United Airlines, Inc. v. Port Authority of New York and New Jersey - No. 16-14-13
FAA Docket No:
16-14-13
Author:
D. Kirk Shaffer, Associate Administrator for Airports
Complainant(s):
United Airlines, Inc.Respondent(s):
Port Authority of New York and New JerseyAirport(s):
Newark Liberty International Airport (EWR)
History:
Order Affirming in Part and Remanding in Part (1/11/21) (“Order”), Director’s Determination (11/19/18)
Holding:
Affirming (Director's Determination) in Part and Remanding in Part: Violation of Grant Assurance 22, Economic Nondiscrimination, and Grant Assurance 25, Airport Revenues; Order to Submit Corrective Plan.Abstract:
United Airlines (“United”) filed a Part 16 Complaint alleging that the Port Authority of New York and New Jersey (“Port Authority”): (1) charged unreasonable rates using a fee methodology that was not cost-based and lacked transparency, in violation of 49 U.S.C. § 47107(a), Grant Assurance 22, Economic Nondiscrimination, and DOT/FAA Policy Regarding Airport Rates and Charges; (2) generated excessive surplus revenues in order to subsidize non-aeronautical functions, and improperly diverted airport revenue in violation of 49 U.S.C. § 47107(b)(2) and Grant Assurance 25, Airport Revenues; and (3) engaged in actions that were contrary to the Anti-Head Tax Act, 49 U.S.C. § 40116, and the Airline Deregulation Act, 49 U.S.C. § 41713.
In response, Respondent denied all of United’s allegations and asserted that the flight fees at issue were not unreasonable or unjustly discriminatory. Respondent further claimed as a grandfathered airport there was no unlawful diversion of revenue because it could use airport revenue for non-aeronautical purposes. Finally, Respondent raised an affirmative defense that United was challenging the reasonableness of fees that were established by agreements to which United was a party.
The Director found that costs included in fees charged to United were not based on a reasonable and transparent cost-allocation methodology in accordance with 49 U.S.C. § 47107(a), Grant Assurance 22, and DOT/FAA Policy Regarding Airport Rates and Charges. (Director’s Determination, p. 17.) The Director also found that the Port Authority did not maintain an adequate audit trail for the allocation of its expenses and engaged in deficient accounting practices and record keeping. (Director’s Determination, p. 17.) The Director thus ruled that corrective action was needed to ensure that the Port Authority’s common costs were allocated according to a reasonable, transparent, and cost-allocation methodology applied consistently, and with improved accounting practices and record keeping. (Director’s Determination, pp. 17-18.) Moreover, the Director found that the airport sponsor was in violation of Grant Assurance 22, Economic Nondiscrimination, by virtue of deficient accounting practices, poor record-keeping, associated procedures, and lack of transparency in setting its rates and charges, which were not consistent with the DOT/FAA Policy Regarding Airport Rates and Charges. (Director’s Determination, p. 23.)
The Director further reviewed allegations that the airport sponsor had violated federal revenue use obligations by diverting airport revenues to fund non-airport, money-losing operations, and used airport revenues to fund projects that exceeded the limits of a “grandfather” exception. (Director’s Determination, p. 18.) The Port Authority denied the allegations, contending that it was a “grandfathered” airport pursuant to the Airport and Airway Improvement Act such that it was allowed to use airport revenue for non-aeronautical purposes. (Director’s Determination, p. 18.)
The Director concluded that the Port Authority had not clearly articulated the methodology it used to calculate the amount of grandfathered revenues. (Director’s Determination, p. 22.) The record showed that the Port Authority had a history of large fluctuations in grandfathered payments and that the Port Authority had expended considerable amounts of airport revenue on non-aviation facilities that it did not own or operate. (Director’s Determination, p. 23.) Additionally, the Port Authority had used excess profits generated by aviation fees to fund non-airport-related projects. (Director’s Determination, p. 23.) As such, the Director found that the Port Authority could not demonstrate that it had complied with the grandfather exception permitted by 49 U.S.C. § 47107(b)(2) and § 47133, Grant Assurance 25, Airport Revenues, and FAA’s Policy and Procedures Concerning the Use of Airport Revenues. (Director’s Determination, p. 23.)
In all, the Director required the sponsor to provide a Corrective Action Plan detailing: (1) how its common costs were allocated according to a reasonable, transparent, and not unjustly discriminatory cost-allocation methodology applied consistently with the airport (“EWR”); (2) how the sponsor intended to modify its accounting practices and associated procedures in order to eliminate the identified deficiencies concerning the financial management of operations at EWR; (3) how the sponsor intended to establish and present to the FAA an acceptable and proper grandfathering methodology to be used consistently going forward; and (4) how the sponsor intended to identify the total amounts of diverted airport revenue, including for past development expenditure; credit the accounts for each Port Authority airport; adjust its rates and charges at EWR to reflect the change in costs; and identify measures to be taken to prevent future occurrences. (Director’s Determination, pp. 23-24.)
Administrative Appeal
The Port Authority filed an administrative appeal, raising three issues: (1) whether the Director erred in finding that it improperly expended airport revenue on projects that were not owned or operated by it in violation of Grant Assurance 25, Airport Revenues, and 49 U.S.C. §§ 41707(a), 47133(a); (2) whether the Director erred in finding that the Port Authority performed its grandfathering calculations using an improper methodology; and (3) whether the Director erred in finding the EWR flight fees lacked transparency and that the Port Authority engaged in deficient accounting practices and record-keeping. (Order, p. 8.)
Limiting Grandfathered Diversion of Airport Revenue to Facilities Owned and Operated by Port Authority
As to the first issue, the Associate Administrator decided that grandfather rights were limited by the terms of a statutory exception and that grandfathered diverted revenue may only be used to support facilities that the Port Authority owned or operated. In support of this decision, the Associate Administrator recognized that 49 U.S.C. § 47133(a) restricts the use of revenues generated by an airport that is the subject of federal assistance to specific capital or operating costs of an airport. An exception is provided under 49 U.S.C. § 47133(b), which provides that “a law controlling financing by the airport owner or operator, … or a debt obligation issued not later than September 2, 1982, by the owner or operator, provides that the revenues … be used to support not only the airport but also the general debt obligations or other facilities of the owner or operator.” (Order Affirming in Part and Remanding in Part, hereinafter “Order,” p. 9.)
As such, the Associate Director disagreed with the Port Authority’s view of the grandfather provision—that if it has the requisite “debt obligation” or the requisite “law controlling financing,” then it is grandfathered. (Order, p. 11.) For the Associate Administrator, those conditions determined if the Port Authority was grandfathered in the first instance and “in no way restrict[ed] how grandfathered revenue may be used once that status is conferred.” As such, the “proper reading of the statute is that these two statutory attributes both give rise to grandfathered status, as PANYNJ argues, but also define the allowable scope of the exception.” (Order, p. 11.)
According to the Associate Administrator, moreover, the interpretation urged by the Port Authority would result in a regime where there were “no limits” on grandfathered expenditures. “The Associate Administrator sees nothing in the statutory text that compels such an unreasonable result.” (Order, p. 12.) The Associate Administrator also underscored that his decision “is consistent with FAA’s written and longstanding positions on grandfathering. FAA and DOT have clearly and repeatedly expressed that an airport sponsor may divert revenue under § 47107(b)(2) only ‘if the “grandfather” provisions of 49 U.S.C. § 47107(b)(2) are applicable to the sponsor and the particular use.’” (Order, p. 12.)
Having held that the statutory requirements to grandfathered status were met and that they defined the scope of such rights, the Associate Administrator then, on the basis of fundamental principles of statutory construction, upheld the Director’s finding that the grandfather rights at issue did not include the right to divert revenue to facilities not owned and operated by the Port Authority, i.e., the Associate Administrator held that the qualifying statutory language “law controlling financing” requires that airport revenue “be used” to support “not only the airport” but the “other facilities of the owners or operator,” a phrase that itself means facilities that the Port Authority owns. (Order, p. 13.)
Although the Director found that grandfather rights allowed diversion to occur “within certain limits,” the Associate Director noted that the Director’s Determination apparently assumed that the Port Authority was grandfathered without analyzing this issue. This perhaps stemmed from the Port Authority’s argument that it had grandfather status based on a pre-1982 law controlling financing, an argument that suggested that any pre-September 2, 1982, debt obligations that could give rise to grandfathered status had been retired. Assuming that to be the case, the Director apparently did not analyze the extent to which the Port Authority’s enabling act qualified it for grandfathered status, the Associate Administrator surmised. In order to definitively resolve the questions of compliance, such an essential condition must be established and not merely assumed, however, and for that reason, the Associate Director remanded the case, in part, to the Director, to determine: (1) the basis for the Port Authority’s grandfather rights, if any; and (2) if such rights are based solely on the Port Authority enabling act, whether the enabling act is sufficient to create grandfathered status and, if so, its scope. (Order, pp. 13-14.)
As the final point, the Associate Administrator agreed with United Airlines that the only expenditures that the Port Authority was “required” to make could be considered grandfathered—a conclusion that provided an independent reason to not allow the diversion of revenue to support facilities not owned by the Port Authority. (Order, p. 14.) As a matter of statutory interpretation, then, the Associate Administrator concluded that “absent a showing that [the Port Authority’s] enabling statute requires it to divert revenue to facilities that it does not own, … the permissive nature of the diversion provides an independent basis to disallow it.” (Affirmative, p. 15.) “Nothing in this Order would prevent [the Port Authority] from using non-airport revenue to support facilities that it does not own.” (Order, p. 17.)
Methodology for Calculating Amount of Grandfathered Revenues
A second issue on appeal centered on whether the Director erred in finding that the Port Authority used an improper methodology to calculate the amount of grandfathered airport revenue. The Port Authority averred that its grandfathering methodology was agreed to by the FAA on several occasions and that it otherwise used a reasonable method of measuring grandfathered airport revenue. (Order, p. 17.) Finally, the Port Authority challenged an expert report on these matters.
Neither argument prevailed, however. As the Director had, the Associate Administrator “likewise found no evidence in the administrative record of FAA files indicating [the Port Authority’s] grandfathering methodology was received or approved by the FAA.” (Order, p. 19.)
As to the methodology, the Associate Administrator observed that the Port Authority had measured the annual amount of grandfathered airport revenue “to be the calculated net change in the reserve fund balances attributable to PANYNJ’s non-aviation business segments.” (Order, p. 19). The Port Authority characterized this methodology as a reasonable way to calculate grandfathered revenue because the FAA had not adopted standards to evaluate or approve grandfather methodologies. But, in this regard, “PANYNJ’s argument misses the mark,” the Associate Administrator wrote. “The issue presented is whether PANYNJ grandfather methodology complies with the requirements of 49 U.S.C. § 47107(b)(2), § 47133, and 49 U.S.C. § 47115(f)”—and it did not. (Order, p. 19.)
In all, the Associate Administrator “concludes that the amount of grandfathered airport revenue cannot be measured by the non-aviation method employed by PANYNJ. The Associate Administrator concludes that the findings in the Determination are supported by the great weight of reliable, probative, and substantial evidence and upholds the Director’s finding that PANYNJ has not complied with the grandfathering exception provided by 49 U.S.C. § 47107(b)(2) and § 47133, and Grant Assurance 25, Airport Revenues.” (Order, p. 21.)
Flight Fees
Next, the Port Authority challenged the Director’s decisions that the flight fees at EWR lacked transparency, and that the Port Authority engaged in deficient accounting practices, poor record-keeping, and associated procedures in setting rates and charges at EWR. At the core of the flight fees issue was United Airlines’ contention that the Port Authority’s flight fees at EWR were unreasonable and lacked transparency based upon a “hidden” 38% markup over the Port Authority’s actual costs. (Order, p. 21.)
Ultimately, the Associate Administrator concluded that the Port Authority’s failure to cooperate with legitimate inquiries from United; failure to periodically analyze and true-up markups to actual costs; and admitted inability to validate cost recovery markups of the EWR flight fee constituted substantial evidence supporting the Director’s finding of an insufficiently transparent rate-setting methodology. The Associate Administrator thus affirmed the Director’s finding of a lack of transparency. (Order, pp. 24-25.)
Corrective Action Plan
As a final matter, the Associate Administrator required the Port Authority to submit a Corrective Action Plan. Specifically, the Associate Administrator ordered the Port Authority to: (1) disclose all financial data or information relevant to the use and accounting of airport revenue; (2) limit the use of airport revenue to specifically described “permitted” or “exceptional uses,” including the capital or operating costs of the airport where the revenue was generated; (3) “establish, enhance, implement, and maintain a separate accounting and reporting methodology that fully discloses all expenditures made using airport revenues at each of its airports”; (4) maintain separate accounts for airport revenue for each of its airports; (5) report the amount of excepted payments to the FAA; (6) quantify and report certain payments that were made for the support of any facility or project that was not owned or operated by the Port Authority; and (7) annually submit to the FAA a sworn declaration under penalty of perjury certifying the accuracy of all accounting and reports required to be prepared under the Corrective Action Plan. (Order, pp. 30-32.)
Remand
The Associate Director remanded the matter to the Director to determine if the Port Authority had grandfather rights based on a pre-September 2, 1982, law controlling financing as provided for in 49 U.S.C. §§ 47107 and 47133, as well as Grant Assurance 25. As such, the Associate Administrator’s decision affirmed the Director’s decision that to the extent grandfather rights existed, they did not allow for the expenditure of airport revenue to support facilities that the Port Authority did not own or operate. The matter was otherwise remanded to the Director for a determination as to whether to issue a civil penalty consistent with the instances of non-compliance affirmed, and, if so, the amount. (Order, p. 33.)
In accordance with the remand Order, the Director analyzed the Port Authority’s grandfathered status and whether to issue a civil penalty. The Director examined the remand Order and its record, the Director’s Determination and its record, the supplemental filings submitted by the parties, and related information. Based on this examination, the Director found that the Port Authority does indeed have grandfathered rights based on laws controlling its financing and covenants in debt obligations enacted or issued not later than September 2, 1982, as provided for in 49 U.S.C. §§ 47107(b)(2) and 47133(b)(1). (Director’s Determination on Remand, p. 2.) More specifically, following an exhaustive review of historical and applicable statutory law (and its legislative history), the Director determined that the applicable authority “validates that laws were in place prior to 1982 that control financing for PANYNJ facilities and airports, and require revenues to be used to support not only airport, but other port owned and operated facilities.” (Director’s Determination on Remand, p. 13.)
The Director also found that issuing civil penalties was not warranted “because of (1) the on-going good faith corrective action discussions between the FAA and PANYNJ, (2) the uncertainty about the amounts of actual unlawfully diverted revenues as noted in both the Director’s Determination and Remand Order, and (3) the effect of the corrective actions that PANYNJ will ultimately implement ….” (Director’s Determination on Remand, p. 17.)