwick airports. The BAA
had also sought to earn a rate of return on the funds invested in the
new projects during construction. Nothing in the Final Policy precludes
the Department from determining that an airport proprietor that is
financing on a pay-as-you-go basis significant new capital development
through unilaterally imposed terminal rents is charging unreasonably
high terminal fees. Rather, we are relying on the market mechanism and
negotiating process to prevent such an occurrence in the first
instance. Nothing in our experience with the US airport industry
indicates that a U.S. airport would be able to duplicate the BAA's
approach to charging for terminal facilities.
Likewise, the results of our approach to nonairfield assets is
consistent with ICAO guidelines. First, the Final Policy does not
permit fees to be established for these facilities by any method.
Rather, the method must be reasonable. In addition, we rely on market
discipline to assure that these fees, which are largely negotiated, are
reasonable, and do not result in the generation of excessive profits
(or rate of return). As IATA acknowledges elsewhere in its comments,
the ICAO guidelines permit an airport proprietor to earn a reasonable
return on its investment.
We do not agree with carrier arguments that our approach to
enforcing the prohibition on airport revenue diversion will provide
incentives to airport proprietors to charge excessive fees for
nonairfield facilities and services to obtain additional funds for
general municipal purposes. Our approach to nonairfield assets will not
undermine enforcement of the requirements on the use of airport
revenues. The Department is committed to ensuring that airport revenues
are

[[Page 32009]]

used for airport purposes, as required by law under 49 USC
Sec. 47107(b). Moreover, in section 112 of the FAA Authorization Act of
1994, codified at 49 U.S.C Sec. 47107(l), Congress added new
requirements relating to both legal and illegal diversion of airport
revenue in response to carrier concerns, as well as new sanctions for
violations of the revenue diversion prohibition. On February 20, 1996,
the FAA issued a Proposed Policy and Procedures Concerning the Use of
Airport Revenues, Docket 28472 (61, FR 71344, February 26, 1996). In
addition, on March 18, 1996, the FAA published formats for the
preparation and filing of two reports by airport sponsors. One report
would list amounts paid and services provided by the airport to other
units of government, as well as explanations for claims of lawful
diversion. The other report would detail the total revenue and
expenditures at each commercial airport, including revenue surplus.
These reports were required by section 111 of the 1994 Reauthorization
Act.
In addition, the statute prohibiting revenue diversion excludes
from the prohibitions certain arrangements that were in place when the
statute was enacted. Many instances of airport revenue diversion
identified in the Congressional Report cited by the carriers involved
``legal diversion'' under this statutory exception.
To date, our experience does not indicate that the statutory
provisions and FAA's actions in implementing them are ineffective in
assuring that airport revenue is used for lawful purposes. At this
time, concerns about airport revenue diversion do not justify
curtailing airport proprietors' customary flexibility to establish fees
for non airfield facilities.
We are not adopting the NATA's suggestion that additional guidance
be given for lease negotiations. As the NATA acknowledges, each lease
negotiation will involve unique considerations and circumstances. A
factor that is important in one negotiation may have no relevance in a
second. Moreover, the Department is committed to applying the Final
Policy to general aviation fees in a flexible way. By delineating
criteria to be considered in negotiating leases, the policy would
decrease, not increase, flexibility.
Finally, the Department has reviewed the detailed guidance under
Principle 2 and modified the provisions as appropriate to reflect the
narrowing of the requirement for HCA-based fees. Not all of the
paragraphs suggested by the commenter have been modified. In some cases
the unrevised paragraphs implement statutory requirements in addition
to the reasonable fee requirement.

14. Application of HCA Requirement to Airfield and Public Use Roadways

The Supplemental Proposed Policy proposed that airfield facilities,
airfield land and public-use roadways, be valued according to their
historic cost to the original airport proprietor, except by agreement
with users. Proposed para. 2.5.1. In addition, in proposed Paragraph
2.5.1(a), the Department proposed methods for charging for land
dedicated to the airfield and public use roadways (``airfield/roadway
land''). This provision is discussed separately below. The Department
also proposed to allow airport proprietors to charge more than a pro
rata share of airfield costs to particular users to encourage efficient
use of the airfield. Proposed Para. 2.5.1(b). This provision is also
discussed separately below.
Airport Proprietors: ACI/AAAE point out that their earlier
acceptance of HCA valuation for airfields was not based on analogy to
other industries, but based on their conclusion that vast majority of
members would not be greatly disadvantaged. ACI/AAAE do not accept the
carrier position that airports possess market power with respect to any
airport facilities. ACI/AAAE urge the Department to implement the HCA
valuation requirement flexibly, to permit direct resolution of
disputes. ACI/AAAE also argue that, to be effective, peak-pricing
systems must incorporate landing fees that are high enough to balance
supply and demand, regardless of the airfield's historic cost. ACI/AAAE
request the Department to clarify that an airport using an otherwise
acceptable peak-hour pricing system may charge landing fees that are
not based on historic cost.
Massport asserts that in some cases, the HCA valuation requirement
for the airfield is inconsistent with sound economic theory and
efficient allocation of scarce airport resources. Massport suggests
that the policy should define HCA valuation for the airfield as
presumptively reasonable, but permit an airport proprietor to show that
other valuation methods are reasonable.
Los Angeles and San Francisco request that the HCA requirement for
the airfield and public-use roadways be eliminated. Los Angeles argues
that market-based rents are inherently reasonable, as the Department
itself recognized in proposing to narrow the HCA requirement. Market-
based rates also reflect economic reality better. Los Angeles further
argues that the reasonableness of market-based pricing has been
sustained in judicial decisions, including Blum v. Stenson, 465 U.S.
886, 892-95 (1984); Harmon City, Inc. v. United States, 733 F.2d 1381-
1382-84 (10th Cir. 1984); and Telesat Cablevision, Inc. v. City of
Riviera Beach, 773 F.Supp. 383, 407 (S.D. FL 1991).
Los Angeles and the City of San Francisco argue that market-based
pricing for the airfield is most consistent with the requirement that
airport proprietors establish a fee and rental structure that will make
the airport as self-sustaining as possible. Both airport proprietors
rely on the determination of the OIG that airports must receive no less
than fair market value for aeronautical land and improvements in order
to meet this mandate. Los Angeles also argues that its proposed method
of determining FMV, based on the land's next best use, avoids any risk
that the FMV determination will reflect the exercise of market power.
Los Angeles further argues that even though the Supplemental
Proposed Policy would allow the airport proprietor to amortize the
costs of acquired land, the HCA requirement would not allow the airport
proprietor to compensate itself for the opportunity costs of
maintaining its investment in the airfield rather than using the
property for other purposes. Los Angeles asserts that the courts now
recognize opportunity costs as a real cost, citing among other
decisions, Afram Export Corp. v. Metallurgiki Halyps, S.A., 772 F.2d
1358, 1369 (7th Cir. 1985); Duff v. Marathon Petroleum Co., 985 F.2d
339, 340 (7th Cir. 1993). Los Angeles also complains that the HCA
valuation requirement fails to compensate the airport proprietor for
the costs of inflation. At a minimum, the policy should be modified to
permit adjustments to HCA valuation to reflect general inflation.
Los Angeles also argues that the HCA valuation requirement results
in an unconstitutional taking of the airport proprietor's property,
because it precludes the airport proprietor from earning a fair return
on investment. Los Angeles argues that, under Duquesne Light Co. v.
Barasch, 488 U.S. 299, 307, 310 (1989), a rate set at a level that is
confiscatory is unconstitutional. A rate that does not allow for a rate
of return is per se confiscatory, according to Los Angeles, and
therefore, unconstitutional. Los Angeles also suggests that the fair
return must be based on the present value of the assets, citing Smyth
v. Ames, 169 U.S. 466, 547; Denver Union Stockyard Co. v. United
States, 304 U.S. 470, 473 (1938).

[[Page 32010]]

Los Angeles also argues (in its comments on the Interim Policy) that
the property of public as well as private entities is protected by the
takings clause of the Constitution, citing United States v. 50 Acres of
Land, 469 U.S. 24, 31 (1984).
Los Angeles further argues that requiring HCA valuation for
airfield land subsidizes air carriers needlessly by transferring the
value of the airfield assets to the carriers.
In addition, Los Angeles argues that the HCA valuation requirement
would make the charge for airfield land in the rate-base a function of

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A96-15687. Public record. Not legal advice.