[Federal Register Volume 59, Number 80 (Tuesday, April 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10057]


[[Page Unknown]]

[Federal Register: April 26, 1994]


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Part XI





Department of Transportation





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Federal Transit Administration



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Private Enterprise Participation; Notice
DEPARTMENT OF TRANSPORTATION

Federal Transit Administration
[Docket No. 93-B]

 
Private Enterprise Participation

AGENCY: Federal Transit Administration, DOT.

ACTION: Notice of Recision of Private Enterprise Participation 
Guidance.

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SUMMARY: On November 26, 1993, the Federal Transit Administration 
published a Notice in the Federal Register proposing to rescind its 
current guidance on private enterprise participation, which was 
believed to be unnecessary, as well as overly restrictive of the 
ability of local planning agencies and transit operators to make 
rational transportation choices in light of local needs. The agency 
provided a 60-day comment period in connection with the Notice. This 
final notice announces the agency's decision to rescind the private 
enterprise guidance as proposed and presents its statement of policy on 
this issue.

DATES: The recisions and statement of policy will be effective 30 days 
after the date of publication in the Federal Register.

FOR FURTHER INFORMATION CONTACT: John W. Spencer, Deputy Associate 
Administrator, Office of Budget and Policy, Federal Transit 
Administration, 202/366-4050; Gregory B. McBride, Deputy Chief Counsel, 
Federal Transit Administration, 202/366-4063.

SUPPLEMENTARY INFORMATION:

I. Introduction

    On November 26, 1993, the Federal Transit Administration (FTA) 
published a Notice of Proposed Recision of Private Enterprise 
Participation Guidance (58 FR 62407) (the Notice) in which it sought 
public comment on a proposal to rescind its current guidance on the 
participation of private enterprise in the provision of mass transit 
service. The agency stated its belief that the current guidance is 
unnecessary and restricts the ability of local planning agencies and 
transit operators to make rational transportation choices in light of 
local needs. As discussed in detail below, FTA received a total of 415 
comments from the public on its proposal. Although many comments were 
not supportive, we found all helpful in the decisionmaking process. In 
the end, FTA remains convinced that its proposed course of action 
represents responsible public policy that adheres to the statutory 
construct and recognizes the appropriate roles to be played by the 
entities involved; accordingly, FTA hereby provides final notice to the 
public of its decision to rescind its policy statement, ``Private 
Enterprise Participation in the (Federal Transit) Program'' (49 FR 
41310, October 22, 1984); Circular 7005.1; Chapter X of Circular 
9040.1C; and Chapter IV of Circular 9070.1C.
    In this final notice, we present FTA's view of the private 
enterprise provisions at issue, summarize the comments received in this 
docket, respond to the five primary issues raised, and discuss the 
policies that will guide FTA action in this arena in the future.

II. Background

    In light of the comments received, the background discussion of the 
private enterprise provisions in our November Notice bears reiteration 
and expansion. As noted there, the principal purpose of the Federal 
Transit Act, as amended (FT Act), 49 U.S.C. app. 1601 et seq., is to 
assist the development and improvement of mass transportation systems 
in metropolitan and rural areas. In sections 3, 9, 16(b)(2), and 18, 
Congress has authorized FTA to make funds available to State and local 
public bodies for capital acquisition and construction, operating 
assistance, and planning activities in connection with mass 
transportation projects. Congress has expressed its concern that such 
Federal assistance not be used without regard for the interests of 
private enterprise. The agency's original authorizing statute, the 
Urban Mass Transportation Act of 1964, now the FT Act, contained two 
provisions, section 3(e) and the first two sentences of section 4(a), 
which expressed this intent. Section 4(a) provided that

    [N]o federal financial assistance shall be provided pursuant to 
subsection (a)- of section 3 unless the Secretary determines that 
the facilities and equipment for which the assistance is sought are 
needed for carrying out a program * * * necessary for the sound 
economic and desirable development of such area. Such program shall 
encourage to the maximum extent feasible the participation of 
private enterprise.

(Emphasis added.)

    The Federal Public Transportation Act of 1978 deleted this 
provision, but added a new section 8 that included subsection (e), now 
subsection (o), which provides that ``[t]he plans and programs required 
by this section shall encourage to the maximum extent feasible the 
participation of private enterprise.''
    In section 3(e), as revised by the 1978 Act, Congress has directed 
that where an existing mass transportation company is providing 
service, FTA may not provide financial assistance to a public body for 
the operation of competing or supplemental service, unless it finds 
that the relevant transportation improvement program required by 
section 8 provides for the participation of private enterprise to the 
``maximum extent feasible.''
    In South Suburban Safeway Lines, Inc. v. City of Chicago, 416 F.2d 
535, 539 (7th Cir., 1969), the court observed that in section 3(e)

    Congress seems to have been primarily concerned over the 
possibility of public acquisition of private facilities * * * 
although competition with and supplementation of existing facilities 
are also dealt with.

    The legislative history of section 3(e) is consistent with the 
court's understanding. In brief, section 3(e) originated in Senate Bill 
S.6 (88th Cong., 1st Sess.), one of the bills leading to the Urban Mass 
Transportation Act of 1964. The principal sponsor of S.6, Senator 
Harrison Williams of New Jersey, indicated that this provision was 
intended to further a neutral Federal posture on the question of 
whether public or private companies should operate federally assisted 
mass transportation services. In discussing the provisions of the bill, 
Senator Williams said that

    The public would not have to operate the transit facilities and 
equipment itself. It could provide for their operation by lease or 
other arrangement. Thus, every locality would remain free to choose 
public or private operation of its transportation system or any 
combination of the two.

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

    In the House of Representatives, an amendment to H.R. 3881 (88th 
Cong., 1st Sess.) contained language substantially similar to that 
which the Senate had passed. Subsequently, the Senate adopted the House 
language, and the provision was signed into law. The debate in the 
House revealed that the intent of section 3(e) was to provide fair and 
equitable treatment of private providers whose existing operations 
might face competition from or acquisition by federally funded transit 
systems and to require the Administrator to use his judgment in making 
the required findings. 110 Cong. Rec. 14464 (Daily ed., June 25, 1964). 
However, the legislative history provides no guidance on how the 
required findings are to be made.
    The statute does not favor private operations over publicly owned 
operations. ``All the statute requires is encouragement of private 
participation to the maximum extent feasible. It does not allow private 
operators to write their own ticket.'' Westport Taxi Service, Inc. v. 
Adams, Civil No. B-76-369 (D.Conn., April 13, 1977), slip opinion at 
12; aff'd. in part, rev'd. in part, 571 F.2d 697 (2d Cir. 1978).
    At the same time, Congress has made it clear that decisions 
regarding mass transportation services to be provided with Federal 
assistance are to be made locally. Indeed, section 2(b) of the FT Act 
states that one of the fundamental purposes of the Act is

    To provide assistance to State and local governments and their 
instrumentalities in financing such systems, to be operated by 
public or private mass transportation companies as determined by 
local needs * * *.

49 U.S.C. app. 1601(b)(3) (emphasis added). Strongly reinforcing this 
principle, section 12(d) prohibits FTA from regulating ``in any manner 
the mode of operation of any mass transportation system * * *.'' Thus, 
the public/private operator choice is to be made at the local level.
    This emphasis on local decisionmaking in determining how best to 
serve the transportation needs of the local area has been recognized by 
the courts:

    The statutory scheme of (FTA) emphasizes the large role to be 
played by local bodies responsible for urban mass transit * * *. 
This reliance on the local or State group is consistent with the 
statute's encouragement of local responsibility in urban mass 
transportation. The statute does not promote a procedure which 
leaves all decisions with the Secretary (of Transportation), but 
rather emphasizes local solutions to problems.

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

    The participation of private enterprise in mass transit is 
addressed at several points in the current FT Act; most notably, 
section 9(f) requires that in developing a proposed program of projects 
recipients consult with ``interested parties, including private 
transportation providers'' and in developing the final program of 
projects recipients particularly consider the ``comments and views * * 
* of private transportation providers.'' This activity at the recipient 
level is the first step that leads to the planning process under 
section 8. In section 8(o) Congress has required that local 
transportation plans and programs prepared under section 8 encourage 
``to the maximum extent feasible the participation of private 
enterprise.'' In section 3(e), Congress has directed that where an 
existing mass transportation company is providing service, FTA may not 
provide financial assistance to a public body for the operation of 
competing or supplemental service, unless it finds that the relevant 
transportation improvement program required by section 8 provides for 
such private enterprise participation to the ``maximum extent 
feasible.'' In section 9(e)(1), Congress extended the requirement of 
section 3(e) to the section 9 formula grant program.
    The statutory scheme viewed as a whole thus juxtaposes two 
potentially competing interests: private enterprise participation and 
local determination. By authorizing the Administrator to use his 
discretion in making the required finding, Congress has placed 
responsibility for resolving any conflicts in the hands of the Federal 
agency. Since that finding rests on judgments of ``feasibility,'' which 
are made in the first instance in the program of projects developed by 
the local metropolitan planning organizations (MPOs), it is apparent 
that Congress has vested the agency with broad discretion in carrying 
out this responsibility.
    Between 1964 and 1984, FTA provided no separate guidance relating 
to the participation of private enterprise in mass transportation. FTA 
first issued guidance on this issue in a policy statement, ``Private 
Enterprise Participation in the (Federal Transit) Program'' (49 FR 
41310, October 22, 1984), which set forth the factors FTA would 
consider in determining whether a recipient's planning process 
appropriately considered the participation of private enterprise. These 
factors included consultation with private providers in the local 
planning process, consideration of private enterprise in the 
development of the mass transit program, the existence of records 
documenting the participatory nature of the local planning process, and 
the rationale used in determining whether or not to contract with 
private operators for transit services.
    In 1986, FTA further informally implemented its private enterprise 
guidance for sections 3 and 9 recipients in FTA Circular 7005.1 
(``Documentation of Private Enterprise Involvement in sections 3 and 9 
Programs'') and for sections 16(b)(2) and 18 recipients in Chapter X of 
FTA Circular 9040.1C (``Section 18 Program Guidance'') and Chapter IV 
of FTA Circular 9070.1C (``Section 16(b)(2) Program Guidance''). These 
circulars state clearly that FTA will not condition grants on a certain 
level of private enterprise involvement. At the same time, the 
circulars outline certain elements and procedures relating to private 
enterprise participation that a grantee should use in its planning 
process.
    Congress has responded twice to FTA's 1984/1986 policy initiative 
on private enterprise participation, on both occasions acting to 
restrain the agency. First, in the Conference Report accompanying the 
Department of Transportation and Related Agencies Appropriations Act, 
1987 (Pub. L. 99-464), Congress expressed concern that FTA had exceeded 
its discretion by conditioning certain section 9 grants on private 
enterprise involvement; section 327 of that Act prohibited such 
conditioning of section 9 formula grants.
    Second, the Intermodal Surface Transportation Efficiency Act of 
1991, Pub. L. 102-240, (ISTEA) amended section 8(i)(5) of the FT Act to 
add the following:

    The Secretary shall not withhold certification under this 
section based upon the policies and criteria established by a 
metropolitan planning organization or transit grant recipient for 
determining the feasibility of private enterprise ----participation 
in accordance with section 8(o) of the Federal Transit Act.

    Thus, on the one hand, section 3(e) requires that FTA make a 
finding that the MPO has appropriately encouraged private enterprise 
participation; on the other, this new provision requires that in 
considering whether to certify that an MPO is meeting its obligations 
under Federal law, FTA may not consider the process used by the MPO (or 
a transit grant recipient) to determine the feasibility of private 
enterprise participation. Moreover, the ISTEA Conference Committee 
Report states that under section 8(i)(5), ``localities shall be 
afforded wide flexibility in establishing criteria to be used in 
determining the `feasibility' of private involvement in local 
programs.'' Clearly, then, Congress signaled FTA that it is to pay as 
significant deference to MPO judgments as to feasibility.
    In the Notice, FTA stated that it had reviewed its policy in light 
of the statutory background and believed that the 1984/1986 initiatives 
should no longer be part of its guidance. The Notice pointed out that 
FTA has not generally provided advance notice and opportunity for 
comment when adopting or rescinding the circulars it uses to provide 
guidance to grantees. FTA invited public comment on the 1984 Policy 
Statement and Circular 7005.1 only after their issuance as final 
documents. In this proceeding, however, FTA has provided prior notice 
of its proposal to change policy consistent with ISTEA to remove 
unnecessary Federal direction of local parties' discharge of their 
planning responsibilities under the FT Act and to thereby give full 
weight to the local decisionmaking process. FTA invited comments on its 
proposed action during the 60 days following publication of the Notice.
    Before summarizing the comments generally, we will briefly address 
two issues. First, a few commenters suggest, in effect, that the 
agency's action to rescind the previous policy represents a retreat 
from the statute's requirements. We firmly disagree. The participation 
of private enterprise in the Nation's transit industry is not only 
encouraged by the FT Act, it is essential to the health and success of 
that industry. The question addressed in this notice is not whether, 
but how, FTA will go about encouraging that participation.
    Second, this question is essentially one of policy choices. An 
earlier administration chose to play an active Federal role in 
restricting the options of MPOs and grantees in their consideration of 
private enterprise participation (e.g., requiring the use of a 
particular accounting method and mandating route reviews every three 
years). The program it developed, based on 20-year-old statutory 
provisions previously unelaborated by the agency and adopted without 
the benefit of prior notice and comment, can be argued to have been a 
fair exercise of the discretion vested in an administrative agency 
wrestling with policy choices. But as discussed at greater length 
below, the claims of a few commenters that the previous policy had, in 
effect, taken on some kind of quasi-statutory status cannot withstand 
scrutiny. As the Supreme Court has noted,

    An agency to which Congress has delegated policymaking 
responsibilities may, within the limits of that delegation, properly 
rely upon the incumbent administration's views of wise policy to 
inform its judgments. While agencies are not directly accountable to 
the people, the Chief Executive is, and it is entirely appropriate 
for this political branch of the Government to make such policy 
choices * * *

Chevron U.S.A. v. Natural Resources Defense Council, 497 U.S. 837, 
865-866 (1984).

    In the transportation arena, new State and Federal mandates--the 
Americans with Disabilities Act and mandated drug and alcohol testing, 
for example--require new programs and services, but the availability of 
Federal operating assistance to help pay the costs of these programs 
remains limited. Given the increasingly limited funds available, it is 
local decisionmakers responsible for meeting the transit needs of the 
community who most keenly feel the need to obtain the most transit 
service possible with the funds available.

III. Summary of Comments

A. -Overview

    Some 415 comments were received in response to the Notice from 
commenters representing a variety of views and interests, including 
transit systems, private operators, unions, and members of Congress:

--Transit systems and government entities
73
Private operators---
263
--Unions------
55
--Members of Congress----
24

    In general, private operators opposed the proposed recision, 
arguing that the existing private enterprise policy was effective and 
consistent with the FT Act, brought needed competition to the provision 
of transit services, and helped lower the cost of those services. 
Unions, a number of transit systems, and others, in contrast, took the 
view that the current policy needlessly creates paperwork burdens and 
reviews that are time consuming and not relevant to privatization 
efforts, which should be left to the local decisionmaking process. Many 
commenters simply expressed general support for or opposition to the 
policies under review.

B. -Summary of Comments by Issue

1. Procedural Objections
    While many commenters addressed the substance of the proposal, a 
few asserted that the manner in which the agency announced its 
proposal, i.e., the Notice of Proposed Recision, was itself flawed. 
These commenters noted that the FT Act specifically requires the agency 
to follow notice and comment procedures. The fact that an agency uses 
the term ``guidance'' or ``guideline'' is not controlling; the status 
of such materials as ``rules'' is determined by their binding 
character. By rescinding the existing guidance, the commenters contend, 
the FTA will effectively create a new ``binding norm'' by establishing 
the standards and procedures by which the agency maintains it will 
fulfill its statutory obligation to encourage participation of private 
transportation companies in transit service. Further, these commenters 
argued, the existing guidance clearly is mandatory in nature. Because 
such guidance effectively is a rule, they assert, the agency is 
obligated to comply with rulemaking procedures before amending or 
repealing the guidance. One commenter cited a Supreme Court case to the 
effect that an agency changing its course by rescinding a rule is 
obligated to supply reasoned analysis for the change beyond that which 
may be required when an agency acts in the first instance. In this 
regard, commenters also alleged that, contrary to what FTA stated in 
its Notice, there is no significant record to show that grantees have 
found the existing guidance burdensome.
    Another commenter noted that although certain specific protections 
and activities are explicitly and implicitly contained in the FT Act, 
no process or procedure is prescribed in the statute for the 
enforcement of these requirements, which is therefore left to the 
rulemaking process. Nor is the agency free to act independent of the 
administrative record. The problem with the FTA analysis, asserted this 
commenter, is that it has failed to adhere to the requirement that a 
nexus exist between the need for changes and the underlying, supportive 
facts.
    Another commenter argued that the agency had predetermined its 
final action on the Notice, notwithstanding its notice and comment 
review period. This commenter maintained that the agency's Notice 
misstates the private enterprise requirements, the statutory 
provisions, and the legislative history. This commenter also argued 
that the Notice misrepresents the material in the agency's files, the 
agency's interpretations of the current requirements, and the 
enforcement history of the program.
    On the other hand, many commenters supported the agency's proposal 
and the procedure by which it was announced. One argued that much of 
the administrative burden imposed by the existing requirements could 
have been avoided or alleviated had the policies been subjected to the 
Federal Register notice and comment process.
2. Fully Allocated Cost Methodology
    The current private enterprise policies require that grantees use a 
fully allocated cost methodology when calculating their costs of 
providing service for comparison with those of potential private 
operators. The Notice indicated, however, that the method was not 
always an appropriate gauge of the true cost of providing a particular 
service and that FTA believes that in comparing public and private 
costs of operating a particular service, a recipient should be free to 
use any reasonable accounting method it finds appropriate in a given 
setting. A number of commenters particularly supported this aspect of 
the Notice. They noted that they long have argued that the criteria and 
policies for choosing among public and private providers should be left 
to local transit agencies and community planners and that the proper 
role for the Federal government should be one of neutrality. The 
constraints imposed on local decisionmakers by the fully allocated cost 
method resulted in service choices that not only failed to produce 
expected cost savings, but resulted in serious service, safety, and 
maintenance problems as well, they contended.
    One commenter stated that recision of the guidance would enable it 
to award contracts consistent with its Board's policy requiring it to 
consider only avoidable costs when evaluating the cost-effectiveness of 
private carrier proposals. This transit system argued that the 
avoidable cost method best measures the true cost savings achieved 
through the contracting of service.
    One commenter presented an analysis by a Columbia University 
professor of a report by a consulting company recommending, on the 
basis of a fully allocated cost methodology, that a large transit 
system privatize 25 percent of its transit bus service. Contrary to the 
cost savings projected in the report, the professor's study, using a 
marginal cost analysis, concluded that the proposed privatization 
program would produce no savings and, in fact, would cost the transit 
agency a considerable sum. Moreover, the commenter argued, the proposal 
would result in seriously fragmented service and the associated 
organizational, safety, and service problems evidenced in other cities 
that privatized on this basis.
    Another commenter argued that experience throughout the country 
indicates that forced privatization efforts have resulted in 
significant cost increases, serious service problems, and ridership and 
revenue losses. This submission provided examples of areas where 
privatization allegedly increased costs. In one case, an audit showed 
that projected savings of 30-40 percent were actually in the 3 to 4 
percent range. The commenter contended that because the fully allocated 
cost analysis requires public agencies to include their fixed costs as 
part of their bottom line as well as costs incurred for buses and 
employees, comparisons on this basis are fundamentally flawed. They 
contended that fixed costs should not be included among the costs of a 
public transit operator because these costs will be incurred regardless 
of whether the particular service is offered or not.
    On the other hand, some commenters argued in favor of the fully 
allocated cost methodology. By standardizing the way costs are counted, 
they contended, the fully allocated cost method can reduce 
transactional costs, help highlight and eliminate cross-subsidies, and 
improve accountability and transparency.
    One commenter argued: (1) That permitting public transit agencies 
to submit cost of service bids based solely on the short-run marginal 
cost of service would result in calculations that ignore the costs of 
facilities and rolling stock and assume that the public transit agency 
operates its system at the least possible cost; (2) that marginal cost 
analysis does not permit the riding public and taxpaying public to 
compare the total costs of service for the transit system with and 
without the proposed alternative service patterns of providers of 
service; (3) that direct comparisons of labor productivity between the 
public transit agency and private contractors would be difficult or 
impossible since the bases for calculating costs would be different, as 
might the reliability and quality of the service in question; and (4) 
that fully allocated cost comparisons are intended to permit a 
transparent view of the costs of existing and proposed services and the 
acquisitions of assets and liabilities that may be relevant.
    Another commenter noted that concern about using fully allocated 
costs is misplaced in that the disclosure of all costs is designed to 
level the playing field in light of Federal and other subsidies 
available to public operators. This commenter further noted that the 
fully allocated cost method is an analytical baseline, more of a 
disclosure than an absolute sum, and that fully allocated costs may be 
discounted for costs that cannot be saved when determining the 
feasibility of using private contractors.
3. Institutional Barriers
    The current policy requires that local authorities ignore local law 
when considering the feasibility of using private enterprise in local 
transit service. That is, under the current private enterprise policy, 
FTA does not recognize, as legitimate barriers to private enterprise 
participation, local laws or policy or labor agreements that call for 
direct operation of mass transit service. Many commenters maintained 
that this position unduly restricts the prerogatives of local officials 
and impedes their ability to consider a broad range of transit options. 
They also argued that the successful negotiation of collective 
bargaining agreements often requires that transit officials be accorded 
a maximum degree of bargaining flexibility. The comments in response to 
this point varied: unions and certain transit systems argued for 
flexibility in light of unique local situations. Private operators 
argued in favor of a ``level playing field'' so that local arrangements 
are not used to bar private operators from being considered for the 
purpose of providing public transit services.
    A commenter argued that FTA must balance the two often conflicting 
provisions of the FT Act: the section 13(c) labor protection provisions 
and the private enterprise provisions. To the extent that FTA reduces 
the private enterprise requirements while the 13(c) requirement 
continues in full effect, this commenter argued, the balance will 
inevitably be altered and riders of public transit will be harmed by 
the imbalance.
    Another commenter noted that Federal financial assistance 
necessarily comes with overriding Federal requirements, e.g., 
procurement rules, that follow the Federal dollar. It is inconsistent, 
the commenter contended, for an agency to impose Federal procurement 
requirements on grantees, but at the same time to permit them to thwart 
the purposes and conditions of Federal assistance merely by agreeing 
with third parties such as unions. If, continued the commenter, the 
concern about institutional barriers is labor protection, then one must 
consider that section 13(c) of the Act contains express provisions for 
the protection of labor. If Congress intended to exempt contrary 
provisions of labor agreements from the private enterprise mandates of 
the Act, it would have done so; breaking down institutional barriers is 
a necessary precondition to enabling competition to develop new and 
more efficient means to deliver transit services.
    On the other hand, others argued against using the transit program 
to override State constitutional prohibitions, State and local laws and 
referenda, rulings of State regulatory bodies, and local collective 
bargaining agreements. This policy, they contended, has had the net 
effect of depriving local transportation leaders of the flexibility to 
determine to what extent privatization is in the best interest of their 
local communities.
    Indeed, a member of Congress commented that ``the ISTEA and prior 
congressional directives have emphasized that the criteria and policies 
for choosing among public and private providers should be left to local 
transit agencies and community planners and that the proper role for 
the Federal government should be one of neutrality on this essentially 
local decision.'' The proposal, the same member noted, ``properly 
reflects the emphasis on local decision-making which I and other 
architects intended in the ISTEA.'' Similarly, a United States Senator 
noted that ``the new language (in the Notice of Proposed Recision) 
properly reflects the intent of ISTEA.'' And: ``The ISTEA emphasized 
that the criteria for choosing among public and private transit 
providers should be left to local transit agencies and community 
officials.''
4. Review of Existing Service
    The existing private enterprise policy provides that recipients 
should review each route every three years to determine whether the 
services in question could be more effectively provided by private 
operators. FTA noted that this represented a significant burden, 
particularly for major transit systems, and indicated that local 
authorities should determine the frequency of any such reviews.
    Those commenters opposed to this requirement contended that it is 
burdensome and unnecessary, while those in favor argued that it forces 
systems to review routes on a regular basis, giving private operators 
an opportunity to make their case.
    One transit system commenter noted that the requirement was ``oddly 
redundant'' since all of its service already was provided by the 
private sector, and noted that it was a burden because of the 
inordinate amount of staff time required to complete the task. A 
Senator stated that the agency's proposed action ``wisely reduces 
burdensome paper work and other restrictive requirements, while 
retaining options of private enterprise participation.''
    A large transit system stated that the current requirements entail 
a significant administrative burden for many transit agencies with 
large and complex route structures, necessitating the diversion of 
significant resources to conducting reviews on a three-year cycle. 
Another transit operator stated that the requirement places an 
inordinate planning burden on it, without any corresponding benefits. 
Rather than such a mandated approach, this operator supported route 
analysis based on local needs and considerations and noted that it 
carries on an ongoing analysis of service levels required to meet 
demand.
    Commenters supporting this requirement, in contrast, contended that 
contracting out has saved significant sums and that the three-year 
review period is necessary to realize these savings, as well as for the 
agency to satisfy the private enterprise provisions in the statute. One 
commenter stated that the three-year review helps to ensure efficiency 
and effectiveness in the delivery of transit services. Competition, 
this commenter noted, requires periodic review of results. Whatever 
FTA's view on three-year reviews of routes, this commenter continued, 
the claim that they are burdensome is without foundation.
5. Appeal Process
    The private sector circulars provide that both recipients and MPOs 
should develop a process for the resolution of disputes with private 
operators, with an appeal to FTA available to private operators if they 
fail to resolve disputes at the local level. In the Notice, FTA 
indicated that since it would be conducting regular reviews of grantee 
compliance with planning requirements, a formal appeal process leading 
to FTA did not appear necessary, although the agency is always 
available to receive reports of planning process failures.
    This aspect of the Notice did not generate much specific comment, 
but appeared to be included in the general opposition to ``burdensome'' 
requirements on the part of some commenters, and on the other hand, to 
be one of the elements that those in favor of the existing guidance 
support.
    One commenter noted that, in response to a Freedom of Information 
Act (FOIA) request, it was provided with FTA's private sector complaint 
decisions: of the twelve complaints, eight were dismissed for failure 
to state a cognizable claim; two were remanded for failure to have a 
local dispute process; and two included findings of violations with no 
penalties imposed. This record, the commenter argued, underscores the 
lack of burden created by the FTA appellate process.

IV. FTA Response To Comments

A. Procedural and Legal Adequacy of the Notice

1. Procedural Objections
    Several commenters objected to the Notice as failing to meet the 
rulemaking requirement of section 12(i)(3) of the FT Act: ``The 
Secretary shall propose or implement rules governing activities under 
this Act only in accordance with this section except for routine 
matters and matters having no significant impact.'' They pointed out 
that in the Notice, FTA acknowledged that the proposed recision of its 
private enterprise guidance is ``a relatively significant change''; 
consequently, they argued, the section 12(i)(3) rulemaking requirement 
applies to this proceeding. Section 12 defines a ``rule'' as a 
``statement of general or particular applicability designed to 
implement, interpret, or prescribe law or policy in carrying out 
provisions of this Act'' and requires the following procedures:

    (i) Rulemaking procedures.
    (1) Procedures.
    The Secretary shall provide an agenda listing all areas in which 
the Secretary intends to propose rules governing activities under 
this chapter within the following twelve-month period. The Secretary 
shall publish the proposed agenda in the Federal Register as part of 
the Secretary's semi-annual rulemaking agenda which lists rulemaking 
activities of (FTA). The Secretary shall also transmit the Agenda 
required by the first sentence of this paragraph to [various 
committees] on the day that the Secretary's semi-annual rulemaking 
agenda is published in the Federal Register.
    (2) Views.
    Except for emergency rules, the Secretary shall give interested 
parties not less than sixty days to participate in any rulemaking 
under this chapter through submission of written data, views, 
arguments with or without the opportunity for oral presentation, 
except when the Secretary for good cause finds that public notice 
and comment are unnecessary due to the routine nature or matter or 
insignificant impact of the rule, or that an emergency rule should 
be promulgated. The Secretary may extend the 60-day period if the 
Secretary determines that such a period is insufficient for diligent 
persons to prepare comments or that other circumstances justify an 
extension of time. An emergency rule shall terminate 120 days after 
the date on which it is promulgated.
    (3) Limitation.
    The Secretary shall propose or implement rules governing 
activities under this Act only in accordance with this section 
except for routine matters and matters having no significant impact.

    The Secretary's most recent semi-annual agenda of rulemaking 
activities was published on October 25, 1993 (58 FR 56632). As the 
agenda indicates, it was based on reports submitted by the Department's 
initiating offices in July 1993, five months prior to the publication 
of the Notice and well before the agency had formulated its proposal. 
We do not believe that the publication requirement serves to foreclose 
FTA's ability to proceed with proposals to amend rules or guidance that 
were developed subsequent to the most recently published agenda and 
prior to the next. Moreover, as the agenda itself notes, its purpose is 
to ``enable the public to be more aware of and allow it to more 
effectively participate in the Department's regulatory activity.'' This 
objective has been clearly met, as an extraordinarily large number of 
commenters have participated in this proceeding. FTA has complied with 
the public participation requirement by providing prior notice and a 
60-day public comment period. FTA believes that in this proceeding it 
has met the requirements of section 12(i).
    Two commenters in particular objected to the path FTA has followed, 
arguing that FTA should instead conduct a rulemaking proceeding under 
the Administrative Procedure Act (APA), 5 U.S.C. 553, that would entail 
a notice of proposed rulemaking and provide for public comment. FTA 
finds this essentially semantical argument to be without merit. These 
commenters identified no procedural defects in the process FTA has 
followed, nor did they assert any prejudice to their ability to 
meaningfully participate. In short, these commenters simply argue that 
FTA's action is legally defective because it titled its November 
notice, ``Notice of Proposed Recision * * *,'' instead of ``Notice of 
Proposed Rulemaking.'' FTA believes that since it has followed the 
notice and comment procedure of section 12(i), the labels used are 
irrelevant. We note also that, although the APA requires prior notice 
and comment, that requirement does not apply to a matter relating to a 
Federal grant program. 5 U.S.C. 553(a)(2).
    The objection of these commenters would have been more valid in the 
context of the process used to adopt the current policies. In 1984 and 
1986, FTA did not provide prior notice and opportunity for comment. If 
these commenters believed the policies then issued in final form 
without prior notice or comment to constitute a ``binding norm,'' they 
could have gone to court asserting the consequent invalidity of the 
1984/1986 guidance.
    In the past, FTA has issued guidance in the form of statements of 
policy and circulars. For example, FTA has issued circulars addressing 
third-party procurement, cross-border leasing, and suspension and 
debarment. Thus, FTA's 1984/1986 guidance was consistent with its 
general practice.
    Even if FTA wanted to use the label favored by these commenters--
thus agreeing that action to rescind the 1984/1986 guidance constitutes 
rulemaking--it would have faced a certain awkwardness. Issuing a notice 
of proposed rulemaking to propose the amendment of a rule generally 
refers to something codified in the Code of Federal Regulations. Here, 
no such target exists; accordingly, FTA judged that a proposal to 
rescind the current nonregulatory guidance, especially when providing 
prior notice and comment, would be appropriate and would adequately 
serve the evident public interest in this issue.
2. Objections Based on the Record-
    Two commenters argued that the Notice fails to state a rationale 
for recision of the guidance and is thus legally defective. They cited 
Motor Vehicle Manufacturers Association v. State Farm Mutual Insurance, 
463 U.S. 29, 42 (1983), in which the Court held that ``an agency 
changing its course by rescinding a rule is obligated to supply a 
reasoned analysis for the change beyond that which may be required when 
an agency acts in the first instance.'' They pointed out that FTA based 
its proposal, in part, on its belief that some grant recipients have 
found elements of the policy to be burdensome. They noted that in 
response to a request for documents under the Freedom of Information 
Act, FTA produced few such written grantee complaints. They concluded 
that FTA has acted in an arbitrary and capricious manner, since it has 
not supplied the ``reasoned analysis for the change'' required by State 
Farm.
    We note, however, that elsewhere in State Farm, which involved the 
National Highway Traffic Safety Administration's (NHTSA) recision of a 
passive restraint requirement for automobiles, the Court stated:

    Recision of the passive restraint requirement would not be 
arbitrary and capricious simply because there was no evidence in 
direct support of the agency's conclusion. It is not infrequent that 
the available data do not settle a regulatory issue, and the agency 
must then exercise its judgment in moving from the facts and 
probabilities on the record to a policy conclusion.

---Id. at 44.

    The question, then, is not whether FTA has evidence in support of 
its belief that grantees find the current policy burdensome. Indeed, 
the Court invalidated NHTSA's finding that the passive restraint 
requirement was unnecessary not because it lacked supporting evidence, 
but because there was substantial evidence to contradict that finding. 
Moreover, State Farm involved review of a final rule, and no court has 
held that an agency proposal is somehow invalid for lack of a 
sufficient record. FTA believes that the record it has developed in 
this proceeding fully supports the action it is here announcing.
    Here, FTA finds that the weight of the documentary evidence in its 
records, including responses of grantees to complaints by private 
operators, protests from labor unions representing transit workers, and 
documented failures of specific privatization programs to realize cost 
savings or improvements in service quality, strongly indicates that the 
policy has imposed significant administrative and financial burdens on 
recipients, while conferring little measurable benefit on public 
transit providers and users. In addition, many comments to this docket 
support FTA's judgment.
    The current policy was not developed with the benefit of prior 
notice and comment and is thus not due the same deference as a rule so 
developed, as was the rule at issue in State Farm. In addition, the 
effects of the current policy have not been the subject of scientific 
study or extensive research. FTA must accordingly base its new approach 
to the participation of private enterprise on its experience in 
administering the current policy, on the insight developed in this 
proceeding, and on recent legislation emphasizing greater local 
decisionmaking such as the ISTEA amendment to section 8(i)(5) of the FT 
Act. Of course, FTA has broad statutory authority in developing its 
approach to implementing the private sector provisions of the FT Act, 
``an administrative decision which is essentially an exercise of 
discretion.'' South Suburban Safeway Lines, Inc. v. City of Chicago, 
416 F.2d 535, 539 (7th Cir. 1969).
    In a decision handed down a year after State Farm, the Supreme 
Court emphasized the deference that must be given to an agency's 
judgments within the agency's field of discretion and expertise. In 
Chevron, the Court upheld an Environmental Protection Agency rule under 
the Clean Air Act allowing states to treat all pollution-emitting 
devices within the same industrial grouping as though they were encased 
in a single ``bubble.'' Having determined that Congress had not 
expressed any specific intention regarding the applicability of the 
statutory provisions in question, the Court decided that the only 
question on review was whether or not the agency's interpretation was a 
``reasonable one'' in light of the environmental and policy objectives 
of the statute. For a unanimous Court, Justice Stevens stated that

    An agency to which Congress has delegated policymaking 
responsibilities may, within the limits of that delegation, properly 
rely upon the incumbent administration's views of wise policy to 
inform its judgments. While agencies are not directly accountable to 
the people, the Chief Executive is, and it is entirely appropriate 
for this political branch of the Government to make such policy 
choices--resolving the competing interests which Congress itself 
either inadvertently did not resolve, or intentionally left to be 
resolved by the agency charged with the administration of the 
statute in light of everyday realities.
    When a challenge to an agency construction of a statutory 
provision, fairly conceptualized, really centers on the wisdom of 
the agency's policy rather than whether it is a reasonable choice 
within a gap left by Congress, the challenge must fail. In such a 
case, federal judges--who have no constituency--have a duty to 
respect legitimate policy choices made by those who do.

    Id. at 865-866.

    Citing Morton v. Ruiz, 415 U.S. 199, 231 (1974), the Court noted 
that ``the power of an administrative agency to administer a 
congressionally created * * * program necessarily requires the 
formulation of policy and the making of rules to fill any gap left, 
implicitly or explicitly, by Congress.'' Id. at 844.
    In enacting the private enterprise provisions of the FT Act, 
sections 3(e), 8(o), and 9(f), Congress did not indicate how they were 
to be applied or implemented. Indeed, for the first 20 years, 1964-
1984, the private enterprise provisions were regarded as largely self 
executing, as FTA issued neither formal nor informal guidance until 
1984 and 1986. Instead, Congress left decisions concerning the 
implementation of the provisions to the discretion of the FTA 
Administrator. South Suburban at 539.
    In the FT Act, Congress made it clear that decisions regarding mass 
transportation services to be provided with Federal assistance are to 
be made locally; indeed, section 2(b) states that one of the 
fundamental purposes of the Act is

    To provide assistance to State and local governments and their 
instrumentalities in financing such systems, to be operated by 
public or private mass transportation companies as determined by 
local needs.

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

    Congress further declared that ``[i]t is the purpose of this Act to 
create a partnership which permits the local community, through Federal 
financial assistance, to exercise the initiative necessary to satisfy 
its urban mass transportation requirements.'' 49 U.S.C. app. 
1601(a)(emphasis added). This emphasis on local decisionmaking in 
determining how best to serve the transportation needs of the local 
area has been recognized by the courts:

    The statutory scheme of (FTA) emphasizes the large role to be 
played by local bodies responsible for mass transit * * *. This 
reliance on the local group is consistent with the statute's 
encouragement of local responsibility in urban mass transportation. 
The statute does not -promote a procedure which leaves all decisions 
with the Secretary (of Transportation), but rather emphasizes local 
solutions to problems.

Pullman v. Volpe at 438-439.

    This original congressional intent that local decisionmakers 
determine the feasibility of private enterprise involvement has been 
reiterated in a recent amendment to section 8(i)(5) of the FT Act made 
by ISTEA, which prohibits FTA from withholding certification of a MPO 
on the basis of its private enterprise policies or those of a 
recipient. Section 8(i)(5) thus reinforces the fundamental statutory 
principle on this issue: local decisionmakers should make the decision 
as to whether transit service should be publicly or privately operated.
    The recently issued joint FTA/Federal Highway Administration (FHWA) 
statewide and metropolitan planning regulations (49 CFR part 613 and 23 
CFR part 450) offer an appropriate vehicle for such local 
decisionmaking. These regulations require a process for demonstrating 
explicit consideration of and response to public views, including those 
of private operators of transit service, during the planning and 
program development process provided for in 23 CFR 450.212(a)(5) and 
450.316(b)(1)(v). FTA believes that these processes will afford private 
operators ample opportunity to express their views and comments on the 
development of transit programs, while allowing local officials to 
encourage the participation of private enterprise to the maximum extent 
feasible.
    Some commenters questioned the wisdom of FTA's proposed recision of 
the current policy, stating that this action would ``cause irreparable 
economic harm to the private surface transportation industry.'' They 
indicated that recision would impede the statutory goal of developing 
responsive and widely accessible transit services. One commenter cited 
a report containing data from FTA's section 15 report showing that from 
1984 to 1990, contracted revenue miles increased from 2.8 percent of 
total mass transit revenue miles to 4.2 percent. However, a close 
examination of the report shows both annual increases and decreases 
during those years in contracted revenue miles, with no clear trend 
apparent. The author notes that overall, ``the numbers indicate that 
the extent of contracted bus service is relatively low and the trend 
has been stable with only modest increases.'' He also acknowledges that 
the report ``does not address performance areas such as safety, 
reliability, and overall quality of service.'' The commenter observed 
that contracted services, which he claims have been consistently shown 
to produce cost savings for local transit agencies, are still a very 
small share of the total market. The commenter claimed that ``the 
situation would be much worse without the increase in transit services 
brought about by the (current) FTA policies and guidance,'' but 
provided no evidence for this assertion.
    Other commenters cited reports detailing specific experiences of 
transit authorities with privatization of bus routes, including one 
FTA-funded demonstration project, that resulted in limited or no cost 
savings and a decrease in service quality and reliability. They stated 
that implementation of FTA's private sector requirements has often 
placed an undue and unnecessary burden on staff because of a lack of 
interest by private operators or their inability to provide the type of 
services required.
    Commenters opposed to the recision failed to provide substantive 
evidence demonstrating that the current policy has resulted in a 
significant increase in private sector involvement in the provision of 
mass transit services or assisted in the development and improvement of 
mass transit systems; accordingly, FTA cannot agree that recision will 
cause financial harm to private operators or prevent the agency from 
accomplishing its statutory mission. The evidence presented, even by 
commenters opposed to the recision, indicates that the existing 
requirements have been of limited effectiveness and questionable 
utility in furthering private sector involvement in mass transit. FTA 
therefore believes that its decision to allow local authorities to make 
their own determinations concerning private enterprise involvement 
without rigid Federal mandates is justified by the record before the 
agency, reasonable in light of the objectives of the FT Act, and 
responsive to the specific provisions of the statute.
    Several commenters opposed the recision on the ground that it 
represents an abrogation by FTA of its responsibility to enforce the 
private sector provisions of the FT Act. They claimed that without the 
current requirements, FTA will be unable to ensure the participation of 
private enterprise ``to the maximum extent feasible,'' as required by 
the statute.
    FTA strongly disagrees. As indicated above, the available data do 
not demonstrate that the current requirements are effective. In our 
view, no commenter has established a causal relationship between the 
implementation of the requirements and increased private enterprise 
participation. On the other hand, public transit authorities have cited 
specific examples of hardship or undue burdens caused by the imposition 
of the existing guidance. FTA therefore believes that it is justified 
in exercising its administrative and policymaking discretion by 
implementing the private sector provisions in a manner consistent with 
the statutory scheme and reinforced by ISTEA, i.e., through local 
decisionmaking rather than through Federal mandates.
    One commenter alleged that FTA did not open the comment period for 
this proceeding prepared to evaluate fully and fairly all the comments 
submitted, but rather with a fixed and predetermined purpose to 
``paper'' its previously decided action. The commenter submitted as 
evidence of FTA's prejudgment certain statements made by the 
Administrator before a trade association group prior to commencement of 
this proceeding, indicating that the agency found the current private 
enterprise requirements inappropriate and burdensome and intended to 
seek their recision. FTA finds nothing improper in the Administrator's 
comments.
    In Association of National Advertisers v. FTC, 627 F.2d 1151 (D.C. 
Cir. 1979), cert. denied, 447 U.S. 921 (1980), the court ruled that 
certain statements made by the Chairman of the Federal Trade Commission 
prior to a rulemaking proceeding under the Federal Trade Commission 
Improvements Act did not disqualify the Chairman from participation in 
or invalidate the proceeding. The court emphasized that the Chairman's 
presentation to a trade group of his views on issues later addressed in 
the rulemaking was a valid exercise of his policymaking prerogatives: 
``The view of a neutral and detached adjudicator is simply an 
inapposite role model for an administrator who must translate broad 
statutory commands into concrete social policies. If an agency official 
is to be effective, he must engage in debate and discussion about the 
policy matters before him.'' Id. at 1168-1169. See also, Lead 
Industries Ass'n. v. EPA, 647 F.2d 1130, 1179 (D.C. Cir. 1980), cert. 
denied, 449 U.S. 1042 (1980); and United Steelworkers of America v. 
Marshall, 647 F.2d 1189, 1208-1210 (D.C. Cir. 1980), cert. denied, 453 
U.S. 913 (1981).
    Indeed, stated the court,

    One cannot even conceive of an agency conducting a rulemaking 
proceeding unless it had delved into the subject sufficiently to 
become concerned that there was an evil or abuse that required 
regulatory response. It would be the height of absurdity, even a 
kind of abuse of administrative process, for an agency to embroil 
interested parties in a rulemaking proceeding, without some initial 
concern that there was an abuse that needed remedying, a concern 
that would be set forth in the accompanying statement of the purpose 
of the proposed rule.
    Investigation and policy-making are integral to the total 
function just as much as decisionmaking. It is appropriate and 
indeed mandatory for agency heads and staff to maintain contacts 
with industry and consumer groups, trade associations and press, 
congressmen of various persuasions, and to present views in 
interviews, speeches, meetings, conventions, and testimony * * *

Nat'l. Advertisers at 1176.

    Accordingly, FTA finds that far from impairing the integrity of 
this proceeding, the Administrator's remarks cited by the commenter 
reflect the agency's valid concern with the current private enterprise 
requirements.

B. Review of Existing Service

    Circular 7005.1 provides that recipients should review each of 
their routes every three years to determine whether that service could 
be more effectively provided by private operators. FTA proposed to 
eliminate this provision, since reports from grantees indicated that it 
entails a significant administrative burden, especially for major 
grantees with large and complex route structures, requiring the 
devotion of substantial staff time to conducting reviews on an 
arbitrary three-year cycle.
    Five commenters, one representing private transit providers and 
four representing public transit agencies, addressed this issue. The 
commenter for the private sector termed an anomaly FTA's 
characterization of three-year route review as an undue burden, since 
the FT Act calls for Federal review of a grantee's planning processes 
every three years. This comment confuses FTA's statutory duty to 
conduct triennial reviews to ensure that transit programs comply with 
Federal requirements with a nonstatutory, nonregulatory mandate that a 
grantee review all routes within its system, even if use of a private 
operator is not feasible on its face or if, in fact, no private 
operator is available to provide service on these routes. This 
commenter also indicated that three-year route review is necessary to 
stimulate competition for transit services, but offered no evidence 
that the provision has ever been successful in increasing competitive 
bidding opportunities.
    The four commenters on behalf of transit agencies supported 
recision of the provision, agreeing that it requires an inordinate 
amount of staff time while producing few corresponding benefits. They 
emphasized that the decision of whether to put routes out to 
competitive bid should be made by the local transit authority working 
with the community and determined in the community's best interest. One 
grantee stated that the provision was redundant, since all of its 
service is already provided under contract with private operators. 
Another agency objected to a Federal mandate, suggesting on-going 
analyses of service to assess the cost-effectiveness and appropriate 
service levels required to meet demand, with an evaluation of whether 
service should be put to competitive bid based on its location, service 
area, deadhead miles, ridership level, and relationship to other 
services within the region. FTA agrees that use of such factors should 
provide some grantees with a more rational basis for determining the 
frequency of route reviews than the current mandatory three-year cycle, 
which, according to the commenters, is often an empty and time-
consuming exercise.
    FTA therefore concludes that the three-year reviews of service 
routes provided by Circular 7005.1 should no longer be required. 
Instead, FTA encourages grantees to include periodic review of route 
service in the consultative process required under section 9(f) of the 
FT Act (49 U.S.C. app. 1607a). Grantees should base the frequency of 
these reviews on the factors cited above and any other factor a grantee 
finds relevant to its local circumstances. FTA believes that route 
evaluation using this process will relieve grantees of an undue 
administrative burden, while resulting in competitive bidding decisions 
that are based on appropriate and meaningful local factors.

C. Fully Allocated Cost Analysis

    Circular 7005.1 provides that grantees should use a fully allocated 
cost methodology when providing service for comparison with the costs 
of potential private operators. The use of this accounting methodology 
was intended to ensure that local decisionmakers have considered all 
costs associated with the provision of service by a public agency.
    In the Notice, FTA pointed out that the experience of many 
recipients shows that in the context of their operations, the fully 
allocated cost methodology is not always an appropriate gauge of the 
true cost of providing a particular service; in some cases, it takes 
into account costs already incurred or costs that remain fixed, such as 
salaries of senior managers and other personnel who would be on the 
recipient's payroll regardless of whether the service was operated by 
the recipient. Similarly, FTA has interpreted the current policy to 
require that recipients bid fully allocated costs when competing with 
the private sector in response to a procurement solicited by a third 
party. FTA now concludes that this requirement interferes with maximum 
open competition by artificially restricting price competition between 
recipients and private enterprise. Moreover, FTA's ``Fully Allocated 
Cost Analysis Guidelines'' are set forth in a complex and lengthy 
document that imposes a significant administrative burden, especially 
on smaller recipients that lack adequate staff resources.
    FTA proposed that in comparing public and private costs of 
operating a particular service, recipients should be free to use any 
reasonable accounting methodology. FTA noted that cost is but one 
factor to be used in local decisionmaking and that maximum feasible 
participation of private operators may depend on other factors, e.g., 
the ability to maintain quality service, operate in a coordinated 
system, and provide an adequate measure of safety.
    Several commenters representing private operators and the majority 
of those representing public operators addressed this issue. Private 
sector commenters, who overwhelmingly opposed the proposed recision, 
recalled that the intent of the fully allocated cost methodology is to 
measure the true cost of a transit service, taking into account the 
direct cost of service as well as the portion of shared costs 
attributable to the service in question. They argued that allowing 
public operators to use marginal costs in comparative bid situations 
results in an unfair comparison of costs, which in the majority of 
situations will favor public carriers, and provides a distorted picture 
of the real costs of public operators to taxpayers. They stated that 
the fully allocated cost methodology is essential to evaluating the 
efficiency and effectiveness of capital and operating dollars spent on 
transit.
    Public transit operators related, however, that practical 
experience with the fully allocated cost methodology has produced less 
than favorable results. Several pointed out that the FTA guidelines are 
extremely complex and difficult to apply, even by trained accounting 
staff. They noted that the fully allocated cost methodology is not a 
normal analytical tool that has other applications. They stated that 
the calculation of ``fully allocated cost'' has caused a great deal of 
controversy due to differing opinions about which model truly reflects 
the real world in which transit systems operate.
    For instance, one grantee related that it spent $28,912 to have a 
consultant develop a cost allocation model that was unusable in its 
delivered form. Numerous additional staff hours were required before 
the model was even marginally useful, and the model must be updated 
every year through a cumbersome process. According to the grantee, the 
result of this substantial investment has been more expenses due to 
litigation brought against it by private providers whose opinion of how 
a fully allocated cost model ought to work differed from the grantee's. 
In the case of just one challenge by a private operator, the grantee 
spent $19,125 to have a consultant audit cost comparisons. This figure 
does not include legal fees associated with that complaint.
    Some grantees complained that certain private operators have taken 
advantage of the fully allocated cost requirement to thwart local 
initiatives. One grantee, for example, stated that for 13 years, it 
provided demand response service for 80 severely handicapped adults, 
taking them from home to their worksite. A private carrier convinced 
the mental health agency overseeing the program to put the service out 
for bid. Because it was required to include all of its overhead costs 
in the bid, the transit agency concluded that it could not compete with 
the private operator and chose not to bid. The private operator then 
withdrew its original bid and renegotiated a fee structure 
approximately 50 percent higher than its original bid. The mental 
health agency determined that it could not afford the service and 
rejected the bid. As a result, a transit-dependent population, which 
had for 13 years been served by the transit agency, is now without any 
transit service.
    One commenter for the private sector cited a report by a noted 
economist who, on the basis of a study of the utilities industry, 
advocates the use of a fully allocated cost methodology, since ``years 
of experience in the electric power industry have shown that cost 
analysis must be the same for both the buyer and the seller of 
electricity.''
    However, a commenter supporting the recision provided an analysis 
of a specific FTA grantee privatization proposal by another economist, 
who points out that the use of the FTA-mandated fully allocated cost 
methodology often results in a skewed cost comparison. That methodology 
requires accounting for all of the grantee's fixed costs, from 
implementation of the Americans with Disabilities Act requirements to 
police protection of transit property and system planning and 
marketing. In contrast, private operators are not charged with 
responsibility for managing a regional transportation network and 
usually provide only a limited amount of bus service. They are thus 
able to submit lower bids that do not necessarily reflect the actual 
per-hour cost savings of privatizing service.
    Many public transit agencies pointed out that even under the 
current guidance, cost is only one factor that grantees may consider in 
determining whether or not to privatize service. The participation of 
private operators ``to the maximum extent feasible'' may also depend on 
the quality, reliability, or the specialized nature of the service they 
provide. Several grantees stated that, based on their own specific 
local needs, even if the requirements to use the fully allocated cost 
methodology and other elements of the current guidance are rescinded, 
they will continue to seek proposals for transit service from private 
providers.
    Given the complexity and difficulty of applying the fully allocated 
cost methodology and its dubious value as an analytical tool, FTA 
concludes that grantees should no longer be required to use it when 
comparing public and private costs of operating a particular service. 
Instead, recipients should use any reasonable and generally accepted 
accounting method they find appropriate under their local 
circumstances. FTA believes that recision of this element will relieve 
local officials of an undue administrative burden while increasing 
their flexibility to determine whether service is ``to be operated by 
public or private mass transportation companies as determined by local 
needs,'' consistent with section 2(b) of the FT Act.

D. Local Institutional Barriers

    The 1984 Policy Statement and the circulars provide that FTA will 
not recognize, as acceptable limitations on private enterprise 
participation, local institutional and policy constraints such as local 
labor agreements or local laws or policy that call for direct operation 
of mass transit service. In the Notice, FTA noted the view of many 
grantees that this position unduly restricts the prerogatives of local 
officials and impedes their ability to consider a broad range of 
transit options. Moreover, the successful negotiation of collective 
bargaining agreements often requires that transit officials be accorded 
a maximum degree of bargaining flexibility.
    Commenters representing the private sector objected to FTA's 
proposed recision of this policy. One argued that this proposal, if 
adopted, would further entrench institutional barriers, resulting in a 
stifled marketplace, steadily declining ridership, and steadily 
increasing costs for services. Another noted that Federal financial 
assistance necessarily comes with overriding Federal conditions, such 
as ADA mandates or environmental quality requirements. Generally 
speaking, these commenters maintained that breaking down institutional 
barriers is a necessary precondition to enabling competition to develop 
new and more efficient means to deliver transit services.
    Commenters for the public sector supported FTA's proposal to 
recognize that there can be legitimate institutional barriers to 
privatization. These commenters stated that FTA's use of the grant 
program to override state constitutional prohibitions, state/local laws 
and referenda, rulings of state regulatory bodies, and local collective 
bargaining agreements has had the net effect of depriving local 
transportation leaders of the flexibility to determine to what extent 
privatization is in the best interest of their local community. Another 
commenter asserted that this aspect of FTA's private enterprise 
guidance, and its often vigorous implementation, has encouraged 
grantees to renege on or contravene the terms of collective bargaining 
agreements concluded under section 13(c) of the FT Act, which mandates 
that grantees afford certain protections to transit workers.
    One grantee noted that as a result of a recent State Supreme Court 
ruling, the contracting out of bus routes is subject to negotiation and 
binding arbitration with its labor union. Given that fixed route 
service is at the core of the collective bargaining unit's work 
function, the grantee stated, the union's concurrence in any decision 
to privatize existing fixed route bus service is unlikely.
    Another grantee stated that it was adversely affected by this 
failure to recognize institutional barriers when, in 1989 and 1990, FTA 
refused to make two section 9 grant awards because local requirements 
in section 13(c) agreements required the successful proposer to take on 
the employees of the outgoing private operators. FTA held that this 
successor employer clause was unacceptable under the FT Act because the 
provision limited the ability of proposers to submit competitive bids. 
The issue was resolved only when Congress adopted special legislation 
allowing the particular grantee's use of the successor clause. 
Department of Transportation and Related Agencies Appropriations Act of 
1991, Public Law 501-516, section 335, and Department of Transportation 
and Related Agencies Appropriations Act of 1993, Public Law 102-388, 
section 342. A review of FTA files reveals several similar instances in 
which grantees were threatened with suspension or withdrawal of FTA 
funds because of the existence of local institutional barriers to 
private sector participation in their mass transit programs.
    A commenter for the private sector noted that the congressional 
action mentioned above was limited in applicability to one particular 
grantee and argued that one can therefore infer congressional approval 
of the overall existing policy. FTA finds that argument entirely 
speculative. Congress has never specifically approved this or any other 
aspect of the current private enterprise policy. Congress' intervention 
in that case is instead consistent with its pattern since 1984 of 
allowing FTA discretion in defining and implementing the private sector 
provisions, but of curtailing the agency's action when it threatened 
local officials' wide discretion in determining the feasibility of 
using private operators. FTA believes, moreover, that in view of such 
legal and collective bargaining impediments, the requirement that a 
grantee ignore institutional barriers to private sector involvement is 
not reasonable. It sometimes places grantees in the untenable position 
of being required to violate State or local laws, court rulings, or the 
terms of their own statutorily mandated collective bargaining 
agreements in order to receive funds under the FT Act, which states 
that such funds may be used to provide service ``to be operated by 
public or private mass transportation companies, as determined by local 
needs.'' 49 U.S.C. app. 1601(b)(3). Accordingly, this aspect of the 
guidance is an unacceptable restraint on a grantee's statutory 
responsibility to determine what level of private sector involvement is 
feasible based on particular local factors. FTA further notes that, 
like other elements of the current policy, the institutional barriers 
provision does not rest on specific statutory authority, but instead 
was adopted for policy reasons, without prior notice and comment.
    One commenter states that FTA's proposed acceptance of 
institutional barriers to private sector involvement is inconsistent 
with Executive Order 12893 (January 26, 1994), which provides that 
``agencies should work with State and local enities to minimize legal 
and regulatory barriers to private sector participation in the 
provision of infrastructure facilities and services.'' This commenter 
maintains that recision would undermine this policy. The Executive 
Order makes it clear, however, that encouragement of private sector 
participation, like the other principles of sound infrastructure 
management, is to be implemented through efficient State and local 
programs. Accordingly, the Executive Order directs that Federal 
agencies work with State and local entities to minimize such 
institutional barriers, not to mandate that local officials overlook 
them. Indeed, by stating that institutional barriers should be 
minimized rather than ignored, the Executive Order recognizes that such 
barriers exist and must be taken into account by local officials in 
determining the feasibility of private sector involvement. FTA finds, 
therefore, that recision of its current guidance concerning 
institutional barriers to privatization is fully consistent with 
Executive Order 12893.
    FTA finds that no data demonstrate that the current policy has 
resulted in increased private sector involvement and that the current 
policy has curbed the ability of local communities to determine which 
transit options best meet the needs of their community. FTA believes 
that this recision of the previous policy will restore to local transit 
officials the flexibility they need to determine to what extent 
privatization is feasible without the imposition of a Federal mandate 
that has often disrupted the grantmaking process and jeopardized the 
balance between Federal and State/local requirements.

E. Appeal Process

    The circulars provide that both recipients and MPOs should develop 
a process for the resolution of disputes with private operators. 
Private operators may appeal to FTA if they fail to resolve their 
disputes at the local level. Pursuant to this provision, FTA has 
rendered administrative decisions following an investigation of 
disputes. In certain of these decisions under the current policy, FTA 
has indicated that it would withhold Federal funds from grant 
recipients that failed to conform to an FTA determination. In the 
Notice, FTA stated that since it will be conducting regular reviews of 
grantees' compliance with the planning requirements, a formal appeal 
process leading to FTA does not appear necessary.
    Commenters for the private sector supported a continued role by FTA 
in the private sector complaint process. One commenter stated that by 
proposing to do away with the appeal process, FTA is showing that it 
will not enforce the statutory requirements of the FT Act. Another 
noted that of the 12 private enterprise complaints brought to FTA since 
the current private sector policy was adopted, eight were dismissed 
outright because the grantee had committed no procedural error, two 
resulted in remands to the grantee, and in all but one other case, the 
grantee's decision was upheld. This, argues the commenter, ``is not a 
record of heavy-handed federal interference in local decisionmaking.''
    FTA agrees that the appeal process has not played a significant 
role in furthering the private enterprise provisions of the FT Act. The 
figures cited by this commenter reveal that the process has in fact 
resulted in lengthy and cumbersome delays (FTA has taken up to two 
years to decide certain matters) and has had little impact on the local 
decisionmaking process or on the level of private sector involvement. A 
review of FTA records indicates that in the one case in which a grantee 
was cited for a violation of the private enterprise provisions and 
ordered to reopen a certain route to private sector bids, no private 
operator submitted a bid to provide service on the route.
    FTA therefore concludes that the appeal process has been a 
fruitless exercise. Periodic FTA reviews should ensure that grantees 
are in compliance with the planning requirements for local 
participation without needless Federal intrusion and additional 
paperwork and administrative burdens on both grantees and FTA. FTA will 
therefore eliminate the appeal to FTA. However, FTA notes that the 
agency may investigate and take action in the case of any failure by a 
grantee or MPO to follow Federal requirements. Since private enterprise 
participation in the planning process is mandated by ISTEA and the new 
metropolitan and statewide planning regulations (49 CFR part 613 and 23 
CFR part 450), FTA will monitor and investigate any apparent failures 
by grantees and MPOs to follow the procedures set out in their own 
local planning process.

V. FTA's Final Action

    In keeping with congressional intent that FTA carefully respect the 
prerogatives of local decisionmakers with regard to the participation 
of private enterprise in the provision of mass transit, FTA is 
rescinding its 1984 Policy Statement (49 FR 41310, October 22, 1984), 
Circular 7005.1, Chapter X of Circular 9040.1C, and Chapter IV of 
Circular 9070.1C. The recision of this guidance will become effective 
thirty days after publication of this notice.
    FTA's recision of the current guidance is based on its judgment 
that the requirements it imposes, while ineffective, have unduly 
infringed on the decisionmaking authority that local officials are 
entitled to exercise under the FT Act. FTA believes that this recision 
is within the broad limits of its authority under the FT Act, that it 
is, in fact, ``an administrative decision which is essentially an 
exercise of discretion.'' South Suburban at 539. FTA's action in this 
matter represents a policy choice, one it believes to be reasonable and 
valid in light of its review of the agency's experience in 
administering the current provisions over the past ten years and fully 
within the limits of its policymaking discretion. The Supreme Court has 
affirmed the authority of an agency to make policy choices within the 
scope of its statutory delegation. Chevron at 865-866.
    In rescinding these requirements, we emphasize that the agency 
continues to support the participation of private enterprise; indeed, 
we believe that the applicable requirements--the section 9(f) process 
and the new section 8 planning requirements--represent a comprehensive 
and thorough approach to the consideration of private enterprise at the 
local level, consistent with requirements of the FT Act.
    We first stress the continuing significance of the section 9(f) 
process as described in FTA Circular 9030.1A, during which key 
decisions regarding private enterprise participation are made. Pursuant 
to chapter IV of that Circular, each recipient:
     Makes available to the public information concerning the 
amount of funds available under section 9 and the program of projects 
that the recipient proposes to undertake with such funds;
     Develops a proposed program of projects concerning 
activities to be funded in consultation with interested parties, 
including private transportation providers;
     Publishes the proposed program of projects in sufficient 
detail and in such a manner as to afford affected citizens, private 
transportation providers, and as appropriate, local elected officials 
an opportunity to examine its content and to submit comments on the 
proposed program of projects and budget and on the performance of the 
recipient; and
     Affords an opportunity for a public hearing to obtain the 
views of citizens on the proposed program of projects.
    The Circular further provides that in preparing the final program 
of projects to be submitted to the FTA, the recipient consider the 
views and comments of private transportation providers and, if 
appropriate, modify the proposed program of projects and budget.
    The second leg of the agency's implementation of the private 
enterprise provisions involves the planning regulations recently issued 
jointly by FTA and the Federal Highway Administration (FHWA). Sections 
1024, 1025, and 3012 of ISTEA amended the FT Act by revising section 8 
to require a continuing, comprehensive, and coordinated transportation 
planning process in metropolitan areas and States. ISTEA makes 
fundamental changes to the traditional planning and programming 
criteria for project selection in metropolitan areas. There is 
heightened emphasis on environmental and intermodal values, financial 
constraint in plans and transportation improvement programs (TIPs), and 
greater public participation in local decisionmaking. Moreover, the 
rules are designed to facilitate State and local compliance with the 
Clean Air Act conformity requirements for nonattainment areas through 
the development and adoption of the plans and TIPs.
    In addition, the statewide planning regulation requires that States 
consider all modes of transportation--surface, air, water--in 
developing plans and programs that can serve all areas of a State 
efficiently and effectively. Implementing ISTEA, the rule calls for 
public participation in statewide planning and programming and for 
State agencies to more closely coordinate their efforts with all other 
interested parties, public and private.
    Thus, with FHWA, FTA has amended the metropolitan planning 
regulations at 23 CFR part 450 and has issued new statewide planning 
regulations to carry out the directives of ISTEA. These rules apply to 
all MPOs serving urbanized areas with a population of at least 50,000, 
State transportation agencies, and publicly operated transit agencies. 
The rules provide for the development of transportation plans and TIPs 
and for the selection of projects to be funded under title 23 U.S.C. 
and the FT Act in metropolitan areas and States. Because of the 
significance of these new rules, FTA and FHWA are undertaking a 
comprehensive outreach effort to explain the new requirements to 
States, metropolitan planning organizations, transit operators, and 
private entities.
    Sections 450.316(b) and 450.212 of the metropolitan planning rule 
set out detailed and extensive requirements regarding public 
participation in the development of transportation plans by statewide 
agencies and MPOs. These provisions require that private operators be 
provided with timely information about transportation issues and an 
opportunity to comment throughout the transportation planning process. 
They also require that interested parties be provided with access to 
technical and policy information used in the development of plans and 
TIPs, as well as open public meetings where matters related to transit 
programs are being considered.
    In short, under this framework the private enterprise provisions 
now involve a dual effort: first, at the local transit system level by 
means of the section 9(f) consultative process discussed above, and 
second, at the expanded metropolitan planning level, which through the 
ISTEA and its implementing regulations has become the critical point 
where transportation decisions will be made.
    FTA believes that the section 9(f) and section 8 requirements will 
provide an adequate basis for the finding required under section 3(e) 
before FTA may provide financial assistance to a public body for the 
operation of service that competes with or supplements service provided 
by an existing mass transportation company, i.e., that the program of 
projects required to be developed by MPOs by section 8 provides for the 
participation of private enterprise to the maximum extent feasible.-
    FTA's findings will be based on such criteria as the efforts a 
grantee or MPO has made to notify and consult with the private sector 
in its section 8 or section 9(f) planning process; the effect of public 
mass transit service proposals on existing private mass transit 
operators; and any other steps or processes the grantee or MPO has 
taken to encourage private sector involvement. FTA believes that such 
factors will allow it to determine whether the program developed under 
section 8 involves the private sector ``to the maximum extent 
feasible,'' given particular local circumstances, both in connection 
with grant making sections 3, 9 and 18.
    Sections 450.316(b) and 450.212 provide that before submitting a 
proposed program of projects to FTA for certification, a State or MPO 
must assure that citizens, affected public agencies, representatives of 
transportation agency employees, private providers of transportation 
and other interested parties have been given full and open access to 
the decisionmaking process. In ISTEA Congress signaled its intent that 
FTA should defer to the local decisionmaking process with regard to the 
participation of private enterprise by adding the following to section 
8(i)(5):

    The Secretary shall not withhold certification under this 
section based upon the policies and criteria established by a 
metropolitan planning organization or transit grant recipient for 
determining the feasibility of private enterprise participation in 
accordance with section 8(o) of the Federal Transit Act.

    Accordingly, in making a finding under section 3(e) when making a 
specific grant, FTA will rely on its previous certification of the 
transportation planning process developed under section 8, unless it 
has noted deficiencies in that process related to private enterprise 
participation. In addition, FTA will conduct periodic Federal planning 
management reviews to ensure that all the planning requirements of 
section 8 are being met by recipients of FTA funds. Furthermore, FTA 
will monitor compliance with the private enterprise provisions of the 
FT Act as part of the annual audits and triennial reviews mandated by 
section 9.

    Dated: April 21, 1994.
Gordon J. Linton,
Administrator.
[FR Doc. 94-10057 Filed 4-25-94; 8:45 am]
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