[Federal Register Volume 66, Number 161 (Monday, August 20, 2001)]
[Rules and Regulations]
[Pages 43680-43718]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-20691]



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Part III





Department of Transportation





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Federal Aviation Administration



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14 CFR Part 187



Fees for FAA Services for Certain Flights; Final Rule

  Federal Register / Vol. 66, No. 161 / Monday, August 20, 2001 / Rules 
and Regulations  

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DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 187

[Docket No.: FAA-00-7018; Amendment No. 187-12]
RIN 2120-AG17


Fees for FAA Services for Certain Flights

AGENCY: Federal Aviation Administration (FAA), DOT.

ACTION: Final Rule.

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SUMMARY: The FAA is issuing this final rule, required by law, lowering 
the fees it established by interim final rule, which was issued on May 
30, 2000 (65 FR 36002, June 6, 2000). The interim final rule 
established fees for FAA air traffic and related services for certain 
aircraft that transit U.S.-controlled airspace but neither take off 
from, nor land in, the United States. This final rule allows the FAA to 
continue to charge fees as required by law. This action also addresses 
a recent Court of Appeals opinion concerning the interim final rule.

DATES: Effective August 20, 2001.

FOR FURTHER INFORMATION CONTACT: Randall Fiertz, Office of Cost and 
Performance Management, (APF-2), Federal Aviation Administration, 800 
Independence Avenue, SW., Washington, DC 20591; telephone (202) 267-
7140; fax (202) 493-4191.

SUPPLEMENTARY INFORMATION:

Availability of the Final Rule

    You can get an electronic copy using the Internet by taking the 
following steps:
    (1) Go to the search function of the Department of Transportation's 
electronic Docket Management System (DMS) web page (http://dms.dot.gov/search).
    (2) On the search page type in the last four digits of the Docket 
number (7018). Click on ``search.''
    (3) On the next page, which contains the Docket summary information 
for Docket No. 7018, click on the document number for the item you wish 
to view.
    You can also get an electronic copy using the Internet through 
FAA's web page at http://www.faa.gov/avr/armhome.htm or the Federal 
Register's web page at http://www.access.gpo.gov/su__docs/aces/
aces140.html.
    You can also get a copy by submitting a request to the Federal 
Aviation Administration, Office of Rulemaking, ARM-1, 800 Independence 
Avenue SW., Washington, DC 20591, or by calling (202) 267-9680. Be sure 
to identify the amendment number or docket number of this rulemaking.

The Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act (SBREFA) of 
1996 requires FAA to comply with small entity requests for information 
or advice about compliance with statutes and regulations within its 
jurisdiction. Therefore, any small entity that has a question regarding 
this document may contact their local FAA official, or the person 
listed under FOR FURTHER INFORMATION CONTACT. You can find out more 
about SBREFA on the Internet at our site, http://www.faa.gov/avr/arm/sbrefa.htm. For more information on SBREFA, e-mail us at [email protected].

Introduction

    Since 1996, the Federal Aviation Administration (FAA) has 
undertaken several rulemaking actions to impose fees for FAA services 
provided, made available, or used by certain flights. Congress directed 
the FAA to establish these fees to recover the cost of FAA services 
rendered to certain aircraft operators who otherwise do not contribute 
by taxes or other assessments to the cost of the air traffic control 
system. The details of the authority as well as the fees and other 
pertinent details are provided below.
    The FAA's rulemaking efforts to impose these statutorily required 
fees have been repeatedly challenged in court. The most recent 
challenge resulted in an opinion of the U.S. Court of Appeals for the 
District of Columbia Circuit that was issued on July 13, 2001 (Air 
Transport Association of Canada vs. FAA; 00-1334, July 13, 2001). In 
that opinion, issued in response to a consolidated petition for review 
of the Interim Final Rule (IFR) that established the fees, the Court 
stated, ``Because FAA has failed to articulate the basis for its 
conclusions that `the unit costs of providing [air traffic control] 
services to overflights within each environment [are] identical to the 
unit costs of providing [air traffic control] services to all air 
traffic within each environment,' we vacate the 2000 Rule and remand to 
the FAA for further proceedings consistent with this opinion.''
    Because the Court faulted the explanation provided by the FAA in 
the IFR, and not the substance of the IFR, the FAA has determined that 
the publication of this Final Rule will both meet the requirements of 
the statute and address the concerns of the Court. Moreover, the 
publication of this rule completes the FAA's task of establishing the 
fees as directed by Congress. Also, this action provides a detailed 
record that explains the basis of these fees--which the FAA, through 
its agency expertise, developed to meet the Congressional mandate.

Overview

    The provision of air traffic control and related services by the 
FAA involves an exceedingly complex series of events requiring 
thousands of people and hundreds of machines, collectively costing many 
billions of dollars. Some 40,000 to 50,000 flights operate within the 
U.S. air traffic system each day; only about 650 (or fewer than 1.5%) 
of these flights meet the definition of an Overflight, and only about 
300 flights per day are currently subject to these fees.
    As detailed below, many different services are provided, made 
available, or used in several different ways to flights operating in 
the U.S. air traffic system. While no two flights are exactly alike, 
all flights that enter the air traffic system receive benefits from the 
entire ATC system, whether requested or not. All the services provided 
by the FAA are required for all flights because the ATC system is an 
interdependent, interlocking chain of people and equipment that 
seamlessly benefits all flights in all circumstances, with or without 
the operators' participation or knowledge, to travel safely through 
U.S. airspace.
    Services to these flights, as detailed below, usually begin with 
the filing of a flight plan, but continue well beyond the flight plan 
(e.g., training, airspace planning, emergency services, etc.). As 
Congress recognized, the development, operation and maintenance of the 
ATC system involves many activities and services (the statute lists a 
few of these services) whose fixed and common costs ``swamp'' any of 
the highly variable activities and services that are provided to, made 
available to, or used by any individual flight. FAA used its Cost 
Accounting System (described in the ``Costing Methodology Report,'' 
provided in the docket, FAA-00-7018, item 6) to determine the costs of 
providing the air traffic services used by all flights (including those 
subject to the fees). As costs can be segregated by the lines of 
business of the FAA (in this case Air Traffic Services), the costs can 
be further broken down by the major airspace environments (Terminal, 
Oceanic, and Enroute) where services are provided to flights in U.S.-
controlled airspace. The flights that are subject to these fees use 
mainly Enroute and/or Oceanic services. Therefore, only the

[[Page 43681]]

costs of these two air traffic environments were used in deriving the 
fees, in part to ensure that only the costs ``directly related'' to 
services for flights in these two airspace environments would be 
considered in establishing fees.
    Since the ATC system is available to all flights, and all flights 
benefit from the ATC system, the FAA does not distinguish between 
flights as to the services provided within each ATC environment. 
Consequently, there is little, if any, cost difference between any of 
the flights within each ATC environment. Nearly all costs for services 
provided or used serve to make the system available, with any 
individual flight cost variability lost in a sea of fixed and common 
costs (see discussion of the first comment below). While there are cost 
differences between the two environments (Enroute and Oceanic), and 
these are reflected in the fees, ultimately the costs of providing the 
air traffic control and related services to any given aircraft within 
each operational environment are essentially identical. Any cost 
variation in services provided an individual flight is de minimis. The 
costs are essentially the same, whether the flight flies at 41,000 
feet, 31,000 feet, or 5000 feet, or whether the flight has one radio 
contact or many radio contacts with controllers. Also, the FAA has no 
current or projected system (nor does FAA believe one could be 
developed economically) that could track the de minimis cost difference 
that might exist between individual flights.
    Accordingly, the fees described below fairly treat all users the 
same in terms of costs, just as all flights are treated the same in 
terms of the benefits and services. Those who are subject to the fees, 
who are otherwise interchangeable with any other user in the ATC 
system, pay fees based on the same costs as other users because the 
services provided, made available, or used are the same as for any 
other flight. Therefore, as detailed below, the fees imposed in this 
rulemaking are based directly on the costs to the FAA of providing 
services for safe air transportation for all flights, including those 
subject to fees.
    As noted by the Court of Appeals in the case cited above, it would 
appear that the costs of some flights should be different from others. 
But the ATC system does not provide services individually; rather it 
provides benefits globally. This is because of the interlocking 
relationship of the costs of the air traffic control system and the 
requirement to have all services available to all flights at all times 
to achieve safety for all. Set forth below, especially in the FAA's 
response to the comments, are the details of how the FAA has complied 
with the statutory mandate, along with further explanation of why the 
cost to the FAA of any flight, in either the Enroute or the Oceanic 
environment, is essentially the same, on a per-mile basis, within each 
environment.

Background

Authority To Establish Fees

    The Federal Aviation Reauthorization Act of 1996 (the Act) directs 
the FAA to establish by Interim Final Rule (IFR) a fee schedule and 
collection process for air traffic control (ATC) and related services 
provided to aircraft, other than military and civilian aircraft of the 
U.S. Government or of a foreign government, that neither take off from, 
nor land in, the United States (49 U.S.C. 45301, as amended by Public 
Law 104-264). Such flights are commonly referred to as ``Overflights.'' 
The Act further directs the FAA to seek public comment after issuing 
the Interim Final Rule and to subsequently issue a Final Rule.
    The Act directs the FAA to ensure that the fees authorized by the 
Act are ``directly related'' to the FAA's costs of providing the 
service rendered. The Act further states that ``services for which 
costs may be recovered include the costs of air traffic control, 
navigation, weather services, training and emergency services which are 
available to facilitate safe transportation over the United States, and 
other services provided by the Administrator or by programs financed by 
the Administrator to flights that neither take off from, nor land in, 
the United States.''
    Services for which fees can be charged under the Act are those 
``rendered'' or ``provided'' by the FAA. By specifying that these 
services include all ``services which are available to facilitate safe 
transportation over the United States,'' the Act further recognizes 
that, due to the integrated and interlocking nature of the air traffic 
control and related services, fees will be based on the cost of all FAA 
services provided, made available, or used by those aircraft operations 
covered by the Act.
    Every aircraft, including those covered by the Act, directly 
receives the benefit of a wide variety of services through the 
integrated FAA system merely by being present in U.S.-controlled 
airspace. No request for services is necessary, as it is impossible for 
flights to safely pick and choose what services are necessary for their 
own safety and that of others in the ATC system.
    It is clear that Congress well understood that the full range of 
these ATC and related services would be used by the FAA in calculating 
the fees when Congress provided that costs may be recovered for the 
many services that are available to facilitate safe transportation of 
aircraft over the United States.

Fee Concept

    The FAA's ATC system is considered the preeminent ATC system in the 
world. Each year, some 40 percent of the world's aircraft operations 
take place within this system. The system is a fully integrated, 
massively complex collection of people and equipment, with backup 
capabilities and redundancies, which facilitates the safe 
transportation of aircraft in U.S. airspace every moment of the day.
    To accomplish this task, the FAA makes available a wide array of 
services that are rendered directly or indirectly to the highly diverse 
and frequently dense aircraft operations in U.S. airspace. These 
aircraft operations range from the smallest, most basic, private 
aircraft operating in good weather from grass fields, to the largest, 
most sophisticated, commercial aircraft operating in bad weather to the 
busiest airports in the world. These aircraft operations also include a 
large assortment of U.S. and foreign government and military aircraft 
operating at all extremes of flight.
    One category of these aircraft operations involves aircraft that 
neither land in nor takeoff from the United States, but do operate in 
U.S. airspace under the direction of the FAA. These ``Overflights'' are 
a microcosm of the larger, complex set of aircraft operations. 
Overflights involve virtually every size and type of aircraft flying 
everything from short distances at low altitudes to long distances at 
high altitudes. The same tremendous variety of equipment, 
instrumentation and capabilities seen in all other flights (i.e., non-
Overflights) is also seen in Overflights.
    The type and scope of interaction between the FAA and a given user, 
either an Overflight or a non-Overflight, may vary considerably from 
one flight to another, but the services rendered involve making 
available at all times the total system that facilitates the safe 
transportation of all aircraft. For the ATC system to properly provide 
safe flight to all operators, the many services provided, made 
available, or used must work together harmoniously so that the FAA can 
serve any aircraft anywhere in

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the ATC system, regardless of how it is equipped and where it is going.
    Any aircraft flying in FAA-controlled airspace may use any system 
or set of systems during any portion of the flight. Due to the passive 
nature of parts of the ATC system, such as navigational aids, the FAA 
does not always know precisely who is using a particular aspect of the 
ATC system, when, or how many times. Likewise, any aircraft flying in 
the ATC system receives many services automatically just by being in 
the system, without having to request the services specifically. All 
flights benefit from merely entering the system, and these benefits are 
far beyond any explicitly requested by a user.
    Communication between the user and the FAA may be initiated by 
either the FAA or by the aircraft operator. Oftentimes, vital ATC 
services are provided and received without the full knowledge of both 
parties, the provider and the recipient. For example, the routing of 
aircraft to avoid other aircraft or bad weather, or to enjoy better 
flying conditions, is frequently accomplished by the FAA without the 
user's specific knowledge (or understanding of why a particular routing 
or re-routing was given by the FAA). Similarly, the use of navigational 
aids and other automatic flight information systems is nearly always 
accomplished without the knowledge of the FAA. For example, satellites 
and VOR's emit radio signals that are available for use for 
navigational purposes by any and all aircraft equipped to receive their 
signals--and this is a genuine benefit to all such aircraft--but the 
FAA has no way of knowing or metering when these signals are being 
received and by whom. These aspects of the ATC system, provided by the 
FAA at considerable cost, are in many ways comparable to signals and 
warnings used in other modes of transportation (e.g., highway traffic 
lights, warning signals at railroad crossings, lighted directional 
buoys in harbors and waterways, weather channels and reports), all of 
which contribute in major ways to transportation safety but are 
impossible to meter directly to specific users. Finally, many other 
services, such as emergency assistance or routing to an alternate 
airport, may be accomplished without the knowledge of affected 
aircraft, other than the one having the emergency or needing the 
service.
    To establish fees that capture this dynamic, varied and highly 
integrated system that must meet the highest of safety standards, the 
FAA has chosen a fee-setting methodology (as detailed below) that not 
only captures the costs of making available the many services rendered, 
but fairly meters those costs among the users based on the number of 
miles flown in the ATC system by each user.
    In summary, the fee system established under this rulemaking has 
been based directly on the FAA's costs of making the services rendered 
by this highly integrated ATC system available to all flights, 
including Overflights, to facilitate their safe operation in the 
airspace controlled by the United States.

Overflight Operations

    Operators of overflight aircraft benefit from the FAA's provision 
of ATC and related services in several ways. First, and most 
importantly, FAA's air traffic services enhance safety through the 
availability of ATC, navigation, and communications services, as well 
as the provision of many emergency services that facilitate safe air 
transportation. Second, flying through U.S.-controlled airspace allows 
the operator to choose optimized routing for the aircraft, which is a 
substantial benefit. The level and type of ATC and other services that 
are provided or made available to operators of overflights depends, in 
part, on the portions of U.S.-controlled airspace such flights transit. 
These services that are available to operators include communications, 
navigation, radar surveillance, emergency services, and flight 
information services. For aircraft transiting U.S. enroute airspace, 
Air Route Traffic Control Centers (ARTCCs) provide separation by means 
of radar surveillance (if they are operating under instrument flight 
rules or generally in airspace above 18,000 feet). Also, these flights 
mainly use navigational aids and radio communication with ARTCCs.
    For aircraft transiting oceanic airspace, where radar surveillance 
and some navigational aids are not available, navigation is generally 
conducted by on-board systems. Aircraft separation, however, is 
provided under procedural control, under which flights report their 
position to an air traffic controller each time they fly over a 
specified reporting point.
    The FAA estimates that approximately 236,000 non-public flights 
(i.e. in aircraft that are not statutorily exempt) annually transit 
U.S.-controlled airspace without landing or taking off in the United 
States (see the report entitled ``Overflight Fee Development Report, as 
Amended,'' item 101 in the docket).
    Charging overflights for ATC and related services is accepted in 
the international arena. The International Civil Aviation Organization 
(ICAO) states that ``where air navigation services are provided for 
international use, the providers may require the users to pay their 
share of the related costs * * *.'' (ICAO's Policies on Charges for 
Airports and Air Navigation Services, Paragraph 36 (Document 9082/6)). 
Further, paragraph 47 of Document 9082/6 notes that ``providers * * * 
may require all users to pay their share of the cost of providing them 
[air navigation services for international use] regardless of whether 
or not the utilization takes place over the territory of the provider 
State.'' (Document 9082/6, adopted by ICAO in December 2000, has been 
placed in the docket as item 119. An earlier version of this document, 
ICAO Document 9082/5, had been previously placed in the docket as item 
7.)

Use of Overflight Fees

    At the same time Congress passed the Act, it also established 49 
U.S.C. 41742, which sets forth how the Overflight Fees are to be used. 
Each year, $50 million from fees or other funds made available to the 
FAA are authorized and appropriated for the Essential Air Service (EAS) 
program. This program, administered by the Office of the Secretary of 
Transportation, provides air carrier service to small communities. The 
statute has been in effect since October 1996, and $50 million has been 
authorized and appropriated each subsequent year. The statute 
underscores the need for the FAA to act expeditiously in establishing 
and collecting Overflight Fees.

History

    On March 20, 1997, the FAA published an Interim Final Rule (IFR), 
``Fees for Air Traffic Services for Certain Flights through U.S.-
Controlled Airspace'' (62 FR 13496), which established fees for FAA air 
traffic and related services provided to certain aircraft that transit 
U.S.-controlled airspace but neither take off from, nor land in, the 
United States. The FAA invited public comment on the IFR and held a 
public meeting on May 1, 1997. The effective date of the rule was May 
19, 1997, and the comment period closed on July 18, 1997. The FAA also 
published two additional amendments to that IFR on May 2, 1997 (62 FR 
24286) and October 2, 1997 (62 FR 51736).
    That rulemaking was subsequently challenged. The Air Transport 
Association of Canada (ATAC) and seven airlines petitioned the United 
States Court of Appeals for the District of Columbia (Court) to review 
the rule. On January 30, 1998, the Court issued its opinion on the 
eight consolidated petitions in the case of Asiana Airlines v. the FAA, 
134 F. 3d 393 (D.C. Cir.

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1998). The Court rejected the petitioners' claims that: (a) the FAA 
acted improperly in employing an expedited procedure before the 
effective date of the IFR; and (b) the FAA violated the anti-
discrimination provisions of various international aviation agreements. 
However, the Court concluded that the FAA's methodology of determining 
cost violated statutory requirements. Therefore, the Court vacated the 
IFR fee schedule and remanded the IFR to the FAA for further 
proceedings consistent with the opinion. On July 24, 1998, the FAA 
published a Final Rule (63 FR 40000) removing the 1997 IFR.
    After the FAA removed the 1997 IFR, the FAA met with various user 
and aviation interest groups to listen to their concerns about fees 
under the Act. The last such meeting was on May 24, 2000, and included 
the Department of Transportation General Counsel and members of her 
staff. A summary of each of these meetings can be found in the docket 
for this rulemaking.
    On June 6, 2000, the FAA published a new Interim Final Rule with a 
request for comments and notice of another public meeting (65 FR 36002, 
June 6, 2000). The FAA held the public meeting on June 29, 2000, and 12 
individuals representing 10 different organizations made presentations. 
A discussion of the comments made at the public meeting can be found in 
the following section of this document. The FAA began charging fees on 
August 1, 2000. The FAA extended the comment period on October 6, 2000 
(65 FR 59713), and again on October 27, 2000 (65 FR 64401), closing the 
comment period on December 26, 2000. Also, on November 1, 2000, the 
Congress enacted the National Transportation Safety Board Amendments 
Act of 2000 (Public Law 106-424). Section 16 of that Act deemed the 
Interim Final Rule, published on June 6, 2000, to have been issued in 
accordance with the Act.
    Just before the August 1, 2000, effective date of the current fees, 
the ATAC and seven airlines again petitioned the Court to review the 
Interim Final Rule. The petitions were again consolidated into a single 
case. Issues raised by the petitioners included some of the same 
process and procedure questions raised in the previous litigation, as 
well as new issues regarding the adequacy of information provided by 
the FAA to support the fees and whether the fees meet the statutory 
requirement of being ``directly related'' to the FAA's costs of 
providing the services. The Court heard oral arguments on May 14, 2001. 
On July 13, 2001, the Court issued an opinion, described in the 
``Introduction'' section of this rulemaking.

Reports Adopted by the FAA

    The FAA asked Capital Economics, a firm with expertise in finance, 
accounting and economics, to review the fee schedule developed by the 
FAA to recover the costs of providing ATC and related services to 
``Overflights.'' Capital Economics is located in Washington, DC, and 
specializes in conducting analysis of complex regulatory issues. The 
FAA requested Capital Economics to assist in responding to comments on 
the IFR. The FAA has adopted for this rule the Capital Economics 
report, entitled ``A Review of FAA Overflight Fees.'' This report has 
been placed in the rulemaking docket (Docket No. FAA-00-7018, item 99).
    The Capital Economics review confirms that the FAA's fee structure 
is well within the scope of commonly accepted economic, financial, and 
accounting principles as applied in a practical, real-world setting. 
Also, in Capital Economics' view, the FAA's reliance on a mileage-based 
fee structure complies with the statutory requirement that the fees be 
cost-based and not value-based. The review also finds that due to the 
prospective high metering costs of other alternative methods, the 
mileage-based metric is likely to be the least expensive measure to 
employ to assign costs to Overflights. In addition, the FAA agrees with 
Capital Economics' conclusion that there is no better alternative 
allocation mechanism than the mileage-based method used by the FAA, 
even ignoring metering costs. The report indicates that the fee 
structure developed by the FAA meets the ``subsidy-free'' test, which 
means that the Overflight Fees do not subsidize other agency costs, 
users, or services. The basis for these conclusions is captured in the 
Capital Economics report.
    The FAA also has relied extensively on the work of the accounting 
and professional services firm, Arthur Andersen, which has been one of 
the agency's partners in developing its Cost Accounting System (CAS) 
and has provided advice to the FAA on CAS-related accounting matters. 
Arthur Andersen developed a ``Costing Methodology Report,'' which was 
used by the FAA in deriving its Overflight Fees. Arthur Andersen later 
published an Addendum to this report. Both of these items are included 
in the rulemaking docket (FAA-00-7018), items 6 and 101, respectively. 
The Costing Methodology Report describes how the CAS captures costs for 
all FAA lines of business and how costs are assigned to the Enroute and 
Oceanic Services. The Addendum to the Arthur Andersen report addresses 
several of the principal comments the FAA has received on the 
Overflight Fee IFR.
    As noted above, the FAA has adopted the Capital Economics and 
Arthur Andersen reports in responding to many of the comments received 
in this rulemaking. Those comments are addressed in detail below.

Discussion of Comments

    The FAA received a total of 57 different comments, many of them 
multiple times, from the 28 commenters listed below, in response to the 
Interim Final Rule, including statements made at the public meeting 
held on June 29, 2000. In addition, the FAA either already had or 
received several letters, reports and other items of information 
relating to the Interim Final Rule. The FAA carefully considered these 
documents as well as the comments prior to issuing this Final Rule.
    A number of the commenters generally agree that the FAA has the 
right to collect fees for its services; however, many argue that the 
methodology the FAA uses to derive its fees is flawed. Several 
commenters requested additional information or clarification regarding 
certain underlying assumptions, cost categories, terminology, cost 
data, cost allocation processes, and reports provided by consultants. 
Although many of the requests for information did not identify a 
specific issue or problem, the FAA has attempted to respond to these 
comments wherever possible, and has provided an additional reference or 
a point of contact where further information can be obtained if needed.
    Many commenters included extensive attachments in support of their 
position, which can be found in the docket. Most comments are from 
foreign air carriers, trade associations representing those air 
carriers, and individuals. The commenters are:

Air Europa Lineas Aereas, S.A.U
Air New Zealand Limited
Air Transport Association of Canada (ATAC)
Airtours International Airways Ltd.
American Airlines
Association of Asia Pacific Airlines (AAPA)
Aviation Assembly
British Airways PLC
Corsair
Deutsche Lufthansa A.G.
Eric A. Jackson
Iberia Lineas Aereas De Espana
International Air Carrier Association (IACA)

[[Page 43684]]

International Air Transport Association (IATA)
International Business Aviation Council, Ltd.
Japan Airlines Company, Ltd.
John R. Bell II
Joseph A. Beaudoin (on behalf of the ATAC)
KLM Royal Dutch Airlines
KPMG LLP (on behalf of the ATAC)
Long Haul Charter Carriers of Italy
LTU-Lufttransport-Unternehmen GmbH. (LTU)
Michael Jengo, Jr. (on behalf of Air New Zealand and other air 
carriers)
Monarch Airlines Limited
National Business Aviation Association, Inc. (NBAA)
Qantas Airways Limited
Richard Henrikson
Societe Air France

Summary of Comments and Disposition

    As stated earlier, many of the commenters agree that the FAA has 
the right to charge fees for Overflights; however, those commenters 
disagree with several elements of the FAA's approach to determining 
those fees. Generally, commenters raise numerous detailed issues on the 
Interim Final Rule, a number of which have been repeated by several 
commenters. Therefore, for clarity, the FAA has grouped most of the 
comments. The following list identifies the major substantive issues 
raised by the commenters:
     The cost of providing air traffic control and related 
services to Overflights versus non-Overflights in the Enroute and 
Oceanic environments,
     The inclusion of fixed and common costs in the Overflight 
Fee cost pool,
     Whether Overflight Fees are subsidizing other costs or 
services,
     The definition of fees ``directly related'' to costs as 
used by the Act,
     Lack of consultation,
     Violation of the Administrative Procedure Act (APA),
     Violation of international agreements,
     Violation of International Civil Aviation Organization 
(ICAO) guidelines,
     Accounting and charging for services provided by air 
traffic controllers at Enroute Centers before having the cost of 
Terminal Services,
     Accounting for costs incurred in the transitional airspace 
between Oceanic and Enroute Services,
     How the FAA determines the cost of providing services to 
Overflights,
     Individual fees for each service delivery point (SDP),
     Alternative methods to assign costs to users, and
     Requests for additional information.

    These comments, and all others received, are addressed below.
1. The Cost of Providing Air Traffic Control and Related Services to 
Overflights Versus Non-Overflights in the Enroute and Oceanic 
Environments
    Many commenters suggest that Overflights cost less than non-
Overflights for various reasons. Several air carriers give specific 
examples of the difference between costs of providing service to 
Overflights versus non-Overflights. British Airways states that the FAA 
incurs a higher level of labor costs for ATC services to aircraft at 
lower altitudes. The following are additional examples that express the 
same concern.
    According to the Air Transport Association of Canada (ATAC), the 
FAA assumes that the level of service it provides to each flight is the 
same regardless of the degree of congestion in the airspace transited 
by the flight. That is, the FAA assumes that the labor costs required 
for controllers to maintain proper separation in congested airspace are 
the same as the labor costs required in sparsely used airspace. The 
ATAC states that the FAA fees rely on this assumption, even though ATAC 
notes that the FAA itself acknowledges on page 2 of its original Fee 
Development Report (Docket item 4), that ``the level of air traffic 
service provided to Overflights depends, in part, on the portions of 
U.S.-controlled airspace transited by such flights.''
    The ATAC also states, ``the FAA assumes that the level of services 
provided to each flight is the same on a per-mile basis regardless of 
the number of sectors transited by the flight. This assumption ignores 
the costs incurred by the FAA when a flight is handed off from one 
sector to another. Such costs will differ among flights with the same 
number of GCD miles but transiting different numbers of sectors.''
    Qantas Airways opines that ``one of the main assumptions underlying 
the FAA's fee calculations is that the ATC services provided to Enroute 
and Oceanic Overflights, respectively do not differ from ATC services 
provided to other Enroute or Oceanic flights.'' Qantas notes that the 
FAA provides no information to show the validity of this assumption.
    Joseph A. Beaudoin, a former air traffic controller, states, in 
comments submitted on behalf of the ATAC, that Overflights represent a 
``miniscule percentage'' of total Enroute traffic, and that the vast 
majority of Enroute traffic is either (1) flights operating at lower 
altitudes (below 18,000 feet) the entire time they are in the Enroute 
environment, or (2) flights transitioning through the lower altitude 
airspace on their way to or from the Terminal environment or high 
altitude sectors (18,000 feet and above). Mr. Beaudoin maintains that 
these low altitude and transitional flights require a much higher level 
of controller attention and contact than do the Overflights, and 
provides several pages of narrative explaining in great detail what he 
believes is involved in providing ATC services to each type of flight 
in the Enroute environment. His conclusion is that Overflights require 
much less time and effort on the part of the controller, and that 
Overflights require much less in the way of services and equipment than 
low altitude and transitional flights.
    In subsequent comments, Mr. Beaudoin also asserts that the 
controller manpower required to service Overflights and non-Overflights 
is not common since controllers generally are not simultaneously 
providing services to Overflights and non-Overflights. Mr. Beaudoin 
further comments that the FAA's labor costs are not fixed; rather the 
number of controllers providing services varies, depending on the 
volume of aircraft operating within the particular geographical area or 
sector and the nature of those aircraft operations.
    Michael Jengo, Jr., a former air traffic controller, submits, on 
behalf of Air New Zealand and other air carriers, another comment on 
the ATC services offered in the Oceanic environment, stating, ``There 
is a significant difference in the level of ATC services provided to an 
Overflight that traverses oceanic non-radar airspace and a flight that 
lands or departs a U.S. airport.''
    The consulting firm of KPMG, which submitted several detailed 
comments on behalf of the ATAC, states that by using Average All-
Aircraft Cost as a surrogate for Average Overflight Cost, the FAA 
ensures that the Overflight fees in the Enroute environment are not 
``directly related'' to the FAA's costs of providing ATC services to 
Overflights.
    KPMG further argues that Low Altitude and Transitional Flights 
require a high level of FAA controller attention and contacts with 
radar facilities because they occur within airspace: (1) in which 
aircraft are constantly requesting or requiring clearance to change 
altitude; (2) that is often congested; and (3) which is frequently 
affected by weather problems and airport delays.
    KPMG concludes that because most flights are non-Overflights, the 
Average Cost used by the FAA is close to the

[[Page 43685]]

average cost to provide services to non-Overflights, and the 
substantial differences in costs between provision of ATC services to 
Overflights and non-Overflights results in a large disparity between 
the Overflight Fees and the actual costs of providing ATC services to 
Overflights.
    FAA Response: The FAA disagrees with these comments. The FAA 
believes its Overflight Fee development approach is a reasonable one, 
consistent with the Act, and that it fairly assesses fees for the 
provision of ATC and related services. The FAA did not seek to 
differentiate between Overflights and non-Overflights for the following 
reasons: (1) The FAA incurs the vast majority of costs by making its 
comprehensive ATC system available to all flights (regardless of the 
type of aircraft and its equipment and capabilities); (2) the FAA's 
marginal cost, including labor cost, for providing services to any 
flight is close to zero; (3) the majority of FAA's costs are common and 
fixed costs; and (4) the controllers' responsibilities for Overflights 
are not fundamentally any different than for non-Overflights.
    In the statute requiring the Fees (49 U.S.C. 45301), Congress 
provided:

    [The FAA] shall ensure that each of the fees required by 
subsection `a' is directly related to the Administration's costs of 
providing the service rendered. Services for which costs may be 
recovered include the cost of air traffic control, navigation, 
weather services, training and emergency services which are 
available (emphasis added) to facilitate safe transportation over 
the United States, and other services provided by the Administrator 
or by programs financed by the Administrator to flights that neither 
take off nor land in the United States.

    The FAA incurs a significant amount of costs simply by making 
services available, as Congress specifically authorized (as quoted 
above), since the same ATC infrastructure is used to provide services 
to Overflights and non-Overflights. Also, the benefits all flights 
receive flow mainly from the ATC system, not the individual ATC actions 
related to an individual flight.
    The FAA ATC system is designed to service and benefit all flights 
by providing for safe passage for all flights all the time. Overflights 
can be anywhere in the ATC system at any point in time for any amount 
of time, and can use any of the available services, regardless of the 
type of flight, user, aircraft, or the aircraft equipment and 
capabilities. Overflights are provided, have made available, or use the 
extensive ATC and related services because of weather deviations, 
aircraft type and equipment, radar vectors, traffic congestion, flight 
stability/comfort, merging routes/crossing routes, transitioning from 
one ATC environment or servicing point to another, as well as many 
emergency services such as diverting to alternate airports. No matter 
where an aircraft is in U.S.-controlled airspace, the FAA makes 
available an extensive and full offering of services to that aircraft 
to facilitate safe air transportation. As a conservative estimate, the 
burden each flight imposes on the FAA is determined by the number of 
miles flown by that flight in each ATC environment. Therefore, each 
Overflight is charged an appropriate fee based on its Great Circle 
Distance (GCD) mileage traveled in the Enroute airspace and its GCD 
mileage flown in the Oceanic airspace.
    The FAA agrees with the conclusions presented by Capital Economics 
in its report (Docket item 99), which supports the FAA's fee 
methodology with respect to Enroute and Oceanic Services (in section 
IIIA, Enroute, pages 8-10):

    The marginal cost of servicing any particular flight in the 
Enroute environment is very small. This is due to several factors. 
The Enroute airspace environment is not capacity constrained. System 
constraints do exist, but they are in other environments, such as 
Terminal Radar Approach Control Facility (TRACON) and Terminal 
Operations. In addition, for safety purposes, the air traffic 
control system has significant built-in redundancy, with multiple 
overlapping components. Also, in providing air traffic control 
services, the FAA incurs costs by making services available (e.g., 
radio navigation aids and broadcast weather services) regardless of 
whether any particular flight uses the services. These services are 
always available in full supply to any and all users that need to 
use them. Once an aircraft enters U.S.-controlled airspace, the U.S. 
ATC system is immediately engaged, and the entire ATC infrastructure 
and full scope of services are available, regardless of the type of 
flight, user or aircraft. The requirements of providing full and 
constant availability of services to all users are designed into the 
system and result in real costs incurred in the provision of air 
traffic control services.
    These factors ensure that no additional physical assets would be 
required to service an additional flight. In addition, the level of 
service utilization does not directly impact on those costs that in 
many other contexts are considered variable, such as labor costs. 
Consider the following:
    (1) An air traffic controller is paid the same amount regardless 
of whether he or she has to monitor a particular aircraft across his 
or her screen or communicate directly with that aircraft. Similarly, 
a controller is paid the same regardless of whether he or she has to 
communicate with an aircraft once or a dozen times. A controller is 
also paid the same regardless of whether he or she works during 
hours when the airspace is quiet or hours when the airspace is busy.
    (2) Controllers have to be trained to provide all Enroute air 
traffic control services and meet all air traffic situations 
regardless of whether or not they encounter all air traffic 
situations. The cost of training does not vary depending on how much 
service is delivered.
    (3) Enroute radar and navigation equipment have to be 
operational at all times regardless of how many flights are in the 
airspace. It is not possible to shut off one or more radar or 
navigational aids at any point in the day in order to reduce the 
overall cost of the radar system.
    (4) Telecommunications capability and capacity have to be 
available at all times during the day regardless of whether any, or 
how many, transmissions are made. Telecommunication services are 
procured on a fixed lease basis, similar to renting a pipeline, 
whereby costs do not increase with small additions to traffic.
    Thus, in addition to the fact that the entire ATC system is 
built to provide a level of service to all users, regardless of 
whether they actually utilize all the services, the lumpy (fixed 
over substantial output ranges) nature of input costs traditionally 
considered to be variable, such as labor or communications, means 
that the additional cost of servicing an additional flight is very 
small.
    This is not to say that there are no differences in the marginal 
costs of servicing one type of Enroute flight versus another. It is 
to say however that both costs are very small and are swamped by the 
allocation of fixed and common costs that must be made in order to 
cover the costs of ATC services.

    The Capital Economics report states further, with respect to 
Oceanic Services (in section IIIB, Oceanic, page 12):

    The marginal cost of servicing any Overflight or non-Overflight 
in the Oceanic environment is very small. In fact, there may be no 
difference in the marginal costs between the two types of flight as 
the same types of procedural controls are generally used for non-
Overflights as for Overflights. The services they receive are very 
similar, if not identical, while in the Oceanic environment. But, 
more importantly, any marginal cost differences that do exist are 
swamped by the large fixed and common costs that must be allocated.
2. The Inclusion of Fixed and Common Costs in the Overflight Fee Cost 
Pool
    Several commenters state that the FAA should not have included 
fixed and common costs in the Overflight Fee cost pool. They argue that 
the FAA should have included only the marginal cost of Overflights in 
order to meet the statutory requirement that fees be ``directly 
related'' to costs. Specific comments on this issue were received from 
ATAC, which states that the FAA makes the assumption that all Enroute 
or Oceanic costs not categorized as ``overhead'' are costs that should 
be included in determining fees directly related to FAA's costs of 
providing

[[Page 43686]]

services to Overflights. Furthermore, ATAC comments that by failing to 
remove all fixed costs, the FAA overstates the costs directly related 
to providing services to Overflights.
    Lufthansa and KPMG assert that the FAA should remove from the total 
costs attributable to Overflights all costs that would have been 
incurred, even if the FAA provided no services to Overflights. They 
state that the overhead amounts removed by the FAA from the Overflight 
Fee cost base clearly do not include all FAA fixed costs of providing 
ATC services; they believe that all fixed costs should have been 
removed.
    FAA Response: The FAA disagrees with these comments. All users of 
the ATC system benefit by being in the system, and all should bear the 
costs. The FAA developed a unit cost for providing air traffic and 
related services in the Enroute and Oceanic environments to provide a 
mechanism for apportioning fairly among all users the overwhelmingly 
large common and fixed costs of the ATC system. The FAA derived the 
unit costs by dividing the total costs of providing ATC services, less 
overhead, in each environment, Oceanic and Enroute, by total miles 
flown in that particular airspace. The use of mileage allows tailoring 
of the costs to the individual user in a manner that is easy to 
administer but fair to the users.
    As Capital Economics points out in its previously cited report, if 
the FAA were to charge only the marginal cost of the specific ATC and 
related services provided to Overflights, it would be unable to recover 
anywhere near the cost of the activity. Capital Economics notes (in 
section II, page 3), ``Faced with this situation, economists typically 
call for a fee system involving a marginal or incremental component 
plus a markup to cover fixed and common costs.'' This is essentially 
what the FAA has done. All directly related costs (including fixed and 
common costs) are derived from CAS data and apportioned among all 
flights, whether Overflights or non-Overflights.
    In its January 1998 opinion (Asiana Airlines v. the FAA, 134 F. 3d 
393 (D.C. Cir. 1998)), based on its review of FAA's previous Overflight 
Fees, the United States Court of Appeals for the District of Columbia 
Circuit recognized that provision of ATC and related services to 
Overflights entails fixed and common costs that must be allocated:

    The difficulty with determining the portion of fixed and common 
costs attributable to Overflights is that by definition these costs 
are shared among a great number of users besides Overflights and so, 
in a sense, do not directly relate to the quantity of services 
consumed. Thus, a method must be devised to apportion these costs 
among all the users who benefit from them, without violating the 
strictures of the statute.

    Understanding the existence and nature of FAA's fixed costs, the 
Court also stated:

    There may be methods to reasonably determine an appropriate 
fraction of the FAA's fixed costs to assign to each Overflight, and 
if the FAA does not have enough information to precisely determine 
the burdens imposed by individual flights, it may proceed based on 
the best data available.

    Because all users receive benefits from the ATC system, and because 
making ATC and related services available involves a significant amount 
of fixed and common costs, it is clearly consistent with the Act, as 
noted by the Court, that the FAA find a way to allocate those costs 
among all users who benefit from them. This is exactly what the FAA has 
done. It recognized the need to allocate fixed and common costs, and 
used an appropriate economic method based on the best available data. 
This does not mean that the unit cost methodology used by the FAA is 
the only way these costs could be apportioned. There may indeed be 
another way to do it--but Congress left it to the FAA to determine the 
methodology. The method chosen by the FAA is clearly reasonable and 
within the parameters specified by the Court. Indeed, as Capital 
Economics notes (in section II, pages 4-5):

    * * * there are many appropriate methodologies. This problem 
arises in practice in countless settings: virtually every business 
firm or government organization provides not just one service but 
several, and these services are often the joint product of the 
entity's operations. It may be possible to isolate the marginal or 
incremental costs of servicing a particular subgroup of customers, 
and this may be possible for each and every conceivable subset of 
customers. However, in the presence of fixed and common costs the 
sum of these marginal costs will fall below the total costs of 
serving all customers. In the extreme, but not uncommon, case of 
very large fixed and common costs, it is quite possible that the 
separate marginal or incremental costs of servicing any and all 
subgroups is virtually zero for each group. It is customary in these 
instances to allocate costs based on sales revenues, level of 
customer activity, level of production, or some other similar, 
conventional method. Examples of such allocation methods are 
ubiquitous.
3. Whether Overflight Fees Are Subsidizing Other Costs or Services
    Commenters suggest that the FAA subsidizes other services or costs 
by treating Overflights the same as all other flights in the Enroute 
and Oceanic environments. Similarly, KPMG claims that because the FAA's 
costs for Overflights are substantially lower than for non-Overflights, 
the FAA's use of ``Average Cost'' as a surrogate for ``Overflight 
Cost'' means that the FAA is requiring Overflights to subsidize 
substantially FAA's provision of ATC services to non-Overflights. Based 
on this assumption, KPMG theorizes that Overflight fees are not 
``directly related'' to FAA's costs to provide ATC services to 
Overflights.
    FAA Response: The FAA disagrees. As previously explained, the FAA 
developed a unit cost of providing, or making available, ATC services 
in both the Enroute and Oceanic environments. The FAA then applied 
those unit costs to total miles flown to achieve a fair, as well as 
direct, allocation of costs between Overflights and non-Overflights in 
each environment that does not subsidize any user.
    Commenters who allege or at least suggest the possible 
subsidization of Overflights by non-Overflights do not provide any 
convincing analysis to support their claims, whereas the Capital 
Economics analysis demonstrates that the Overflight Fees are subsidy-
free.
    Capital Economics states (in section II, page 6): ``Fees that are 
subsidy-free are widely regarded by economists to be preferable to 
those that are not. This is because subsidy-free fees prevent one 
service from subsidizing or from being subsidized by the other services 
offered.'' The Capital Economics analysis goes on to state that 
``subsidy-free fees are defined as those that pass two tests: (1) Fee 
revenues from a service do not exceed the Stand Alone Costs (SAC) of 
that service; and (2) fee revenues for a service are never below the 
incremental cost of that service, measured as the total cost savings of 
not producing the service.''
    The Capital Economics report states (in section IIIC, page 13) as 
follows:

    An FAA analysis of Enroute Overflights, attached to this report 
as Attachment 1, has determined that the stand-alone cost (SAC) of 
servicing these flights is at least $181M. The cost of servicing 
these Enroute Overflights (which underlies the current fee 
structure) is estimated to be approximately $30M, which is well 
below the upper bound, the SAC of serving these flights. Thus, the 
current fee structure quite easily passes the first of the subsidy-
free tests outlined earlier--revenues for the service do not exceed 
the SAC of the service. In addition, as commenters have argued, the 
incremental cost of servicing Overflights is extremely low and 
perhaps nearly zero. Thus, the estimated $30M cost that serves as 
the basis for Enroute Overflight fees under the current fee 
structure easily passes the second test for subsidy-free pricing--
the costs recovered by the fees are never lower than incremental 
costs.

[[Page 43687]]

    An FAA analysis of Oceanic Overflights, included in Attachment 1 
has determined that the stand-alone cost of these flights is at 
least $28M. As a result, the current fee structure easily passes the 
first of the subsidy-free tests outlined earlier. That is, the 
current fee structure is based on an estimate of approximately $19M 
to service these flights, which is well below the SAC of serving 
these flights. In addition, as commenters have argued, the 
incremental cost of servicing Overflights is very low. Thus, the 
estimated $19M in costs which underlies the current fee structure 
easily passes the second test for subsidy-free pricing: the costs 
recovered by the fees are never lower than incremental costs.

    The system the FAA has developed does not subsidize any user. Costs 
that are incurred on behalf of users who are statutorily exempt from 
Overflight Fees (i.e., military and government aircraft), as well as 
the Canada-to-Canada flights, have not been assigned to other users. 
Costs incurred on behalf of those parties are borne by the FAA.
4. The Definition of Fees ``Directly Related'' to Costs as Used by the 
Act
    Several commenters claim that Overflight Fees do not meet the 
Congressional requirement that the fees be ``directly related'' to 
FAA's costs of providing the ATC services to Overflights, and that the 
FAA does not provide a definition of ``directly related'' in the 
Interim Final Rule. One comment received on this issue is from the 
ATAC, which states, ``We understand that an issue may exist as to 
whether Congress intended the FAA to recover only incremental costs to 
providing ATC services to Overflights. To the extent that that was 
Congressional intent, the FAA makes the unwarranted assumption that all 
Enroute or Oceanic costs not categorized as ``overhead'' are costs that 
should be included in calculating costs directly related to FAA's costs 
of providing services to Overflights.'' Another commenter, LTU, states, 
``While the words ``directly related'' are recited in the preamble and 
the Overflight Fee Development Report, these words are never 
interpreted nor explained. It seems the FAA does not accept the 
``directly related'' language, either as used by Congress or by the 
Court of Appeals.''
    FAA Response: The FAA disagrees with this comment. In the statute 
requiring the Fees (49 U.S.C. 45301), Congress provided:

    (The FAA) shall ensure that each of the fees required by 
subsection ``a'' is directly related (emphasis added) to the 
Administration's costs of providing the service rendered. Services 
for which costs may be recovered include the cost of air traffic 
control, navigation, weather services, training and emergency 
services which are available (emphasis added) to facilitate safe 
transportation over the United States, and other services provided 
by the Administrator or by programs financed by the Administrator to 
flights that neither take off nor land in the United States.

Congress did not define ``directly related'' for the FAA. As is common 
with many similar statutes, Congress left it to the FAA to reasonably 
interpret the Act to determine which costs are ``directly related'' and 
thereby useable in the derivation of the FAA's Overflight Fees. While 
some commenters may disagree, the FAA has chosen a reasonable and 
somewhat narrow definition of costs so that each fee (Enroute and 
Oceanic) is directly related to FAA's costs of making available the 
many services that could be, and are, used by Overflights. And, as 
Capital Economics states (in section II, page 2), ``There is no 
standard, or agreed upon, definition of `directly related' in the 
accounting or economic fields.''
    Overflight Fees are based on the FAA's actual costs, as required by 
the Act, and as determined by the new Cost Accounting System (CAS), 
derived directly from the costs of the many services made available. 
The CAS provides the total cost pools for the services provided in the 
Enroute and Oceanic environments. All costs that are traceable to these 
two environments are used in the fee development process. All costs 
attributable to the other two ATS Services, Terminal and Flight 
Services, are specifically excluded, even though some Overflights use 
these services.
    Additionally, although directly traceable to specific services, the 
FAA excludes all overhead costs from the total cost pools used in 
deriving its Overflight Fees. This exclusion, as well as the exclusion 
of Terminal and Flight Service costs, is done through an abundance of 
caution to ensure compliance with the statutory provision that the fees 
must be ``directly related'' to the FAA's costs of the services 
provided, or made available, to Overflights. Within each cost pool 
(Enroute or Oceanic), costs are apportioned between Overflights and 
non-Overflights according to Overflight and non-Overflight miles. Then, 
to ensure that each Overflight is charged an amount that reflects the 
quantity of ATC and related services made available to it, a mileage-
based fee structure is employed. The result is that each individual 
operator's fees are directly proportional to its number of Overflight 
miles flown, as measured by Great Circle Distance from point to point 
of U.S.-controlled airspace.
5. Lack of Consultation
    Nearly every commenter complained that the FAA should have engaged 
affected parties in consultations before issuing the Interim Final 
Rule. Several commenters further requested the FAA to consult with them 
after the effective date of the Interim Final Rule, but before issuance 
of the Final Rule.
    FAA Response: The FAA disagrees. The FAA did engage in consultation 
before the Interim Final Rule was issued. The FAA acknowledges that the 
nature of the consultation may have been different than that expected 
or desired by many commenters. It was as much as is allowable under 
U.S. law, and the FAA believes it was effective in making the views of 
the users known.
    The FAA published the Fees for FAA Services for Certain Flights 
(commonly referred to as ``Overflight Fees'') Interim Final Rule on 
June 6, 2000. Although conducting rulemaking via an Interim Final Rule 
(IFR) is not the FAA's normal or necessarily preferred rulemaking 
practice, the FAA was directed by Congress in the Act to use the IFR 
process to establish Overflight Fees.
    Since then, the FAA has received several affirmations of 
Congressional intent, including two letters from Congress (Docket items 
23 and 28) as well as the subsequent legislation (Docket item 97) 
reaffirming the Congress's direction that the FAA establish Overflight 
Fees via the IFR process.
    Since passage of the Act, the FAA has on several occasions met with 
user and aviation interest groups to listen to their concerns about 
fees. The FAA held a meeting with representatives from the European 
charter carriers, two meetings with the Washington Aviation Assembly, 
and a meeting with counsel from interested airlines. A summary of each 
of these meetings can be found in the docket of this rulemaking, items 
11, 15, 16, and 22, respectively. The FAA held a public meeting on June 
29, 2000, to provide information regarding the Interim Final Rule and 
to invite comments from interested parties.
    Additionally, and separate from the Overflight Fee rulemaking, the 
FAA held two Cost Accounting ``Industry Day'' meetings (July 29, 1999 
and June 30, 2000) to present and discuss Enroute and Oceanic costs for 
fiscal years 1998 and 1999, respectively. Finally, the docket of the 
current rulemaking was extended twice to allow additional comments for 
FAA's consideration prior to issuing a Final Rule. Several additional 
comments were submitted to

[[Page 43688]]

the docket even after the final closing of the comment period on 
December 26, 2000. The FAA has also considered and addressed those 
comments (in this section) in proceeding with the Final Rule.
    Many commenters stated that the FAA violated international 
agreements and ICAO guidelines by not consulting with users prior to 
the implementation of the Overflight Fee Interim Final Rule. The FAA 
disagrees with the commenters on this issue. However, the agency has 
decided to take advantage of an option available to it to provide 
another forum for consultation. The FAA intends to form an Aviation 
Rulemaking Committee for Overflight Fees (pursuant to the 
Administrator's authority under 49 U.S.C. 106(p)(5)) soon after 
publication of the Final Rule.
    Aviation Rulemaking Committees were authorized under the 1996 FAA 
Reauthorization Act, and afford the FAA additional opportunities to 
obtain direct, firsthand information and insight from interested 
parties by meeting together and exchanging ideas with respect to 
proposed and existing rules. In this instance, the Aviation Rulemaking 
Committee's primary task will be to propose possible revisions to the 
Overflight Fees.
    The FAA expects that the Overflight Fee Rulemaking Committee will 
serve as a forum for interaction among the FAA, the users, and the 
public. The Committee will be assigned specific tasks by the FAA 
Administrator or the Assistant Administrator for Financial Services.
    The FAA intends to establish such a committee within 90 days after 
the issuance of this Final Rule. At that time, a Notice will be 
published in the Federal Register with specific details such as 
committee charter, membership, administration, and duration.
6. Violation of the Administrative Procedure Act (APA)
    A significant number of commenters claim that the FAA violated the 
Administrative Procedure Act (APA) by issuing an IFR rather than a 
Notice of Proposed Rulemaking (NPRM). In addition, some commenters 
argue that the FAA should not have used an IFR for what they claim to 
be the ``second'' or ``supplemental'' fee schedule following the 1997 
IFR.
    The ATAC captured many commenters' opinions in its statement at the 
public meeting asserting that the 1998 Court of Appeals opinion 
required that any subsequent fee schedule issued under the Act would 
require an NPRM pursuant to the APA. The ATAC added that the APA calls 
for notice to and comment by affected parties before any rule may 
become effective and that the FAA acted improperly by setting the fees 
without prior notice and comment.
    One commenter claims that APA notice and comment procedures may be 
waived in extreme circumstances and there does not appear to be any 
reason to employ extraordinary procedures in this case given that the 
FAA has been developing the fees for several years.
    FAA Response: The FAA disagrees that it violated the APA. The FAA 
published its previous Overflight Fee IFR on March 20, 1997. This 
rulemaking was reviewed by the United States Court of Appeals for the 
District of Columbia. The Court rejected the petitioners' claims that 
(1) the FAA acted improperly in employing an expedited procedure before 
the effective date of the Interim Final Rule, and (2) the FAA violated 
the Administrative Procedure Act. Subsequently, the recent (July 13, 
2001) decision by the Court of Appeals (referred to above) agreed with 
the FAA.
7. Violation of International Agreements
    LTU, Lufthansa, Iberia Airlines, Japan Airlines, AAPA, British 
Airways, Air New Zealand, and others comment that the FAA violated 
international/bilateral agreements by not consulting with the affected 
parties before issuing the rule.
    FAA Response: The FAA disagrees with these comments, as noted 
previously. The FAA did consult with all parties as required by both 
U.S. and international law.
    The FAA provided an opportunity for foreign governments, foreign 
air carriers, and other interested parties to provide comments on the 
IFR for approximately two months before its effective date. In 
addition, the FAA met formally and informally with representatives from 
foreign governments and the user community to receive and provide 
information regarding the IFR. The FAA held a public meeting (on June 
29, 2000) to allow interested parties yet another opportunity to voice 
their concerns regarding the rule. While this is not the type of 
consultation desired by the commenters, it is consistent with 
international and U.S. obligations of the FAA in this rulemaking.
    Commenters further state that bilateral agreements and ICAO 
recommendations impose an obligation or a responsibility upon the 
United States to consult with other governments and their carriers 
prior to imposing user fees. To the extent possible, the FAA met with 
those governments that expressed an interest in meeting with the agency 
regarding the rule. Indeed, two informational meetings were held, in 
February of 1999 and 2000, with a number of members of the Washington 
Aviation Assembly, a group of Washington-based diplomats from a number 
of foreign Embassies, including specifically representatives of 
virtually all of the countries with carriers significantly affected by 
the Interim Final Rule.
    In the previous litigation (Asiana Airlines v. the FAA, 134 F. 3d 
393 (D.C. Cir. 1998)), the U.S. Court of Appeals agreed with the FAA's 
position on consultation. The Court's opinion stated:

    We agree with the FAA that its actions did not violate any 
duties actually imposed by international aviation agreements. Most 
of the agreements relied upon by petitioners speak of general aims, 
not specific obligations * * *. The petitioners have not cited any 
international agreement that comes close to imposing duty to 
consult. But even if such a duty could be found in an agreement only 
to encourage consultations, the record does not indicate that the 
FAA failed to consult with affected foreign users. Prior to the 
effective date of the IFR, FAA staff held informal meetings as well 
as public meeting with representatives of foreign airlines, provided 
copies of materials from the docket relevant to the IFR development, 
and accepted forty comments on the rule. Although these exchanges 
may not have influenced the content of the regulations made 
effective on May 19, 1997, the terms ``consultation'' and ``exchange 
of information'' in the cited international agreements do not import 
the full notice and comment apparatus of APA. The procedures adopted 
by the FAA cannot be said to have breached the terms of these 
international agreements.

    The FAA's rulemaking and consultative procedures in the current IFR 
have been nearly identical to the previous rule. The FAA believes that 
there has been no violation of any international obligation of the U.S. 
As explained more fully under the previous comment on ``lack of 
consultation,'' the FAA intends to establish an Aviation Rulemaking 
Committee for Overflight Fees to serve as a forum for interaction among 
the FAA, the users, and the public on matters relating to Overflight 
Fees.
8. Violation of International Civil Aviation Organization (ICAO) 
Guidelines
    Lufthansa, Japan Airlines, AAPA, ATAC, Air New Zealand, and others 
claim the FAA violated ICAO guidelines by not consulting with affected 
parties prior to promulgation of the rule and by issuing an Interim 
Final Rule. AAPA indicates that the United States has an obligation to 
consult with users regarding any fees due to the large area of 
international airspace that has been designated to it by ICAO. Air New

[[Page 43689]]

Zealand asserts that the Interim Final Rule cites ICAO guidance for 
navigation charges in justifying its user fees, but ignores that the 
same document calls for prior consultations on fees.
    FAA Response: The FAA disagrees with the commenters who allege that 
it violated ICAO guidelines. The ICAO principles they cite do not 
require authorities to conduct consultations prior to implementation of 
user fees. These principles--which at the time FAA issued the IFR and 
the comments were received--were set forth in paragraph 22 of ICAO 
Document 9082/5, Statements by the Council To Contracting States on 
Charges for Airports and Air Navigation Services (Docket item 7). They 
``recognize the desirability of consultation with airport users before 
significant changes in charging systems or levels of charges are 
introduced.'' Further, ICAO Document 9082/5 goes on to state, in 
paragraph 44 that ``The principles enunciated with respect to 
consultation concerning changes in airport charges in paragraph 22 are 
applicable to changes in air navigation services charges.''
    The ICAO guidance document indicates that there may be a need for 
more specific consultation with respect to air navigation charges, but 
then states, in paragraph 45, that ``consultation implies no more than 
discussions between users and providers in an attempt to reach general 
agreement on any proposed charges, and that failing such agreement, 
governments would continue to be free to impose the charges 
concerned.'' The Council continues in paragraph 45 with the 
recommendation that ``when any significant review of existing charges 
or the imposition of new charges is contemplated by a provider of air 
navigation services, appropriate prior notice should, so far as 
possible, be given at least two months in advance to the principal 
users.'' This (the 2-month advance notice) is what the FAA did in the 
current instance. When it issued the current Interim Final Rule, the 
FAA acknowledged its responsibility to conform to ICAO guidelines where 
possible; and (by giving 2-month advance notice, with opportunity to 
comment, before the fees went into effect, and holding the public 
meeting on June 29, 2000) did so to the maximum extent possible under 
U.S. law.
    It should be noted that, subsequent to the issuance of the IFR and 
the receipt of public comment, ICAO in December 2000 issued a new Sixth 
Edition of the above cited guidance document. The new document, 
entitled ``ICAO's Policies on Charges for Airports and Air Navigation 
Services,'' has been placed in the docket (Docket item 119). While it 
includes some new material and a rearrangement of previous guidance, 
the language cited above is retained, almost verbatim, in paragraph 49 
of the new document, the only difference of any consequence being a 
recommendation that 4-months advance notice be given for fee changes, 
vs. the 2-months that were recommended at the time FAA issued the 
Interim Final Rule.
9. Accounting and Charging for Services Provided by Air Traffic 
Controllers at Enroute Centers, Before Having Determined the Cost of 
Terminal Services
    Air New Zealand, Lufthansa, Air France, Iberia Airlines, Japan 
Airlines, KPMG, and Joseph Beaudoin (on behalf of the ATAC), and others 
comment that the Overflight Fees might not be accurate because the FAA 
has not yet determined the cost of Terminal Services. Without having 
determined these costs, they question whether the FAA can properly 
account for services provided by Enroute Centers to aircraft taking off 
or landing at airports that lack an air traffic control tower.
    FAA Response: The FAA acknowledges that the cost data for Terminal 
Services is not yet available in CAS at the service level. The FAA 
disagrees, however, that Terminal Service costs are required to 
calculate Overflight Fees. They simply are not. Since Overflights do 
not use Terminal Services, only the Enroute and Oceanic Service costs 
are needed. CAS has been providing Enroute and Oceanic costs since 
1998.
    Enroute controllers sometimes provide approach control services for 
airports that have no control tower; this occurs most commonly at 
island airports outside the U.S. Controllers are not actually scheduled 
on duty to provide this service exclusively; therefore, controller 
labor costs are not affected by assisting flights landing at these 
airports. Only very minor costs are associated with the provision of 
this particular service, compared with the significant amount of fixed 
and common costs that are incurred in providing multiple services. 
Thus, the impact on costs of providing services at airports that have 
no control tower is de minimis. This circumstance is addressed as 
follows in the Capital Economics report (see Capital Economics report, 
Docket item 99, Section IIIA, page 11):

    If we expand the analysis to consider the incremental cost of 
adding the entire block of Overflights as a group while holding all 
other services at their normal levels we must conclude that the 
change in total costs is still very small. That is, if we start with 
a system that handles only non-Overflights and then add all 
Overflight traffic to that system, the change in total costs would 
be negligible. But this is also true of any similarly sized subgroup 
of flights. Whether this subset be defined as `Overflights' or `all 
flights that are enroute to South Dakota,' the change in total costs 
from serving these subsets (holding all other services at their 
regular levels) is negligible. This is true of any system 
characterized by very large shared input costs. Moreover, to trace 
costs to specific services also has its costs. In such 
circumstances, a composite of services is usually priced as a group.

    The incremental costs of Enroute controllers serving flights at 
non-tower airports would be very small and thus make essentially no 
difference in the overall cost pool. Therefore, it is not necessary to 
delay the implementation of Overflight Fees to be able to calculate the 
de minimis effect of Terminal costs on the fees.
10. Accounting for the Costs Incurred in the Transitional Airspace 
Between Oceanic and Enroute Services
    Several commenters argue that the FAA did not account for the costs 
incurred in the transitional airspace between Oceanic and Enroute 
Services. Former controller Michael Jengo, arguing on behalf of Air New 
Zealand and several other international air carriers, cites the example 
of a Tokyo-to-San Francisco flight. At about 200 miles from San 
Francisco, this flight would be transferred from non-radar airspace to 
a radar transitional sector, which would then descend the flight from 
cruise altitude to about 13,000 feet into the Bay TRACON airspace. He 
states that an Oceanic Overflight does not normally receive such 
transitional service, and that, therefore, the flight landing or taking 
off will require more manpower and equipment than an Oceanic flight 
that only transits U.S. airspace.
    The ATAC asserts that the FAA failed to provide sufficient 
information for the portion of FAA's total cost pool dedicated to 
providing ATC services to aircraft in the combined Enroute and Oceanic 
environments. And Air New Zealand points out that while there are costs 
involved in ``transitioning'' between Oceanic and Enroute Services, it 
is not clear where these transitional costs are allocated.
    In a supplemental declaration, Mr. Jengo states, ``oceanic air 
traffic controllers are generally assigned on a given day to either 
oceanic procedural sectors or to the oceanic radar transitional sector 
* * * they do not

[[Page 43690]]

work both procedural and radar sectors at once.''
    KPMG asserts that given this differentiation between procedural and 
radar transitioning sectors, and the fact that ``oceanic overflights 
are primarily procedural,'' and ``do not normally use radar 
transitioning sector,'' it also follows that neither controller 
manpower nor capital equipment in the Oceanic radar transition 
environment is common among Overflights and non-Overflights.
    FAA Response: The FAA disagrees with these comments. The FAA has 
identified clear boundaries between where Oceanic airspace ends and 
Enroute begins for purposes of the Interim Final Rule. The IFR does not 
attempt to address and account individually for all local variations or 
nuances in the ATC system. Instead, the CAS uses carefully developed 
business rules that are generally consistent with the boundaries 
between Enroute and Oceanic, and tracks costs accordingly. Flights 
departing from or landing in the United States descend or ascend in 
airspace that is generally radar-controlled and thus fall under the 
``Enroute'' cost and service category. Within Oceanic airspace, the FAA 
generally provides the same type of Oceanic procedural services to all 
flights. Overflights constitute only about 1.25 percent of all Enroute 
flights and a little more than 10 percent of all Oceanic flights, and 
it is impossible to meter the use of all services that an Overflight 
could use.
    The comments that the costs of providing ATC services to non-
Overflights in transitional airspace are significantly higher than the 
costs of providing such services to Overflights appear to reflect a 
misunderstanding of exactly how these costs are accounted for under the 
CAS. The airspace Mr. Jengo calls ``oceanic radar transitional sector'' 
is, by the FAA's CAS definitions, accounted for as Enroute airspace, 
because of the type of services (radar, communication, navigation, 
etc.) provided in that region. The CAS attempts to group services in 
logical categories, according to the type of services the FAA provides. 
Where there are variations in controller activities, these differences 
are mostly reflected in the CAS.
    The commenters appear to be concerned that much greater costs are 
incurred in providing service to the non-Overflights, and that as a 
result the Oceanic Overflights are essentially being over-charged to 
provide this greater level of service to the non-Overflights. This is 
not the case, however, since, as explained in the two preceding 
paragraphs, the costs of services provided in the ``radar transitional 
sectors'' are generally assigned under Enroute, rather than Oceanic.
11. How the FAA Determines the Cost of Providing Services to 
Overflights
    Many commenters argue that the FAA should determine the cost of 
providing services solely to Overflights. Some commenters state that 
the FAA could use other, more appropriate methods such as activity-
based costing (ABC), to better allocate Enroute and Oceanic costs. The 
ATAC suggests that the FAA conduct an activity analysis associated with 
Overflights in both the Enroute and Oceanic environments, along with a 
cost-driver analysis indicating how best to allocate costs to each 
activity.
    KPMG, in comments submitted on behalf of the ATAC, states that it 
is not reasonable for the FAA to rely solely on the Arthur Andersen 
Costing Methodology Report (Docket item 6) and FAA's own ``improper'' 
assumptions, given that the FAA could instead use the well-accepted ABC 
methodology to determine its actual costs to provide ATC services to 
Overflights. KPMG further indicates that ABC is a standard cost 
accounting method that apportions costs of resources to those specific 
activities that the resources support.
    In additional comments submitted later (KPMG ``Report on New 
Materials Regarding FAA's Overflight Fees,'' Docket item 105), KPMG 
asserts that the FAA has the means to make a reasonable estimate of the 
portion of its labor costs that are attributable to Overflights. KPMG 
again argues that the FAA could have used ABC to determine its actual 
costs of providing ATC services to Overflights.
    FAA Response: The FAA disagrees. The concept of ABC cannot be 
applied in a useful way to Overflights, because it would require a 
fundamentally different approach to Cost Accounting than the one that 
the FAA has been working to develop for several years. Massive amounts 
of specific, detailed data, not currently collected, on individual 
actions by each controller would be needed to implement an ABC 
approach. This type of approach was considered by the FAA early on in 
the development of the current CAS, but was rejected as being neither 
practicable nor particularly useful. The costs in time and dollars to 
gather and maintain detailed activity data would have been substantial 
and the data itself was not considered meaningful for managerial 
purposes. In addition, there would still be a need to allocate the 
overwhelming amounts of common and fixed costs, as is done under the 
current CAS, since these costs represent all but a minimal part of the 
overall costs of providing the ATC and related services. This is so 
because all of the FAA's ATC services must be available at all times to 
all flights (Overflights or non-Overflights) regardless of the amount 
of air traffic activity to ensure the safety of any flight. As noted in 
the Act:

    Services for which costs may be recovered include the costs of 
air traffic control, navigation, weather services, training and 
emergency services which are available (emphasis added) to 
facilitate safe transportation over the United States, and other 
services provided by the Administrator or by programs financed by 
the Administrator to flights that neither take off nor land in the 
United States.

    The FAA incurs a significant amount of cost by making ATC services 
available, whether or not such services are used by a specific flight 
at a particular time. The services rendered involve making available at 
all times the total system that facilitates the safe transportation of 
all aircraft. As noted by Capital Economics in their review (see the 
Capital Economics report, Docket item 99, Section III A, Page 8):

    These services are always available in full supply to any and 
all users that need to use them. Once an aircraft enters U.S.-
controlled airspace, the U.S. ATC system is immediately engaged, and 
the entire ATC infrastructure and full scope of services are 
available, regardless of the type of flight, user or aircraft. The 
requirements of providing full and constant availability of services 
to all users are designed into the system and result in real costs 
incurred in the provision of air traffic control services.

    See also the FAA's response to comments under the heading ``The 
cost of providing air traffic services to Overflights versus non-
Overflights.'' In addition, the FAA recognizes that, while there may be 
very small differences in the marginal costs of providing services to 
one type of an Enroute flight versus another, these incremental costs 
are so small relative to fixed and common costs that total Enroute 
costs must be allocated to cover the full cost of the services 
provided. On this point, the Capital Economics analysis concludes (see 
Capital Economics report, Section III A, page 10):

    This is an absolutely crucial point that seems lost on 
commenters, who complain that activity-based costing or some other 
close examination of the production process would allow a more 
direct and complete relationship between costs and outputs to be 
established. In other words, they hold that while the costs may be 
difficult to trace back to individual outputs, it is in fact 
possible to do so and a careful study of the activities involved 
will shed light on how costs should

[[Page 43691]]

be assigned. This reveals a misunderstanding of common and joint 
costs, which are the primary feature of air traffic control costs in 
providing services to Overflights.
    Consider an example of an input that is common to the production 
of two outputs, such as the fence that a farmer installs to contain 
his cows and sheep. The installation cost of the fence is clearly 
common to both the production of cows and of sheep. Commenters would 
suggest that studying the production process under activity based 
costing principles would allow for the cost of the fence to be 
attributed precisely between the cows and sheep. But in reality they 
cannot be so assigned regardless of how closely they are studied. 
They are shared costs.
    Even inputs that are traditionally considered variable, such as 
labor, can be largely or completely common. Consider the case where 
all the wear and tear on the farmer's fence is due to aging. The 
farmer's time spent on fence mending is a cost that is common to 
both the production of cows and sheep, and no amount of scrutiny or 
activity based costing techniques will allow them to be assigned to 
one output versus the other. The farmer's fence-mending efforts are 
a common input into the production of both cows and sheep. In a 
similar vein, it is not at all clear that controller time used in 
providing ATC services to flights is separable or assignable to 
individual flights. The suggestion that monitoring contacts made 
with aircraft will allow one to do this ignores the fact that, in 
providing ATC services, a controller is by definition simultaneously 
monitoring and providing safe passage for all flights within his or 
her airspace, Overflights and non-Overflights included.
12. Individual Fees for Each Service Delivery Point (SDP)
    Several commenters suggest that the FAA should have a unique fee 
for each SDP because each SDP has had its unique costs identified by 
the FAA's Cost Accounting System.
    KPMG adds that the FAA failed to provide information on cost 
differences between SDPs, or an explanation of the reason why costs 
were not allocated between Overflights and U.S. originating/terminating 
flights at individual SDPs in order to capture differences in costs in 
different portions of U.S. airspace. In addition, KPMG argues that the 
cost differentials among the various SDPs do not solely reflect the 
differing number of flights encountered by each SDP. To the contrary, 
the differentials reflect different cost structures for each SDP (e.g., 
differing levels of costs for labor, telecommunications and other 
inputs based on local rates and charges for labor, electricity, 
telecommunications, etc., and/or the price, efficiency and/or 
characteristics of equipment). KPMG suggests that in order for each 
Overflight Fee to be ``directly related'' to the costs of providing ATC 
services for that Overflight, the FAA needed to make an adjustment to 
reflect the actual cost structure for the SDP(s) involved in servicing 
that Overflight.
    Qantas Airways expresses its concern that the proposed Oceanic 
charge does not differentiate between the Atlantic and Pacific, 
although intuitively there would seem to be differing operational 
conditions in these two areas.
    Air New Zealand and other commenters ask that the FAA provide data 
to support its derivation of its Oceanic unit rate for each segment 
(Atlantic or Pacific) of Oceanic airspace in terms of the numbers of 
aircraft movements and the distances flown.
    FAA Response: The FAA agrees that it has a significant amount of 
cost data available by SDP and that the costs of providing Enroute and 
Oceanic Services differ by varying degrees from one SDP to another. The 
FAA disagrees, however, with the suggestion that it should have 
determined unique fees for each SDP for this rulemaking. As noted by 
Capital Economics (see Capital Economics report, Section III A, Page 
14):

    Commenters complain that the FAA has acknowledged that its cost 
accounting system allows it to measure costs by Center. They argue 
that, therefore, Overflights should be charged based on the actual 
Centers crossed since costs may vary by Center.
    In the current fee determination, the FAA has opted for a 
simplified fee structure to minimize Overflight administration 
costs, particularly for the introduction of the fees. The present 
fee determination aggregates costs across Centers and charges a per-
mile fee based on the total cost of all Centers. In effect, the fee 
is based on an average Center cost.
    The administrative burden of proving flight tracking, billing 
and collections, and customer service related to Center-based fees 
would be significant. Establishing fees by Center would mean 
additional workload that would include: setting up, maintaining, and 
monitoring an automated system to provide the necessary data; 
conducting quality control for billing and collections to ensure 
that each flight has been assigned the appropriate rate for each 
Center; and providing customer support for such detailed inquiries. 
All these costs would add to the overall cost of supplying ATC 
services to Overflights, which all Overflights would have to bear 
through higher fees. These administration costs could result in 
higher overall fees for all. In addition, there are some specific 
service costs that have been identified in total for all Centers, 
but a determination has not yet been made as to how best to 
attribute them to specific Centers. Thus, achieving Center-based 
pricing would require additional accounting work.

    The FAA does not have SDP-specific data for all of its costs. 
Indeed, significant amounts of total costs at the 21 Centers (SDPs) are 
currently available only at aggregate levels that would need to be 
allocated among all SDPs if SDP-specific fees were to be adopted. More 
than 15 percent of Enroute costs and more than 45 percent of Oceanic 
costs are in this category. Allocation of those costs among the SDPs 
would require new accounting systems. While there may be differences 
between SDPs, the costs of measuring those differences would exceed any 
benefits that might result from greater precision in fee setting.
    Meanwhile, the FAA continues to work to implement improvements and 
refinements in the CAS. Assuming that the system evolves to the point 
where all costs can be fairly and accurately assigned by SDPs, the FAA 
will again consider the option of charging fees by SDPs.
13. Alternative Methods To Assign Costs to Users
    Commenters suggest that the FAA should consider other ``better'' 
measures, such as cost per activity, cost per flight hour, cost per 
handle, or some other appropriate method, for assigning costs to users. 
KPMG, for example states, ``The FAA also makes the unwarranted 
assumption that miles traveled is an appropriate measure of the cost 
incurred in providing ATC services. At the Industry Presentation, the 
FAA presented information on `Cost per Flight Hour' and `Cost per 
Activity' and stated that `Cost per Activity' is a more meaningful 
measure of the costs incurred by the FAA at Enroute SDPs.'' KPMG also 
states ``The FAA has failed to provide any explanation of why the 
extensive flight data available was not used to determine a reliable 
allocation of costs, despite the statement in the Andersen Report that 
`automation systems readily track events related to (ATS) services.' 
For example, a `handle' is a measurable event tracked by automation 
systems at each service delivery point and can be considered a unit of 
service * * *.'' Air New Zealand suggests that using mileage as a 
denominator results in Oceanic Overflights picking up twice their share 
of costs, on a per-flight basis, compared to all Oceanic flights.
    FAA Response: The FAA disagrees with these comments. Cost per 
Flight Hour and Cost per Activity are used globally in the FAA's cost 
measurement methodology for management purposes to ensure a well 
rounded approach to understanding the agency's costs and in gaining ATC 
managerial efficiencies. But these types of measurements are not 
internationally accepted, nor do systems exist to track Overflights on 
either a

[[Page 43692]]

Cost per Flight Hour or a Cost per Activity basis. FAA did, however, 
consider several other metrics before making its determination that 
using the average unit cost approach with Great Circle Distance (GCD) 
miles was most appropriate and most fair for the Overflight Fee IFR. 
Other metrics considered include the following:
     Cost per air traffic control handle (count of each time an 
aircraft is handed-off from one Sector to another, either within the 
same ATC Center or between different Centers), which is a type of 
Activity Based Costing system;
     By actual distance flown (as opposed to GCD);
     By amount of time flown within the ATC system; and
     By weight of aircraft type--together with various weight-
based combinations such as square root of aircraft weight, GCD times 
square root of aircraft weight, and square root of GCD times aircraft 
weight.
    Upon reviewing the above alternatives, the FAA concluded that 
average unit cost, coupled with GCD, has the following advantages:
     Widely used and accepted around the world (e.g. 
Eurocontrol, Airservices Australia, Airways Corporation of New Zealand, 
and NAV CANADA (enroute));
     Generally considered a good approximation of the level of 
services provided;
     Eliminates most of the effects of weather, winds, air 
traffic control instructions, as well as traffic volume and flow;
     Shortest possible distance between two points, giving the 
user the lowest possible charge based on distance.
    The other options did not offer these advantages.
    Overall, recognizing that the FAA is precluded by statute from 
using any of the weight-based measures (since weight is essentially a 
measure of value), the advantages of using Great Circle Distance appear 
to far outweigh those of any other usable metric.
    Most importantly, the FAA found that cost-per-mile method is the 
most accurate and non-discriminatory (objective measure that can not be 
influenced by the FAA or users), and the least expensive measure to 
use. The Enhanced Traffic Management System (ETMS), which provides the 
flight data used to derive the fees and to determine the charge for an 
individual flight, is a proven and existing system. Any other method of 
measuring contacts or services (e.g., Activity Based Costing systems) 
would have to be separately and specifically developed, at considerable 
cost, for what represents less than 1.5 percent of total flight 
activity in U.S.-controlled airspace. Moreover, using flight-miles as 
the basis for setting fees is a widely accepted practice in 
international aviation (e.g., Eurocontrol, Airservices Australia, 
Airways Corporation of New Zealand, and NAV CANADA (enroute)). Congress 
left it up to the FAA to determine the most appropriate measure for the 
agency, regardless of practices around the world, so long as the metric 
chosen is permissible under the Act.
14. Cost of Overflight Billing and Collections
    In several reports prepared on behalf of the ATAC and numerous 
international air carriers, KPMG questions the methodology used by the 
FAA to allocate billing and collection costs. For example, it states, 
``The FAA has failed to provide any analysis of the costs associated 
with billing and collection of Overflight fees, or any discussion of 
the rationale for charging such fees on a per-mile basis.'' It further 
notes, ``The FAA fee schedule will result in the same billing and 
collection fees to a carrier who has one long Overflight as to a 
carrier with many shorter Overflights resulting in the same total 
mileage. The assumption that GCD miles are the appropriate basis for 
apportioning billing and collection costs is without explanation or 
foundation.''
    FAA Response: The FAA acknowledges that it provided only a summary, 
rather than a detailed analysis of its billing and collections costs 
when it published the Interim Final Rule. The FAA has in fact done 
considerable analysis of its billing and collection costs. The FAA 
reviewed its billing and collection costs again in preparing the Final 
Rule and, as a result of that review, billing and collection costs have 
been reduced by nearly 17% in this rule. The following table presents a 
detailed, item-by-item comparison of the earlier estimate with the 
current one. Differences in the estimates are explained in the notes 
following the table.

BILLING CODE 8010-01-U

[[Page 43693]]

[GRAPHIC] [TIFF OMITTED] TR20AU01.001

BILLING CODE 8010-01-C

[[Page 43694]]

    Major differences between FY99 and current billing and collections 
costs: The changes from the previous cost estimate are the result of 
having more ``actuals'' rather than ``estimates'', including more than 
8 months of actual operating experience under the IFR. Development 
costs dropped $80,000 due to removal of an estimated $100,000 to 
develop external web access (to be included later, when completed), 
offset by a $20,000 increase for OARMIS revalidation. Operating costs 
are substantially lower due to greater efficiencies realized in the 
operation of the air traffic data extraction and processing activities 
as well as the accounting and billing operations.
    FY99 figures and calculation of Billing and Collections costs: The 
developmental costs of $1,550,000 were to be recovered over 2 years in 
equal annual amounts of $775,000. Operating costs were estimated to be 
$963,000 per annum. Thus, the annual recovery was $775,000 + $963,000, 
for a total of $1,738,000 for each of the initial two years.
    Current figures and calculation of Billing and Collections costs: 
The developmental costs of $1,470,000 will be recovered over 2 years in 
equal annual amounts of $735,000. Operating costs are now estimated to 
be $725,000 per annum. Thus, the annual recovery will be $735,000 + 
$725,000, for a total of $1,460,000 for each of the initial two years.
    The use of GCD miles flown to allocate billing and collection 
costs: The FAA chose an allocation methodology that reasonably and 
fairly allocates these costs among all users. There is significant 
variation in the number and length of flights from one operator to 
another. It is true, as KPMG notes, that one long flight might be 
charged the same amount of billing and collection costs as a large 
number of much shorter flights. It is far from clear, however, whether 
this is a problem or not. Alternative methods that might be considered 
include (a) a flat charge per bill; (b) charging on a per-flight basis; 
(c) some combination of (a) and (b); or (d) some combination of (a) or 
(b) with the current per-mile method. While the FAA has identified this 
issue for further study and discussion, it has nevertheless determined 
that the current system of allocating billing and collection costs on 
the per-mile basis is reasonable and appropriate, and consistent with 
the authorizing statute.
15. Increase in Costs of Providing Services From FY 1998 to FY 1999
    Commenters express concern that the FAA's costs of providing 
services to Overflights increased significantly from FY 1998 to FY 
1999. For example, the AAPA states, ``It is unclear why FAA's costs to 
provide service for Overflights jumped over fifty percent, a 
significant increase, from fiscal year 1998 to fiscal year 1999.'' KPMG 
notes ``During the Industry Presentation, the FAA revealed that its 
expenses for capital acquisition and implementation costs were 
substantially higher in FY 1999 than in FY 1998.''
    FAA Response: The FAA acknowledges that the cost of providing 
Enroute and Oceanic Services increased from 1998 to 1999. When the FAA 
released its FY 1998 cost data, it acknowledged that its costs were 
understated. This was attributable to (1) FAA's failure to capitalize 
and subsequently depreciate a number of assets, and (2) a particularly 
conservative costing methodology used with the new Cost Accounting 
System. In FY 1999, as the CAS evolved further, the FAA was able to 
capitalize a significant amount of assets based on better data. The FAA 
also made accounting refinements in such areas as telecommunications 
costs, allowing more accuracy in cost reporting. These accounting 
refinements in telecommunications costs resulted in more accurate, but 
increased, allocations to certain services.
    In addition, the FAA's costs of providing overall service increased 
in FY 1999 in both the Enroute and Oceanic environments. Acquisition 
costs increased significantly due to a continued focus on modernization 
efforts, such as the Display System Replacement and the Wide Area 
Augmentation System project.
16. The Possible ``Over-Allocation'' of Costs to the Oceanic Cost Pool
    The AAPA asks for an explanation of why the Oceanic fees are 
approximately 54% of the Enroute fees, although total Oceanic costs of 
$94 million are only about 4% of total Enroute costs of $2.4 billion. 
They express concern that this might represent an over-allocation of 
FAA costs to the Oceanic environment.
    FAA Response: The FAA disagrees that there may have been an over-
allocation of costs to the Oceanic Service. The unit rates for 
Overflight Fees are determined by the number of miles flown in each 
separate environment (Oceanic and Enroute). The higher the number of 
miles flown in one environment, the greater the denominator when 
dividing costs by miles to calculate the unit rate. In FY 1999, the 
number of miles flown in the Oceanic environment was 483,522,588, while 
the number of miles flown in the Enroute environment was 6,619,138,872. 
This explains why the Oceanic fee is a higher percentage of the Enroute 
fee despite Oceanic costs being a significantly smaller number compared 
to Enroute costs.
    The FAA does not believe that the facts of the situation provide 
any support for the concern that costs may have been over-allocated to 
the Oceanic Service due to the methodology the FAA used to develop its 
fees. The FAA uses the total cost (less overhead costs) of each of the 
two Services (Enroute and Oceanic) and the total miles flown in each 
respective environment to determine the unit rate for each. All data 
used in the calculation are actual figures. Since the two Services are 
very different, this methodology is quite reliable for allocating the 
costs. For the above reasons, the FAA's fee development methodology 
does not result in an over-allocation of costs to the Oceanic 
environment.
17. British Airways Asks the FAA To Provide a More Precise Definition 
of ``Flights'' and How Data on Flights and Miles Are Gathered
    FAA Response: In the FAA's Enhanced Traffic Management System 
(ETMS) database, a flight is entered into the system when the operator 
of the aircraft files a flight plan, and/or the FAA receives its points 
of entry into, and exit from, U.S.-controlled airspace. Also, flights 
are generally confirmed by radio communication, contact reports, or 
radar detection. For the purposes of Overflight Fees, a flight is 
defined by when an aircraft transits U.S.-controlled airspace, but 
neither takes off from nor lands in the U.S.
    In the Oceanic environment, when an aircraft reports its Oceanic 
position to the FAA, the position coordinates become part of ETMS. 
Similarly, in the case of Enroute traffic, radar systems provide 
aircraft coordinates that become part of the same database. These 
coordinates are then used to determine where the aircraft entered and 
exited the U.S.-controlled airspace. The Great Circle Distance for the 
flight is then calculated between the entry and exit points, and 
multiplied by the appropriate unit rate to determine the amount of the 
fee to be billed.
18. Qantas Airways Suggests That ``Search and Rescue'' Costs Should Not 
Be Included in the Overflight Fee Cost Base, According to ICAO Guidance
    FAA Response: The FAA agrees. Search and Rescue costs have not been 
included in either the Enroute or the Oceanic cost pools.

[[Page 43695]]

19. A Better Explanation Is Needed of the Canada-to-Canada Domestic 
Flight Exemption
    Commenters request a better explanation of the Canada-to-Canada 
exemption. For example, Air New Zealand expresses concern ``that the 
fees might be applied in a discriminatory fashion because Canada-to-
Canada flights are exempt from the Overflight fees,'' thereby causing 
an estimated loss in revenue to the FAA of $9.7 million annually. The 
commenter notes further that this may be in violation of Article 15 of 
the Chicago Convention or the provision of ICAO Document 9082/5 (Docket 
item 7) that requires non-discriminatory treatment of foreign users.
    FAA Response: U.S.-to-U.S. and Canada-to-Canada flights often 
transit the other country's airspace for any of several reasons, such 
as weather, volume of activity, equipment malfunction, more direct 
routing, pilot request, etc. Currently, the FAA and NAV CANADA have an 
agreement in place to mutually exempt from otherwise applicable 
Overflight fees for aircraft of any nation that transit one country's 
airspace but originate and land in the other country. The loss in 
revenue to each air traffic service provider is roughly equivalent, and 
the arrangement is beneficial to both in terms of the safer and more 
efficient operation of the joint ATC system serving high volumes of 
aircraft near the borders of the two countries.
    The FAA was very cognizant of the various non-discriminatory 
provisions cited by the commenters when it was structuring the 
arrangement with NAV CANADA, and does not believe the agreement 
violates any of those provisions. The agreement exempts aircraft that 
take off from and land in the same country, regardless of nationality, 
and does not exempt aircraft belonging to or operated by a specific 
country. For example, when Air Canada flies from Vancouver to Toronto, 
a large portion of that flight often occurs in U.S.-controlled airspace 
near the U.S.-Canada border, yet there is no fee charged by the FAA. 
Aircraft of any country flying that same route would be equally exempt.
20. The Cost of the U.S.-NAV CANADA Agreement
    Air New Zealand asks for more detailed cost data on the flights 
affected by FAA's agreement with NAV CANADA, as well as the specifics 
of the arrangement with NAV CANADA. Also, Qantas Airways asks whether 
the cost of providing services to Canadian traffic has been excluded 
from the calculation of Overflight Fees.
    FAA Response: On December 6, 2000, the FAA placed three additional 
documents (see Docket No. FAA-00-7018; items 100-102) in the Overflight 
Fee docket relating to the agreement with NAV CANADA. These are as 
follows:
    (1) Internal FAA Memo of April 12, 2000, providing ATC activity 
data for use in the FAA Overflight Fee Development Report (Item 4 in 
the Overflight Fee docket).
    (2) An Addendum to the Overflight Fee Development Report showing 
the estimated fee collections with Canada-to-Canada flights excluded.
    (3) The September 1999 Agreement between the FAA and NAV CANADA.
    Collectively, these documents show that FAA's estimated costs of 
providing ATC services to the exempted Canada-to-Canada flights have 
been removed from the expected Overflight Fee billings. Thus, there is 
no cross-subsidization of the exempted flights. Those flights are now 
estimated to cost $9.7 million on an annual basis, and the amount to be 
billed annually by the FAA is that much less. While FAA's total costs 
related to Overflights are estimated at $43.2 million, Overflight Fee 
billings will amount to only an estimated $33.5 million. As noted in 
the IFR, the difference of $9.7 million represents the cost to the FAA 
of the mutual exemption arrangement with NAV CANADA. This cost will not 
be passed on to Overflight customers or to any other user; it will be 
borne by the FAA.
21. Requests for Additional Time Before Overflight Fees Are Implemented
    The Long Haul Charter Carriers of Italy and other commenters 
request more time to factor the Overflight Fees into their costs of 
providing service.
    FAA Response: The FAA denied this request for a number of reasons. 
As noted previously, in the Federal Aviation Reauthorization Act of 
1996 (the Act), Congress directed the FAA to establish Overflight Fees 
expeditiously by the Interim Final Rule process. In spite of several 
opportunities to do so, Congress has chosen not to change this 
statutory direction, and even reaffirmed that point last year in the 
NTSB Authorization Act (see Docket item 97). Also, each year since 1997 
EAS has been funded based on the assumption that fees were being 
collected. The FAA moved as expeditiously as possible to implement the 
new fees. This nevertheless took a long time to accomplish, due in 
large part to the FAA's decision to wait until it had sufficiently 
accurate cost data from which to derive the fees. This data was not 
available until after the Inspector General's audit of FAA's financial 
statements for FY 1999 was completed on March 1, 2000.
    Throughout this process, however, the FAA has always indicated its 
intent to implement the new Overflight Fees via the Congressionally 
directed IFR process. (See the several meeting summaries in the docket 
for this rulemaking--items 11, 15, 16, and 22.) Even prior to those 
meetings, the FAA distributed an information paper (see Docket item 9) 
to more than 150 countries at an ICAO Conference in Montreal in 
September 1998, informing them that, ``FAA is working as expeditiously 
as possible to issue another interim final rule (emphasis added) that 
will reestablish overflight fees.''
    Finally, about three months in advance of publication of the 
current IFR, the FAA sent a letter of notification to the aviation 
industry informing known Overflight operators of FAA's imminent plans 
to reestablish Overflight Fees by an IFR. (See Docket item 1). This 
letter also was published in the Federal Register of March 9, 2000.
    In view of the above information and notification provided by the 
FAA over the past few years regarding its intent to issue another IFR 
on Overflight Fees, and in view of the fact that the IFR, when issued, 
provided another 2-month advance warning before the fees were 
effective, the FAA did not believe any additional delay in the 
effective date of the fees was necessary.
22. Air New Zealand Asks What Traffic Growth Assumptions the FAA Used 
in the Derivation of Its Overflight Fees
    FAA Response: None. The FAA used only FY 1999 cost and flight data. 
The current Fees are based on the FAA's actual costs for FY 1999, as 
shown in the FAA's final audited financial statements. The FAA derived 
the unit rate by using these actual costs and the actual miles flown 
that year in each (Enroute and Oceanic) environment. No part of the Fee 
methodology is based on growth assumptions.
23. Exceptions From Fees for Emergencies
    American Airlines comments that flights that are scheduled to 
either land in or take off from the U.S., but then have to make an 
unscheduled foreign stop for safety-related reasons (thereby becoming 
an Overflight) should not be charged Overflight Fees.
    FAA Response: The FAA disagrees. Congress directed the FAA to 
establish

[[Page 43696]]

Overflight Fees for those flights that neither take off from, nor land 
in, the United States (except military and government aircraft of the 
United States and foreign governments). The FAA must enforce this 
Congressional direction in a nondiscriminatory manner. Regardless of 
whether the situation is considered an emergency, if any flight 
constitutes an Overflight, as defined by the Interim Final Rule and the 
Final Rule, the FAA is required by law to charge Overflight Fees to 
that flight.
24. Determining Total Costs Before Being Able To Calculate Overflight 
Fees
    Some commenters suggest that the FAA must be able to determine its 
total costs before being able to calculate Overflight Fees accurately. 
KPMG, supported by several other commenters, asserts that the FAA did 
not explain how it determines its total costs pool, and that the FAA's 
failure to determine its total costs raises a fundamental issue of 
whether the FAA has obtained and used the information it needs to 
determine its costs of providing ATC services in the Enroute and 
Oceanic environments.
    Japan Airlines, Iberia Airlines, and others assert that, since the 
CAS is not yet fully operational, the FAA cannot accurately state how 
much it spends on Overflights.
    FAA Response: The CAS has been capable of determining the FAA's 
total cost pool since its initial implementation at the end of FY 1997. 
Currently, the Enroute, Oceanic, and Flight Services costs have been 
itemized and identified at the Service level. All other costs are 
captured at the FAA lines of business (LOB) level. To ensure that all 
costs have been captured, the FAA reconciles total costs in the CAS to 
total costs in the FAA's General Ledger Accounting System, the 
Departmental Accounting and Financial Information System (DAFIS). Also, 
on an annual basis, FAA produces a ``Statement of Net Costs,'' which 
reports overall agency expenses. This is one of six standard statements 
published each year as part of FAA's annual financial statements. Those 
statements can be found on the Internet at http://www.faa.gov/aba/html_finance_manage/fin_state_ann_rep.html.
    The FAA disagrees that it did not discuss how it determines its 
total cost pool. As the Costing Methodology Report (Docket item 6, page 
iii, Executive Summary) states, ``The purpose of this report is to 
describe (1) how the Federal Aviation Administration's (FAA) Cost 
Accounting System captures costs for all FAA lines of business, and (2) 
how costs were assigned to the Enroute and Oceanic air traffic control 
(ATC) services.''
    In addition, the Arthur Andersen Addendum to the Costing 
Methodology Report (Docket item 98, Section 3, page 6) states:

    The CM Report included a section (Section 3.0) that described 
the origin of CAS financial data. While the report focuses on how 
financial data, related to the Enroute and Oceanic services, were 
processed, the scope of the system covers all areas of FAA costs, 
including non-Enroute and Oceanic data. Arthur Andersen participated 
in the development of the reconciliation process and subsequent FAA 
enhancements to confirm that all costs are reconciled between the 
general ledger and the CAS. These procedures are in place and are 
routinely performed by FAA personnel.

    The FAA, of course, does not dispute that the CAS has not yet been 
fully implemented. It is a work-in-progress, currently expected to be 
in place agency-wide by the end of FY 2002. But it is not needed 
agency-wide to derive Overflight Fees. All that is needed for that is 
the cost data for Enroute and Oceanic Services (since Overfights use 
only those two Services), and CAS has been providing that data since 
1998.
25. The FAA Included Non-Recurring Costs in Enroute and Oceanic Cost 
Calculations
    Several commenters, including Air New Zealand, British Airways, 
Lufthansa, LTU, KPMG, and others maintain that in the Enroute and 
Oceanic cost calculations, the FAA should not have included such non-
recurring costs as those related to the Y2K computer problems.
    KPMG complains further in its later comments (see KPMG ``Report on 
New Materials Regarding FAA's Overflight Fees,'' Docket item No. 105) 
that the Arthur Andersen Addendum (Docket item 98) does not address 
what it (KPMG) considers the overriding problem, i.e., that, even if 
the one-time Y2K costs were correctly ``expensed,'' rather than 
``capitalized,'' for financial accounting purposes, it is improper to 
treat them as recurring expenses for purposes of the Overflight Fees.
    FAA Response: The FAA disagrees. When determining its total costs, 
the FAA must include those costs that are ``expensed'' in their 
entirety in that year, as well as the applicable portion of 
``capitalized costs'' that was expensed. Expenditures fall into one of 
these two categories. Some costs are expensed, meaning that the total 
cost is recognized as an expense in the period in which it is incurred, 
because the benefit of the incurred expense is also received in that 
period. Some costs, however, are capitalized, meaning that the entity 
expects to receive the benefit of the cost over more than one year. In 
these cases, a portion of the cost is expensed each year the benefit is 
received.
    The FAA's Office of Financial Management publishes a desk guide 
that summarizes FAA's accounting practices for deciding the kinds of 
costs that are expensed versus those that are capitalized (see Arthur 
Andersen's discussion of this in the Costing Methodology Report 
Addendum, Docket item 98, pages 7-8). The desk guide indicates that 
software costs can be capitalized, but makes an exception for 
``enhancements that merely correct a design flaw or extend the useful 
life of the software.'' The desk guide can be found on the Internet at 
http://www.faa.gov/aba/html_finance_manage/asset__cap.html.
    The FAA's practice is in accordance with Statement of Federal 
Financial Accounting Standards (SFFAS) No. 10, ``Accounting for 
Internal Use Software'' issued by the Federal Accounting Standards 
Advisory Board (FASAB). This statement is effective in FY 2001, and the 
Board has encouraged its early implementation. SFFAS No. 10 advises 
expensing Y2K costs as they are incurred. The Board's advice in this 
instance is based on the fact that ``enhancement'' needs to be limited 
to instances where new capabilities are being added to the software. 
Since Y2K remediation did not add new capability, these costs were 
expensed in the year incurred.
    In addition to Y2K costs, there are financial adjustments 
representing both costs and credits that are included in the Enroute 
and Oceanic cost pools. These include: value of inventory held 
primarily at the FAA Logistics Center, disposal of obsolete or retired 
supplies, disposal of certain inventory, value of inventory due to 
holding and repairs to damaged inventory, and correction of a prior 
year expense. Offsetting these adjustments to a large extent are 
several credits, for the over-expensing of certain environmental and 
capital investment costs in FY 1998. All of the costs in this cost 
category are directly related to the provision of Enroute and Oceanic 
Services. As stated clearly in the IFR, and again in the Final Rule, 
FAA intends to update and adjust its fees regularly to reflect changes 
in costs. Thus, whatever the net effect of these adjustments on the 
level of the Overflight Fees, it will not be an ongoing cost to users. 
In addition, while

[[Page 43697]]

this treatment of the prior year's non-recurring expenses and credits 
for the purposes of setting the current year's fees may introduce time-
lag issues into the recovery of costs through fees, it is a treatment 
that can be expected to provide accurate cost recovery over time. That 
is, while hypothetically it is possible that last year's non-recurring 
costs are a poor indicator of the current year's non-recurring costs 
and is therefore likely to lead to somewhat inaccurate fees, over time 
there is no reason to believe that it will be systematically over or 
under the appropriate amount of costs incurred. In the long run, any 
incidental overcharges that occur can be expected to be at least 
largely, if not entirely, offset by instances of undercharges.
    In addition if, as the petitioners suggest, the FAA were to attempt 
to resolve this timing issue by deviating from the standard cost 
classification rules outlined above, it would inject a highly 
subjective and arbitrary process concerning cost treatment into every 
round of rate setting.
26. The FAA Expensed Costs That Should Have Been Capitalized
    Many commenters express concern that the FAA expensed costs should 
have been capitalized. Air New Zealand suggests that a better 
explanation of depreciation policies is needed, because a significant 
amount of capital costs appear to be expensed in the current year 
rather than being capitalized and depreciated over the life of the 
asset.
    KPMG comments that FAA's capital cost categories are described as 
expensed costs that are related to implementation of capital systems, 
acquisitions, and research, engineering and development costs. KPMG 
says the FAA methodology assumes that these costs are directly related 
to flights occurring during the fiscal year in which they are expensed, 
and that the association of these costs with capital programs strongly 
suggests that this assumption is unwarranted. KPMG concludes that, even 
where expensing of capital investment costs for financial statement 
purposes is warranted, such costs should be spread over the period of 
the anticipated benefit for purposes of determining annual costs 
``directly related'' to the ATC services provided.
    KPMG complains that Arthur Andersen is silent with respect to other 
large costs that the FAA has improperly expensed for purposes of 
determining its costs ``directly related'' to Overflights. These 
include the $668 million--25% of total Enroute costs, and an additional 
$33 million--33% of the total Oceanic cost pool. KPMG argues that the 
benefits of NAS modernization programs extend over many years and for 
purposes of economic analysis, these costs must be spread throughout 
the period of the benefits rather than expensing them in the year 
initially incurred.
    FAA Response: The FAA agrees in part. The FAA's capital investment 
appropriations, Facilities and Equipment (F&E) and Research, 
Engineering and Development (RE&D), are used both for acquisitions that 
are expensed as well as for acquisitions that are capitalized. Examples 
of valid expense items that may be paid from FAA's capital 
appropriations include training, maintenance, spare parts, and other 
consumables. In determining its depreciation policy, the FAA has 
followed Federal Accounting Standards. As noted previously, the FAA's 
Office of Financial Management publishes a desk guide that summarizes 
FAA capitalization and accounting practices. Chapter 2 of this desk 
guide instructs FAA personnel responsible for accounting for property, 
plant, and equipment, how to treat these items properly. This document 
provides the following guidance regarding capitalization of software 
and research and development costs, respectively:

     * * * software costs that are not eligible for 
capitalization include * * * enhancements that merely correct a 
design flaw or extend the useful life of the software.'' Y2K 
remediation expenses fall into this category.
     * * * Expense any costs incurred for a project before 
technological feasibility has been determined.'' This describes 
research and development projects as executed by the FAA.

    This desk guide states that the procedures and policies on which 
the guide is based are in compliance with all relevant Federal 
Accounting Standard Advisory Board Statements as well as requirements 
of the Chief Financial Officers Act.
    As part of the FAA's annual financial audit for FY 2000, which was 
completed on March 1, 2001, it was determined that certain costs that 
had been expensed in 1999 should have been capitalized. In particular, 
subsequent to publication of the FY 1999 Financial Statements, it was 
determined that some of the costs captured under the Enroute and 
Oceanic ``ARA Expensed F&E Labor/Non-Labor'' categories should have 
been capitalized instead of being expensed. As a result of this 
adjustment, the cost category entitled ``depreciation'' has increased 
slightly due to the additional costs now being capitalized and then 
depreciated over periods of up to 20 years. These costs were derived 
from various projects relating to the provision of Enroute and Oceanic 
air traffic services.
    The net impact is the following:

                             Enroute Service
------------------------------------------------------------------------
                                    Original  FY 1999   Amended  FY 1999
                                           costs             costs
------------------------------------------------------------------------
ARA Expensed F&E Labor/Non-Labor..       $668,351,218       $421,196,901
Depreciation......................       $208,296,479       $213,706,687
Net change due to adjustment......  .................     ($241,744,108)
------------------------------------------------------------------------


                             Oceanic Service
------------------------------------------------------------------------
                                    Original  FY 1999   Amended  FY 1999
                                           costs             costs
------------------------------------------------------------------------
ARA Expensed F&E Labor/Non-Labor..        $33,186,457        $13,082,745
Depreciation......................         $5,182,602         $5,622,672
Net change due to adjustment......  .................      ($19,663,642)
------------------------------------------------------------------------


[[Page 43698]]

    Making such adjustments to the financial statements is a normal 
part of the financial review process, whether the statements are those 
of a private company or a public sector agency. These adjusted FY 1999 
costs are the basis for the FAA's derivation and adjustment of its 
Overflight Fees for the Final Rule. As this adjustment in the Final 
Rule means that there have been overpayments under the Interim Final 
Rule, the FAA will promptly provide credits and refunds pursuant to 49 
CFR part 89.
27. Expenses in the Capital Investment Category
    Several commenters suggest that the FAA should not have included 
Airway Facilities (AF) Expensed F&E Labor/Non-Labor, ARA Expensed F&E 
Labor/Non-Labor, and ATS RE&D Expensed Labor/Non-Labor in the Capital 
Investment category. LTU comments that the FAA included many costs not 
associated with the burden of servicing each flight (e.g., ARA RE&D 
costs) and that many of these are unexplained.
    FAA Response: The FAA disagrees. The full cost of a service should 
include expenses incurred in that year, including the applicable 
portions of capital costs that were expensed. In addition, the FASAB's 
Statement of Federal Financial Accounting Standards (SFFAS) No. 4, 
``Managerial Cost Accounting Concepts and Standards,'' states that 
depreciation (current year portion of capitalized costs) should be 
included as a part of full cost.
    FASAB's SFFAS No. 6, ``Accounting for Property, Plant and 
Equipment,'' states that costs for construction of assets not yet 
complete should not be included in full cost. These costs should be 
collected as ``work in process'' (WIP) and capitalized when the asset 
is placed in service.
    The FAA's cost accounting methodology calculates the full cost of 
providing Enroute and Oceanic Services. The full cost does include 
capitalized costs as applicable and as outlined by the appropriate 
Federal Accounting Standards.
    As noted in the discussion of the preceding comment (relating to 
the expensing of costs that should have been capitalized), it was 
determined in the course of the audit of FAA's financial statements for 
FY 2000 that the FAA had over-expensed certain costs during FY 1999. 
These particular costs should have been capitalized and depreciated 
instead over periods of up to 20 years. The costs used by the FAA to 
derive its Overflight Fees for the Final Rule reflect these 
adjustments.
28. Air New Zealand, KPMG, Lufthansa, and LTU Ask the FAA To Explain 
the ARA Expensed F&E Labor/Non-Labor Costs Under ``Capital Investment''
    FAA Response: As noted above in the discussion of the two 
immediately preceding comments, the FAA has adjusted its costs for FY 
1999 under the ARA Expensed F&E Labor/Non-Labor category as a result of 
the FY 2000 financial statement audit. The amended amount for the 
Enroute Service is $421,196,901, and the amended amount for the Oceanic 
Service is $13,082,745.
    ARA Expensed F&E Labor/Non-Labor consists of projects that support 
the modernization of the National Airspace System. Project codes have 
been established in the CAS to capture the costs of these projects. 
These projects generally represent ``ATS products.'' An ATS product 
could be a piece of equipment or a capability used in the provision of 
ATC services, or an enhancement to an existing system or capability. 
Subject matter experts determined which of the four ATS Services each 
project benefits, and the costs associated with each project were 
assigned to the appropriate Service. In some cases, a project may 
benefit more than one Service. In such instances, subject matter 
experts familiar with these projects determine the appropriate 
percentage split between the Services.
    There are a total of approximately 2,100 line items for Enroute and 
Oceanic Services combined. Examples of the types of projects included 
in this cost element are the following:
     For Enroute, examples include work on the Wide Area 
Augmentation System for the Global Positioning System, Display System 
Replacement, HOST Replacement, Y2K Date Change Program, LORAN-C, Long 
Range Radar Replacement, and Voice Switching Control System (VSCS).
     For Oceanic, examples include work on Oceanic Automation 
Systems, ARTCC Building/Plant Improvement, VSCS for Houston, and Remote 
Maintenance Monitoring.
    The FAA has a complete list of these projects, and will make it 
available upon request. Contact Randall Fiertz in FAA's Office of Cost 
and Performance Management, (202) 267-7140, for further information.
29. The ATAC and KPMG Question the FAA's Assumption for Using Labor 
Costs as the Basis for Allocating Non-Labor Costs. They Also Question 
the FAA's Reliance on Staffing Standards To Allocate Certain Costs
    FAA Response: The FAA disagrees that these assumptions are 
improper. The Arthur Andersen Costing Methodology Report Addendum 
(Docket item 98) addresses both (a) the use of labor costs to assign 
non-labor costs and (b) the use of staffing standards to allocate 
costs, stating as follows (see section 2, pages 4-5):

    When designing the CAS, the FAA relied on the Federal Accounting 
Standards Advisory Board's Statement of Federal Financial Accounting 
Standard No. 4, Managerial Cost Accounting Concepts and Standards 
for the Federal Government (FASAB 4). FASAB 4 discusses the 
complexity of cost accounting processes to be employed by federal 
agencies but does not specify the degree of complexity or 
sophistication of any managerial cost accounting process. FASAB 4 
instructs agencies to determine their own appropriate level of 
detail or complexity based on several factors. Two of these factors, 
key to the FAA's cost accounting design, include:

Relative precision desired and needed in cost information; and
Practicality of data collection and processing.

    These two factors form the basis for the ``best available data'' 
concept adopted by the FAA. `Best available data' as defined by the 
FAA refers to the use of data that is readily available from either 
automated or non-automated sources, that represent the most current 
and accurate source of data in any given business area. Often, the 
FAA had choices as to what data to use as the basis for an 
allocation. The FAA strived to choose the most accurate and readily 
available data source. Arthur Andersen concurs with the design 
decisions made based on both our public and private sector 
experience and our assessment of the sources of information for use 
in this phase of the CAS implementation. When faced with a decision 
between one source that is not readily available and another that 
is, FAA management made a determination as to the relative costs and 
benefits to select the appropriate source. The FAA relied on this 
approach, as reflected in the CM Report, to develop the following 
cost assignments:
    Allocating Airway Facilities (AF) non-labor costs and Air 
Traffic (AT) and AF workers compensation claims to projects and 
Service Delivery Points (SDPs) based on labor costs; and
    Allocating AF labor costs to projects and SDPs based on staffing 
standards.
    The FAA's reason for allocating these costs to projects and 
SDPs, at the current time, is to accomplish full costing of Air 
Traffic Services (ATS) organization's services for Overflight Fee 
purposes. In the future, new business drivers, such as cost and 
performance management, may require these costs to be directly 
assigned. Arthur Andersen concurs with this initial design decision 
until direct tracing capabilities are available for the entire AF 
work force. AF non-labor costs represent approximately 1% of total 
Enroute costs. To directly assign AF non-labor costs the FAA would 
have to modify its legacy accounting system (currently scheduled for 
replacement in FY 2002) requiring an extensive system development 
effort beyond the current

[[Page 43699]]

project's scope. In addition, this change would impose a major 
process change on employees. Therefore, for the purposes of 
determining Overflight Fees, the FAA deemed the burden of the 
changes described above to outweigh any benefit that might be 
derived given the relative size of the cost pool at issue. Arthur 
Andersen agrees with the FAA's approach of deferring the 
implementation of direct assignment techniques for this small pool 
of costs.
    As for workers compensation costs, AT generates the major share 
of the workers compensation liability. ATS believes it is 
reasonable, based on the nature of air traffic control work, that 
labor costs, used as a proxy for headcount, is a reasonable 
indicator for the accurate distribution of workers compensation 
claims (i.e., the more employees an SDP has, the higher their 
workers compensation bill). The FAA is working to improve this 
assignment by using actual workers compensation claims as the basis, 
an improvement planned for fiscal year 2001. Arthur Andersen concurs 
with this initial effort and the need to routinely reexamine the 
initial cost drivers.
    In place of actual time recording, the FAA is relying on 
staffing standards to assign AF labor costs to projects and SDPs. 
This approach has been discussed with the IG. These discussions have 
resulted in agreement that staffing standards represent the best 
available data source for allocating these costs at the present 
time. This agreement comes with the understanding that ATS 
management works towards a more direct, time recording-based method 
of assigning these costs (the FAA recently provided a report to the 
IG outlining a plan to implement labor distribution agency-wide). 
Arthur Andersen supports the continual refinement of the labor 
reporting processes in use and planned by the FAA.

    Since the December 1, 2000 issuance of the above-quoted Arthur 
Andersen Addendum, the FAA has experienced some slippage in its plans 
for handling Workers Compensation costs. The use of actual claims as 
the basis for distributing those costs is no longer planned for 
implementation in FY 2001. Instead, the FAA is continuing to examine 
alternative ways to assign these costs, with actual claims being one of 
the options under consideration.
30. Air New Zealand, Iberia Airlines, Japan Airlines, ATAC, KPMG, and 
Others Ask for an Explanation of Why the FAA Used the Ratio of Oceanic 
Sectors to Total Oceanic and Enroute Sectors To Allocate Certain 
Maintenance Costs
    FAA Response: The FAA used a three-step approach in allocating 
maintenance costs to Oceanic:
     First, costs associated with equipment dedicated solely to 
the provision of Oceanic Service, e.g. ODAPS (Oceanic Display and 
Planning System) and DOTS (Dynamic Oceanic Tracking System) are 
assigned to the Oceanic Service.
     Second, for equipment that is shared between the Enroute 
and Oceanic Services, (e.g., building infrastructure and environmental 
equipment), sector ratio percentages (the percentage of Oceanic sectors 
in the total of Enroute plus Oceanic sectors) were applied as the 
allocation basis.
     Finally, no costs were included in Oceanic for equipment 
such as radars, certain navigational aids, and other equipment that 
provide no benefit to Oceanic users.
    In the second step, where costs are shared between Enroute and 
Oceanic, the sector ratio percentages are considered the most 
appropriate basis to allocate maintenance costs. This determination was 
made because, of the various alternative methods considered, sector 
count appeared to most accurately reflect the actual workload of a 
technician. This is because the ability to generate and maintain 
sectors is a function of the number of ``suites'' of equipment 
available at that location. The number of suites of equipment 
correlates to the workload of a technician. The allocation percentages 
thus derived for each Oceanic SDP are shown in the table below. These 
percentages apply only to those programs shared between Enroute and 
Oceanic.

------------------------------------------------------------------------
                                                                Basis
                                                             amount  (AF
                            SDP                                 costs)
                                                              (percent)
------------------------------------------------------------------------
New York ARTCC.............................................           17
Oakland ARTCC..............................................           17
Houston ARTCC..............................................            5
Anchorage ARTCC............................................           14
------------------------------------------------------------------------

    Three other bases were considered to allocate AF non-labor costs 
from Enroute to Oceanic. The table below describes each option and the 
reason why it was not used:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Aircraft Handled..........................  This measure does not have
                                             any correlation to the
                                             nature of an AF
                                             technician's work (i.e.,
                                             number of facilities
                                             maintained).
F&E Funding...............................  This measure is considered
                                             inconsistent because
                                             funding can vary
                                             considerably by year and
                                             has no correlation to the
                                             nature of an AF
                                             technician's work.
Work Distribution.........................  AF Managers at specific
                                             SDP's were queried as to
                                             the distribution of
                                             technicians' work between
                                             Oceanic and Enroute
                                             systems. This approach was
                                             deemed unreliable (i.e.,
                                             too subjective) and
                                             therefore inadequate.
------------------------------------------------------------------------

31. The ATAC and KPMG Request a Discussion of the ATC Cost Centers Used 
To Assign ATC Costs
    KPMG comments that the FAA has provided no discussion of the 
activities associated with each cost center that would permit 
evaluation of the reliability of the cost assignments to the four ATS 
Services. KPMG further states that the FAA has failed to provide 
information on the total pool of costs associated with each cost 
element, and the allocation of those cost elements across the four 
Services.
    FAA Response: For cost accounting purposes, the FAA is comprised of 
more than 10,000 ``cost centers'' that designate the specific 
organization to which each employee is assigned. Cost centers identify 
organizations throughout the FAA, such as the FAA Administrator's 
Office, staff offices such as Human Resources, Civil Rights, Public 
Affairs, etc., as well as the operational LOBs such as Air Traffic 
Services (ATS), Regulation and Certification, Civil Aviation Security, 
etc. Since every organization within the FAA incurs costs, they are 
referred to as cost centers. Every time an organization incurs costs, 
its cost center code is identified with that cost in the cost 
accounting system.
    Air Traffic Services has, by far, the largest number of cost 
centers within the agency. For example, each air route traffic control 
center (ARTCC) has a unique cost center code that identifies it. Air 
traffic controllers within each of the ARTCCs perform the activities 
associated with providing Enroute and/or Oceanic ATC services. Cost 
centers also uniquely identify other air traffic organizations that 
provide Terminal and Flight Service Station Services. Other cost center 
codes identify field maintenance organizations that are actively 
engaged in ensuring that the equipment used to provide various services 
such as navigation, communications, surveillance (radar), etc., are 
maintained in working order. Cost centers identify the System Support 
Centers and System Support Units (SSCs and SSUs) that perform the 
maintenance activities as well as the System Management Offices (SMOs) 
that manage each of the SSCs and SSUs.
    Cost centers contribute to a better understanding of the FAA's 
costs. For

[[Page 43700]]

example, through the use of cost centers, the FAA is able to identify 
the organizations that perform flight inspections of the equipment used 
to provide air traffic services. Cost centers also allow the FAA to 
identify organizations outside of the Air Traffic Services organization 
that provide support necessary for ATS to function. One example is the 
Academy at the Mike Monroney Aeronautical Center in Oklahoma City. The 
Academy develops and provides training to air traffic controllers and 
the employees that maintain the equipment used to provide air traffic 
services. In summary, cost centers are invaluable elements that allow 
the FAA to identify every organization, and its associated costs, 
throughout the agency.
    As for the cost elements (i.e., line items) for Enroute and Oceanic 
Services, the FY 1999 cost pools for each cost element are provided in 
the ``Overflight Fee Development Report, as Amended'' for the Final 
Rule. Each line item on page 6 of this report represents a cost 
element. The FAA did not provide the total pool of costs for the other 
two ATS Services, because the costs for Terminal and Flight Services 
were not yet available by each cost element in 1999.
32. British Airways, ATAC, KPMG, and Others Request That the FAA 
Provide Information Supporting the Apparent Presumption That All Labor 
Costs in an SDP That Provides Enroute and/or Oceanic Services Are 
Directly Related to the Provision of Such Services
    FAA Response: The FAA used subject matter experts, who were part of 
the team of individuals who developed the original CAS design and 
methodology to cost out each service in CAS. These individuals 
performed the analysis of facilities, including the assignment of labor 
costs at those facilities, for each of the four ATS Services. All labor 
costs at SDPs were assigned by these subject matter experts, based on 
the function to which the costs contribute and the direct relationship 
of each function to the provision of the Enroute and Oceanic Services. 
The FAA will make available the documentation behind the assignment of 
costs to SDPs and ATS Services upon request. Contact Randall Fiertz in 
FAA's Office of Cost and Performance Management (202) 267-7140.
33. Commenters Request the FAA To Provide Adequate Information on the 
Allocation of Telecommunications Costs
    FAA Response: The Air Traffic Services (ATS) organization maintains 
the Telecommunications Information Management System (TIMS) that tracks 
each circuit to a facility (Center, Tower, radar, navigational device, 
etc). Each facility has been assigned to one of the four Services. 
Based on this information, the cost of each leased line is assigned to 
a Service. The Costing Methodology Report (Docket item 6, Section 
4.2.2.4, pages 28-29) includes an explanation of the process used to 
assign these costs.
    In addition to leased telecommunications costs, there are certain 
non circuit-based telecommunications costs provided by contract support 
in the Oceanic airspace. The cost of these items were determined and 
assigned to the Oceanic Service based on actual invoices.
34. KPMG, Supported by Other Commenters, Requests the FAA To Provide 
Historical Data Regarding Workers Compensation Claims To Determine the 
Nature of Their Distribution Between the Services
    FAA Response: The table below illustrates how the CAS allocated 
FAA's historical Workers Compensation costs in FY 1998 and FY 1999. The 
FAA began implementing the CAS in FY 1998; therefore, Workers 
Compensation costs were not allocated among the four ATS Services prior 
to that time. The Department of Labor (DOL) administers the Workers 
Compensation program for Federal agencies, and reports the amount of 
payments made on behalf of the FAA each fiscal year. The Office of 
Management and Budget requires Federal agencies to report a current 
year expense in the amount of the payments made each year by the DOL. 
This practice is in accordance with generally accepted accounting 
principles (accrual accounting) that requires the recognition of 
liabilities, and the corresponding expense, in the period in which they 
are incurred. Congress appropriates and makes the funds available to 
pay the accrued liability in the second subsequent year after the 
liability is recorded.

                                           Workers' Compensation Costs
----------------------------------------------------------------------------------------------------------------
                 ATS service                                FY 1997                   FY 1998         FY 1999
----------------------------------------------------------------------------------------------------------------
Enroute......................................  .................................     $28,700,281     $29,646,139
Oceanic......................................  CAS was not in use in FY 1997             572,090         659,104
Terminal & Flight Services...................  .................................      40,699,213      40,927,320
                                                                                 -------------------------------
      Totals.................................  .................................      69,971,584      71,232,563
----------------------------------------------------------------------------------------------------------------

    The FAA will provide additional information regarding the 
statistical study to interested parties upon request. Contact Randall 
Fiertz in the FAA's Office of Cost and Performance Management, (202) 
267-7140.
35. KPMG, Supported by Other Commenters Including Air New Zealand, Asks 
the FAA To Provide Sufficient Information To Determine the Validity of 
the Statistical Study Used To Establish the Ratios of Enroute to 
Oceanic On-Position Time
    FAA Response: The FAA believes the statistical study to be valid. 
As stated in the Costing Methodology Report Addendum (Docket item 98, 
Section 4, page 7):

    The FAA decided, subsequent to the release of the Costing 
Methodology Report (CM), that additional detail was necessary to 
more fully explain the treatment of certain cost pools with the CAS. 
The pools include Oceanic Air Traffic labor and capital costs.
    As described in the CM Report (see Section 4.3), to assign AT 
labor costs between Enroute and Oceanic, the FAA conducted a 
statistical analysis of controller sign-in/sign-out (SISO) data. 
Arthur Andersen assisted the FAA in this statistical analysis to 
confirm the validity of the sampling techniques. This analysis was 
performed at the request of the DOT IG's office, which also reviewed 
the methodology and final results. This data, captured at the 
employee/controller level, represented the time each person spent 
``on-position'' working either domestic enroute or oceanic air 
traffic (a single controller may be

[[Page 43701]]

certified to work both environments). Data was collected at each of 
the four Enroute Centers that provide Oceanic service for purposes 
of the CAS (New York, Houston, Oakland, and Anchorage).
    The sampling strategy was designed to estimate the average 
Oceanic labor fraction of total controller labor at each Center to 
within a relative error of 5%, with a 95% statistical 
confidence. A sample size of 40 days was calculated, which meets the 
FAA's relative error and confidence requirements. Forty random dates 
were then selected between February 19th and September 6th, 1999.
    Following the IG's review of the statistical analysis, the 
resulting percentages were used in the CAS to assign a portion of 
the Enroute labor cost to the Oceanic Service at each of the four 
Enroute Centers that also provide Oceanic Service.

36. KPMG and Several Others Request the FAA To Provide Additional 
Information on the Use of a Single Set of On-Position Time Ratios To 
Allocate a Broad Spectrum of Costs Between the Enroute and Oceanic 
Environments
    FAA Response: The single set of on-position time was a random 
sample intended to represent a full year. Labor makes up the vast 
majority of the costs allocated in this manner. The Costing Methodology 
Report (Docket item 6, Section 4.3, page 40) states:

    For AT-related costs, historical Oceanic on-position time as a 
percentage of total ARTCC on-position time was considered the most 
appropriate basis. This is because this measure reflects the work 
effort required to provide the Oceanic service. To determine 
approximate Oceanic on-position time as a percentage of total on-
position time, a statistically valid analysis [as explained in the 
previous response] was conducted on a sample of sign-in, sign-out 
time records logged by controllers in the normal course of 
performing their duties at each of the four Oceanic SDPs.

    As indicated above in the FAA response to the comment that there 
may have been an ``over-allocation'' of costs to the Oceanic cost pool, 
the FAA believes it has used a reliable accounting methodology to 
reasonably allocate costs between the Enroute and Oceanic environments. 
To capture costs accurately in the CAS, the FAA performed a statistical 
analysis (see the Arthur Andersen Costing Methodology Report Addendum; 
Docket item 98, Section 4, page 7) to allocate labor costs between the 
Enroute and Oceanic Services. Since different systems are used to 
provide services in the Oceanic and Enroute environments, the task of 
allocating all other costs between these two Services was fairly 
straightforward. Where systems could be identified with provision of 
Oceanic Services only, those costs were assigned directly to Oceanic. 
Where systems could not be specifically identified with the provision 
of Oceanic Services only, costs were allocated on bases that represent 
the best available information. Labor data were used to allocate costs 
between the Oceanic and Enroute environments only in cases where no 
better information was available.
    FASAB 4 states (in paragraph 124) that, ``In principle costs should 
be assigned to outputs in one of the methods listed below in the order 
of preference: (a) Directly tracing costs wherever economically 
feasible; (b) assigning costs on a cause-and-effect basis; and (c) 
allocating costs on a reasonable and consistent basis.'' It further 
states (in paragraph 128) that, ``Direct cost tracing often minimizes 
distortion and ensures accuracy in cost assignments. However, it can be 
a relatively costly process. It should be applied only to items that 
account for a substantial portion of the cost of an output and only 
when it is economically feasible.'' The FAA uses labor statistics to 
assign labor costs on a cause-and-effect basis. The FAA use of labor 
statistics to assign costs other than labor costs was deemed 
appropriate since these costs do not account for a substantial portion 
of the cost of Overflight services. In addition, development of bases 
to enable direct tracing was considered economically prohibitive.
37. KPMG, ATAC, and Other Commenters Request the FAA To Provide Further 
Information on the Allocation of Capital Investment Costs Based on 
Project or Program Coding, and the Assumptions Made in Making Such 
Allocations
    FAA Response: FAA subject matter experts, who are familiar with the 
capital projects and the functions they are intended to support (e.g., 
Enroute surveillance, Terminal navigation, etc.), assigned each project 
to the appropriate Service. This method of assigning costs is referred 
to as ``direct tracing'' (see the Costing Methodology Report, Docket 
item 6, Section 4.1, page 20) and is the most preferred method to 
assign costs as described in FASAB 4. FASAB 4 indicates (in Paragraph 
124) that, ``In principle costs should be assigned to outputs in one of 
the methods listed below in the order of preference: Directly tracing 
costs wherever economically feasible; Assigning costs on a cause-and-
effect basis; and Allocating costs on a reasonable and consistent 
basis.''
38. KPMG, Supported by Other Commenters, Asks the FAA To Provide 
Documentation on the Percentages Used To Allocate Certain Individual 
Cost Elements, Such as Contract Maintenance
    FAA Response: The FAA contracts-out the maintenance of several 
large systems. These contracts span multiple years but are funded 
yearly. Each contract is attributable to one and only one piece of 
equipment or system. Each piece of equipment or system has already been 
assigned to a Service (as described in the Costing Methodology Report, 
Docket item 6, Section 4.2.2.7, page 30 and Appendix B, Section B.12, 
page B-6). Percentages were then calculated to allocate actual costs 
incurred to pay for these maintenance contracts to the Services. The 
percentages were based on the anticipated funding of each contract. The 
work papers supporting the derivation of these percentages may be 
obtained upon request from Randall Fiertz in FAA's Office of Cost and 
Performance Management, (202) 267-7140.
39. The ATAC Requests an Explanation of How the FAA Will Ensure That 
Its Costing Methodology Is Consistent for All ATS Services and Other 
Lines-of-Business Within the FAA
    FAA Response: The Costing Methodology Report Addendum (Docket item 
98) refers to how Terminal and FSS Services will be assigned costs in 
the same manner as Enroute and Oceanic to ensure that costs are 
assigned to the proper Service. Additional information regarding the 
allocation of costs can be found in the Costing Methodology Report 
(Docket item 6, Sections 4.2.1.1, 4.2.1.2, 4.2.5.1, and 4.2.5.4) and 
the Costing Methodology Report Addendum (Docket item 98, Section 3, 
paragraphs 3 to 5).
    The FAA currently uses a consistent costing methodology in 
allocating agency overhead costs. In so doing, the FAA determines each 
LOB's direct cost and allocated overhead on the basis of each LOB's 
direct cost to total FAA direct cost. This same methodology is used 
within the ATS. The FAA determines the cost and allocated overhead for 
each of the four ATS Services on the basis of each Service's cost to 
total ATS cost. In the future, the FAA intends to use this methodology 
to allocate agency overhead to each LOB as the CAS is implemented in 
that LOB.
    The costing methodology used for other LOB-specific costs (i.e., 
costs other than overhead) will likely be very different, since the 
various LOBs and

[[Page 43702]]

Services are different (e.g., ATS versus Aircraft Certification 
services). Costing methodologies for all services do not have to be the 
same in CAS for the costs to be considered valid. The FAA is working to 
develop allocation methodologies for its various services in ways that 
respond to the specific manner in which each particular service is 
provided.
40. Air New Zealand and Other Commenters Ask What Assets Have Been 
Included in the Overflights Cost Base and What Were the Depreciation 
Policies Adopted
    FAA Response: The location of FAA's capitalization policy was 
provided in the Costing Methodology Report Addendum, Section 4, page 7. 
According to FASAB No. 10, items that are typically depreciated are 
commonly referred to as Plant, Property, and Equipment, or PP&E. Based 
on FAA policy, PP&E is defined as real property (land, buildings, and 
other structures) and personal property (installed facilities 
equipment, spare parts, aircraft and aircraft engines, administrative 
information systems, and equipment furnished to others or Government 
Furnished Property and Contractor Acquired Property. FAA policy also 
requires depreciable items to have an estimated useful life of at least 
two years and a unit cost in excess of $25,000.
41. Lufthansa, ATAC, KPMG, British Airways, and Other Commenters Claim 
That the FAA Did Not Provide Sufficient Detail on the Overhead Costs 
Removed From the Overflight Fee Calculations, or Explain What Types of 
Costs Are Included in the Overhead Category
    FAA Response: The FAA acknowledges that it needs to provide a 
fuller explanation of the excluded overhead costs; that information is 
provided in the two tables below. The CAS has the capability to 
identify and track the source and target of overhead costs. While the 
FAA has been able to link these costs directly to the specific cost 
categories or functions of the Air Traffic System they support, the 
agency has taken an extremely conservative approach in determining 
``directly related'' costs by removing all overhead costs from the 
Overflight Fee calculations in addition to excluding all Terminal and 
Flight Service costs. The following tables show the extraction and 
removal of overhead costs:

BILLING CODE 8010-01-U

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[[Page 43704]]


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BILLING CODE 8010-01-C

[[Page 43705]]

    For information on the types of costs included in the Overhead 
category, see Sections 4.2.4, 4.2.4.1, and 4.2.4.2 (pages 33-35) of the 
Costing Methodology Report (Docket item 6).
42. Lufthansa States That the FAA Did Not Explain the ``Unidentified 
F&E Projects'' That Are Part of Oceanic Costs
    FAA Response: Unidentified F&E projects are projects that could be 
attributed to the ATS LOB based on their project coding structure in 
the CAS, but could not be attributed to any particular Service within 
the ATS LOB. In most cases, the ``Unidentified'' projects were a result 
of the FAA changing one or more of the known F&E project numbers to 
indicate a change in the project(s)' capitalization status. In order to 
account for these costs, the FAA developed the following methodology to 
allocate these costs to Enroute, Flight Service, or Terminal Services. 
Using two years of cost data (FY 1998 and 1999), the FAA computed the 
total cost of identified F&E projects for these three Services. The 
percentage of these projects' costs that were attributed to Enroute, 
Flight Services, and Terminal was then computed. These percentages were 
then applied to the total unidentified project cost to compute the 
unidentified project cost to be attributed to each of those three ATS 
Services. This method conforms to paragraph 124 of the Statement of 
Federal Financial Accounting Standard #4 ``Managerial Cost Accounting 
Standards,'' which states that such costs should be of allocated on a 
reasonable and consistent basis.
    None of the costs of the unidentified projects have been allocated 
to the Oceanic Service. This is because the costs of only three types 
of ``Capabilities'' (as described in the Costing Methodology Report; 
Docket item 6, Section 2.2, page 13) are allocated to the Oceanic 
Service: Mission Support, Infrastructure, and Communications. None of 
the ``Unidentified'' projects are attributed to these Capabilities; 
therefore, none of the associated costs are allocated to the Oceanic 
Service.
    The costs of these ``unidentified'' projects have very little 
impact on this rulemaking. Approximately $13 million, from the total of 
about $25 million of unidentified projects, were allocated to the 
Enroute Service. Overflights account for only approximately 1.23% of 
gross Enroute GCD miles. Therefore, the total ``Unidentified F&E Labor/
Non-Labor'' costs attributable to Overflights are estimated to be about 
$160,000, which amounts to only about 2 cents per 100 nautical miles in 
the Enroute environment.
43. Japan Airlines, Iberia Airlines, and Others Comment That FAA's FY 
1999 Costs Have Not Been Revalidated
    FAA Response: The FAA disagrees with this comment. The Costing 
Methodology Report Addendum (Docket item 98, Section 2, paragraphs 1-3, 
page 4) provides information on this topic. The Addendum points out 
that the FAA's financial statements for FY 1999 were audited by the 
Department of Transportation Office of Inspector General prior to the 
FAA's publication of the Overflight Fee IFR in June 2000. The FAA 
received an unqualified or ``clean'' audit opinion (meaning no 
significant issues were identified) from the IG. The FAA believes that 
this constitutes more than sufficient ``revalidation'' of its FY 1999 
cost data. This FY 1999 cost data was then used by the FAA to derive 
its Overflight Fees.
    As noted previously in the Discussion of Comments section under the 
comment, ``The FAA expensed costs that should have been capitalized,'' 
it was discovered subsequent to issuance of the Overflight Fee IFR that 
certain FY 1999 costs that should have been capitalized and depreciated 
were in fact mistakenly ``expensed'' by the FAA. The FY 1999 cost data 
has been revised to correct these items, and the Overflight Fees, which 
are derived from this cost data, have been recalculated. The result is 
a reduction in the unit rate of the Overflight Fees (of approximately 
10 percent for Enroute and approximately 20 percent for Oceanic, 
compared to the Interim Final Rule) in this Final Rule. The FAA will 
provide credits and refunds for this as detailed below.
44. Distribution of Costs Based on Staffing Standards
    Japan Airlines and Iberia Airlines express concerns that the IG 
determined that the CAS had caused the FAA to rely on unreasonable 
proxies in allocating costs between Services. For example, the FAA 
assigned FY 1998 maintenance labor and other (non-labor) costs to 
Enroute and Oceanic Services based on labor standards rather than on an 
actual distribution of costs. The IG found those standards to be 
outdated and over-inflated.
    FAA Response: The FAA disagrees with this comment. The FAA updates 
staffing standards for new equipment on a continuous basis. However, 
the FAA does acknowledge that it does not routinely update the staffing 
standards for existing equipment. The fact that the FAA does not 
routinely update staffing standards for existing equipment does not 
render them unreliable. The FAA conducts a significant amount of on-
site research and analysis at the time its staffing standards are 
initially developed, and therefore does not need to reexamine them 
continuously.
    When the IG reviewed the FAA's financial data in 1999, the IG 
acknowledged the staffing standards as the best available data. The 
Costing Methodology Report Addendum provides the following explanation 
in response to this comment (Docket item 98, Section 2, page 5):

    In place of actual time recording, the FAA is relying on 
staffing standards to assign AF labor costs to projects and SDPs. 
This approach has been discussed with the IG. These discussions have 
resulted in agreement that staffing standards represent the best 
available data source for allocating these costs at the present 
time.

    This agreement came with the understanding that the FAA would 
update the staffing standards on a timely basis, and would work toward 
a more direct, time recording-based method of assigning these costs. 
The FAA recently provided a report to the IG outlining a plan to 
implement labor distribution agency-wide. This plan is available on the 
Internet at http://www.faa.gov/aba/html_performance/initiatives/ldr/files_doc/final_ldr_timeline_rpt.doc.
    The FAA is working aggressively to implement this new Labor 
Distribution System for the entire agency. This system will eventually 
allow the FAA to capture the actual labor costs for all agency 
services. Both Airway Facilities and Air Traffic controller workforces 
are currently in an implementation status. The FAA expects to be 
collecting actual time from these workforces by the end of FY 2002.
    Additional information regarding the use of staffing standards is 
provided in the Costing Methodology Report, Section 4.2.2.1 and Fig 4-
2.
45. Several Commenters, Including Air New Zealand, Lufthansa, Iberia 
Airlines, Japan Airlines and Others, Request the FAA To Provide 
Additional Information on One or More of the Following Items: The 
Structure and Functioning of Its Air Traffic Control Centers, a 
Breakdown and Explanation of Activities Performed by Each of Those 
Centers, and the Number of People Working on Oceanic and Enroute 
Services, Their Salaries and Positions, the Optimal Staffing Numbers, 
and the Number of Hours They Work on Each Service
    FAA Response: As explained in the Costing Methodology Report 
(Docket item 6), all Air Route Traffic Control Centers (ARTCCs), or 
SDPs, provide

[[Page 43706]]

Enroute Services. Of the 21 ARTCCs, there are four that provide Oceanic 
Services for purposes of the CAS and this Rulemaking. The following 
table shows which Centers provide only Enroute Services and which 
Centers also provide Oceanic Services.
    Since the FAA uses aggregate, actual end-of-year labor costs to 
assign or allocate costs to the various ATS Services, it does not use 
the detailed information requested on the number of people working on 
Oceanic and Enroute Services, their salaries, positions, and optimal 
staffing numbers. The FAA believes it has chosen an appropriate 
methodology by using actual, end-of-year labor costs as the basis for 
cost assignment or allocation. The following table provides a list of 
SDPs, the type of services provided by each SDP, and actual AT and AF 
labor costs for FY 1999 for each SDP:

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[[Page 43708]]

Functions Performed by ARTCCs for Purposes of the CAS and This 
Rulemaking
    Enroute Services: Generally refers to ATC and related services 
provided to aircraft operating primarily under instrument flight rules 
in controlled airspace between airport terminal areas. In some cases, 
Enroute services may be provided to aircraft operating under visual 
flight rules. Enroute services are also provided to overflights that 
transit U.S.-controlled airspace. As shown above, 21 SDPs provide this 
service. The typical SDP has responsibility for more than 120,000 
square miles of airspace.
    Oceanic Services: ATC and related services provided in airspace 
where oceanic separation and procedures prescribed by ICAO are 
available. These services (with a few exceptions) are defined by 
specific designated Flight Information Region (FIR) boundaries and 
generally begin just prior to the limits of the radar coverage. 
Generally, within Oceanic FIR airspace, no radar service is available. 
Therefore, oceanic air traffic separation standards (position reports 
at selected time/geographic intervals) are used, rather than enroute 
separation standards (position reports based on radar/transponder 
activity--although, for some flights, such service is not practicable 
or appropriate).
Assignment of Controller Positions to Services
    Because of the cost allocation methodology used to allocate labor 
costs, the FAA does not need the number of hours each employee works on 
each ATC service. For SDPs that provide only Enroute Services, all 
labor incurred at the SDP is attributed to Enroute. For SDPs that 
provide both Enroute and Oceanic Services, AT labor is allocated based 
on a percentage of actual on-position time worked by controllers (as 
explained previously in the discussion of the KPMG comments asking the 
FAA ``to provide sufficient information to determine the validity of 
the statistical study used to establish the ratios of Enroute to 
Oceanic on-position time'').
    Other positions that are assigned at the SDP level are the 
positions that provide ATC maintenance services (provided by the Airway 
Facilities organization). As explained earlier, AF (ATC maintenance) 
labor costs are assigned to facilities based on staffing standards. 
Subject matter experts assign each facility to the Services based on 
the functionality of each facility. For the four SDPs that provide 
Oceanic Services, the FAA uses the ratio of Oceanic sectors to total 
sectors to allocate maintenance costs.
46. Labor for Oceanic Services
    The AAPA comments that labor charges for Oceanic Services primarily 
reflect staffing in the four facilities located in Anchorage, Houston, 
New York, and Oakland and claims that the FAA provides no justification 
that these labor rates are identical in each facility.
    FAA Response: The labor rates at each SDP are not identical. The 
labor costs allocated to Oceanic Services reflect staffing and Oceanic 
workload since on-position time was used as the basis. The Oceanic 
labor costs are assigned to each SDP based on the actual labor costs 
incurred at that particular SDP, and are not identical. Actual labor 
costs for each of the four Oceanic SDPs are shown in the table 
presented in the discussion of the preceding comment.
47. Use of a Weight-Based Formula To Determine Overflight Fees
    The National Business Aircraft Association (NBAA) and the 
International Business Aviation Council, Ltd. (IBAC) ask that the FAA 
consider modifying its fee formula to account for aircraft weight, as 
is done in other countries. NBAA notes, ``In addition to ICAO, 
countries such as Canada, the United Kingdom, France, Germany, and 
other European Union states, ATC facilities charge users for the 
service provided. In determining the ATC charge, all of these countries 
use weight as a basis for determining fees.''
    On a similar note, the IBAC expresses its concern that the U.S. 
does not use weight as a factor in the calculation of its Overflight 
Fees, stating its concern that ``failure by the United States to do so 
will encourage other States to do likewise, to the ultimate detriment 
of the interests of U.S. operators operating internationally.''
    FAA Response: The FAA generally agrees with these comments. Indeed, 
as the NBAA and the IBAC point out, weight is widely used around the 
world as a factor in the setting of fees for ATC services. The FAA is 
statutorily constrained, however, from using weight, or any other 
measure of value, in the derivation of its Overflight Fees. The 
previously discussed requirement that the fees be ``directly related'' 
to the FAA's costs of providing the services has been interpreted by 
the Court of Appeals in the Asiana case (the prior Overflight Fee 
litigation) to preclude the use of any measure of value by the FAA in 
setting its fees.
48. KPMG Comments That FAA's Consultant, Capital Economics, Not Only 
Did Not Conclude That FAA's Fees Satisfied the Statutory Standard; It 
Apparently Never Considered the Question
    FAA Response: The FAA agrees. Although Capital Economics' review 
(See the Capital Economics Report, ``A Review of FAA Overflight Fees,'' 
Docket item 99) touched on some aspects of the statute, the report was 
not intended to address the requirements of the law authorizing the 
Fees. Capital Economics focused its analysis on whether the fee 
development methodology was reasonable and within the guidelines of 
commonly accepted economic principles as applied in a practical, real-
world setting. The other principal findings of the Capital Economics 
report are as follows:
     The FAA's reliance on a mileage-based fee structure 
complies with the requirement that the Overflight Fees be based on cost 
rather than value,
     Due to high metering costs of other alternative methods, 
the mileage-based metric is most likely the cheapest way to assign 
costs on an individual flight basis,
     There is no better alternative allocation mechanism than 
the mileage-based method, and
     The fee structure is ``subsidy-free,'' which many 
economists consider to be a desirable property.
    The determination that these fees meet the statutory standard of 
being ``directly related'' to the FAA's cost of providing or making 
available the ATC and related services was made by the FAA and not by 
Capital Economics.
49. KPMG States That Capital Economics Gives No Empirical Basis for Its 
Assertion That Controller Time Is ``Largely (and Perhaps Completely) 
Common'' to Overflights and Non-Overflights
    KPMG further expresses the view that Capital Economics offers no 
support from any air traffic control expert, either internal or 
external to the FAA. Moreover, KPMG states that there is no information 
in the Capital Economics report establishing that the firm is itself 
qualified to render an opinion as to how air traffic controllers 
perform their duties.
    FAA Response: The Capital Economics report is based on discussions 
with FAA experts regarding the structure and functioning of the FAA, 
mainly the Air Traffic Services organization that provides ATC 
services. Through these discussions, Capital Economics received 
information

[[Page 43709]]

regarding, but not limited to, the services provided within each ATC 
environment, the treatment of fixed and common costs, ATC services 
provided to Overflights and non-Overflights, duties of air traffic 
controllers, and the treatment of specific costs associated with this 
rulemaking. Capital Economics also used information that is publicly 
available. This includes a book, Fundamentals of Air Traffic Control 
(M.S. Nolan, Fundamentals of Air Traffic Control. Second Edition, 
Wodsworth, Belmont, Calif., 1994), information contained in the docket 
of this rulemaking, the estimated stand-alone costs of Overflights 
provided as Attachment 1 of the Capital Economics report (docket item 
99), and the FAA CAS service definitions provided as Attachment 2 of 
the same report. But ultimately any use of the Capital Economics report 
and its conclusions was determined by the FAA in its exercise of agency 
expertise in air traffic.
50. Joseph A. Beaudoin, on Behalf of the ATAC, Asserts, ``The 
Controller Manpower Required To Service Overflights and Non-Overflights 
Is Not `Common' ''
    He states that in the Enroute environment, the FAA divides its Air 
Route Traffic Control Centers (``Centers'') into low-altitude sectors, 
high-altitude sectors, and ultra-high-altitude sectors. He states that 
Overflights operate almost exclusively within the High-Altitude Sector, 
or the Ultra-High-Altitude Sector, where one exists. He asserts that, 
during any particular period of time, controllers normally will not be 
simultaneously handling aircraft in both or all three Sectors. Thus, 
Mr. Beaudoin states, ``there is a difference between the manpower 
requirements of the two types of flights. The typical non-Overflight 
requires far greater controller time than the typical overflight.''
    KPMG, also on behalf of the ATAC, states, ``Of course, because both 
overflights and non-overflights use the high and ultra-high altitude 
sectors, it would be necessary to apportion controller time in those 
sectors between the two types of flights. This could be done based on 
the relative mileage flown by overflights vis-a-vis non-overflights in 
the high altitude sectors, as that would provide a reasonable estimate 
of the relative burden of the two types of flights on the controller 
work force in those sectors.''
    FAA Response: The FAA disagrees. The FAA has determined that the 
costs incurred in servicing Overflights and non-Overflights are quite 
similar for the following reasons:
     The same ATS infrastructure is used to make services 
available to both Overflights and to non-Overflights.
     Overflights use many different altitudes where there are 
many other non-Overflight aircraft. Many flights departing or landing 
in the U.S. also reach such altitudes at some point during their 
flight. Air Traffic Controllers working those sectors have to manage 
non-Overflight and Overflight traffic just the same in providing safe 
air transportation in U.S.-controlled airspace.
     Controllers do not treat Overflights any differently than 
non-Overflights. Overflights can be anywhere in the ATC system at any 
given point requesting all ATC services to be available. The FAA 
doesn't provide services to Overflights based on their altitudes. The 
FAA does not in any way restrict or limit Overflights by altitude or by 
the level of services they receive while transiting through U.S.-
controlled airspace. Also, the assertions of Mr. Beaudoin ignore the 
full spectrum of Overflights.
     The FAA acknowledges that although there may be a small 
difference in the marginal cost of making services available to 
Overflights and non-Overflights, this difference is negligible compared 
to the significant fixed and common costs incurred in making ATC and 
related services available to both Overflights and non-Overflights. 
Also, each flight is different in the services it uses. It cannot be 
said with certainty whether any given Overflight or non-Overflight will 
cost more or less.
    See the first comment, ``The cost of providing air traffic services 
to Overflights versus non-Overflights'' for additional information on 
the FAA's rationale for treating all flights the same in a particular 
operational environment (i.e., either Enroute or Oceanic).
51. KPMG Disagrees With Capital Economics' Farm Analogy
    KPMG says:

    * * * this simple analogy is more analogous to the overflight 
fee situation if one supposes that the farmer has two pastures--high 
and low. A few sheep (overflights) graze in the high pasture, along 
with some cows (non-overflights). The high pasture is sparsely 
populated, however, and all the animals there are placid. As a 
result the high pasture fence needs little repair. The low pastures 
consist only of cows; it is heavily congested, and the cows there 
are ornery and active. Consequently the lower fence needs constant 
repair. It is clear that the farmer's mending costs must be 
primarily assigned to the cows. The fact that some cows are also in 
the upper pasture, and the same farmer does the mending of both 
fences (and needs the same training to do so), does not alter this 
conclusion.

    FAA Response: The FAA disagrees. The FAA has acknowledged from the 
beginning that the marginal cost of serving Overflights versus non-
Overflights may be slightly different. But the metering costs of 
identifying any such differences in marginal costs would be substantial 
for the very small number of Overflights compared to the total number 
of flights in U.S.-controlled airspace. In addition, due to the 
particular cost characteristics of providing Overflight service (as 
outlined in the earlier comments on ``The cost of providing air traffic 
services to Overflights versus non-Overflights''), it is the allocation 
of the large fixed and common costs that make up most of the costs upon 
which the Overflight Fees are based.
52. Based on the Declarations of Mr. Beaudoin and Mr. Jengo, KPMG 
States That the Labor Costs That FAA Incurs To Provide ATC Services Are 
Not ``Fixed''; Rather, They State That the Number of Controllers 
``Varies Depending on the Volume of Aircraft Operating Within the 
Particular Geographical Area or Sector, and the Nature of Those 
Aircraft Operations'' (See Supplemental Declaration of Joseph Beaudoin, 
Docket Item 107, Paragraph 10)
    Thus, KPMG asserts, if there are a large number of aircraft 
operating within a particular area, the FAA may need to assign 
additional controllers to handle the flights. Mr. Beaudoin adds, 
``Generally speaking more controllers are necessary to handle a given 
number of flights in the lower-altitude sectors than are necessary to 
handle the same number of flights in the higher-altitude areas.'' Mr. 
Jengo similarly states that the ``number of controllers needed in a 
given sector varies according to the volume of traffic in that sector 
and the type of traffic.'' (See Declaration of Michael Jengo, Jr., 
Docket item 106.)
    FAA Response: The FAA disagrees. The FAA has a set number of 
controllers to provide ATC services nationwide. Every SDP has a set 
number of controllers assigned to it to manage its workload. Every SDP 
also mostly has a set amount of overtime, training, and other such 
funding provided to it. These numbers do not change daily to manage an 
additional Overflight, or a non-Overflight. Controllers are assigned to 
sectors to manage all air traffic, not Overflights and non-Overflights 
separately. Overflights can be anywhere, at any altitude, in the ATC 
system at any given point in time. The FAA incurs a great deal of cost 
by simply making

[[Page 43710]]

services available to Overflights. Also, controllers do not treat 
Overflights any differently than non-Overflights. These factors support 
the analysis by Capital Economics that the marginal cost of serving an 
individual Overflight is nearly zero.
    The FAA agrees with the Capital Economics analysis that the 
marginal cost of serving an additional flight is very small. This 
includes the labor costs involved in serving any particular additional 
flight. The rationale for this position is outlined in the previously 
cited discussion of the comment regarding ``The cost of providing air 
traffic services to Overflights versus non-Overflights.''
53. KPMG Disagrees With Capital Economics' Conclusion That the Absolute 
Difference Between the Costs of Servicing Overflights and Non-
Overflights Is Small Compared to the Large Fixed and Common Costs That 
Must Be Allocated. KPMG Further Disagrees With Capital Economics' View 
That the FAA Acted Appropriately in ``Ignoring'' the Cost Differences 
Between Overflights and Non-Overflights
    KPMG further states:

    This argument is contrary to FAA's own data. According to the 
FAA's Fee Development Report, on which the overflight fees are 
based, `Field Labor' assigned to `Air Traffic Operations' accounts 
for 37 percent of the $2.7 billion in total costs FAA incurs to 
provide air traffic control services in the enroute environment, and 
23 percent of the $101 million that FAA incurs in the oceanic 
environment. (Fee Development Report at page 8, Table 1.) In total, 
these controller costs amount to more than one billion dollars 
annually. Air traffic control experts Beaudoin and Jengo have 
submitted uncontradicted evidence that the per-hour controller 
manpower devoted to an overflight is much less than that devoted to 
a non-overflight.

    FAA Response: The FAA disagrees. The KPMG comment simply restates 
the FAA's labor costs. These FAA numbers do not show a difference 
between the costs of providing services to Overflights versus non-
Overflights. The FAA agrees with Capital Economics that the marginal 
cost of an Overflight is nearly zero, and the same is true of a non-
Overflight. The FAA already has responded to both the Beaudoin and 
Jengo declarations, which do not characterize correctly the many types 
of flights that transit U.S.-controlled airspace without either taking 
off or landing in the United States (Overflights). The FAA's cost data 
cited by KPMG does not show any differences between the costs of 
providing services to Overflights versus non-Overflights, and the FAA's 
fee development methodology is reasonable and consistent with the Act.
54. KPMG Complains That the ``Stand-Alone Cost Test'' Conducted by 
Capital Economics Is Irrelevant Because It Does Not Establish That the 
Fees Are ``Directly Related'' to Costs. KPMG Argues That the FAA Has 
the Ability To Measure Actual Costs, and That Capital Economics' Use of 
``Stand-Alone Costs'' As a Test for the FAA's Overflight Fees Simply 
Has No Relevance Under the Actual Cost Standard
    FAA Response: The FAA disagrees. The ``stand-alone cost'' test is 
not a test of whether fees are directly related to costs. Capital 
Economics included the ``stand-alone cost'' test in their analysis to 
demonstrate that the fee structure is ``subsidy free.'' This means that 
there are no cross-subsidies between Overflights and non-Overflights in 
the fee structure. In fee development, this is widely considered to be 
a desirable property by economists. Capital Economics conducted a 
variety of analyses in examining whether the fees are within the 
guidelines of commonly accepted economic principles as applied in a 
practical, real-world setting. For additional information in response 
to this comment, see the earlier comments, ``The definition of fees 
``directly related'' to costs as used by the Act,'' and ``Whether 
Overflight Fees are subsidizing other costs or services.''
55. KPMG Complains That the Arthur Andersen Addendum Does Not Attempt 
To Rebut the Statement That the FAA Incurs Substantially Greater Costs 
To Provide Air Traffic Services to a Typical Non-Overflight Than to a 
Typical Overflight
    Instead, KPMG complains that the Addendum offers only general 
support for the FAA's use of ``best available data'' to make certain 
cost allocations, and the FAA's decision to ``expense'' rather than 
``capitalize'' certain costs. KPMG elaborates that the Arthur Andersen 
Addendum asserts that FAA's decisions to expense rather than capitalize 
certain cost items conform to ``the relevant accounting standards.'' 
However, KPMG asserts that the Andersen Addendum ignores the statutory 
directive that each Overflight Fee must be ``directly related'' to the 
FAA's costs of providing air traffic control services for that 
Overflight.
    FAA Response: The FAA agrees that the Arthur Andersen Addendum does 
not address the costs of Overflights and the statutory directive that 
the Fees must be ``directly related'' to the FAA's costs. Arthur 
Andersen's role related to the Overflight Fees was limited to assisting 
the FAA with development of a CAS that adheres to Federal accounting 
standards. The FAA then used the CAS data to derive the Overflight 
Fees.
    The FAA, with Arthur Andersen's assistance, developed Enroute and 
Oceanic cost pools. Overflight Fees were derived based on these cost 
pools since Overflights use primarily Enroute and Oceanic Services. The 
FAA attributed an appropriate portion of these costs to Overflights 
based on miles flown in each (Enroute and Oceanic) environment. As 
noted previously, under the comment, ``The cost of providing air 
traffic services to Overflights versus non-Overflights,'' Capital 
Economics concluded that the FAA's methodology is a reasonable economic 
approach to setting fees when faced with the kind of cost 
characteristics confronting the FAA. Thus, the FAA has complied with 
the Act in establishing Overflight Fees that are directly related to 
the agency's costs, as determined by the CAS. The purpose of both the 
original Arthur Andersen Costing Methodology Report (Docket item 6) and 
the subsequent Addendum (Docket item 98) is to explain the FAA's 
decisions and methodology in assigning and allocating costs in the CAS.
56. Transparency of Fee Development Process and Data
    According to a significant number of commenters, the FAA did not 
provide sufficient information to allow for a transparent process in 
charging Overflight Fees, and to allow interested parties to determine 
whether the Fees are ``directly related'' to FAA's costs.
    In its later comments, KPMG points out that the Arthur Andersen 
Addendum states that allocations in CAS were made using the ``best 
available data'', but that the FAA almost never discloses the nature of 
the data available to it. KPMG complains that they and other commenters 
have no way of judging what information was available to the FAA when 
critical decisions were made, and therefore are unable to assess 
whether the ``best available data'' were in fact used.
    FAA Response: The FAA has provided substantial evidence of its 
decisions herein, as well as throughout this rulemaking process, and 
believes it has been fully transparent in its Overflight Fee 
rulemaking. The FAA is required to clearly explain its reasoning in 
this rulemaking but not to obtain the users' agreement. Ultimately it 
is up to the agency, pursuant to Congress' direction in 49 U.S.C. 
45301(b)(1)(A) and 49 U.S.C. 46110(c) to determine

[[Page 43711]]

what costs are in fact ``directly related'' for the purposes of 
Overflight Fees.
    In addition, as explained more fully under the previous comment on 
``lack of consultation,'' the FAA intends to pursue further contacts 
with the affected parties that will allow the FAA and the interested 
parties to have a dialogue regarding issues related to Overflight Fees 
to eliminate any remaining issue of transparency. The FAA hopes that, 
by taking this action, it will alleviate many concerns raised on the 
Interim Final Rule and continue to provide an opportunity to resolve 
issues in the future. The FAA intends to establish an Aviation 
Rulemaking Committee for Overflight Fees, which will be implemented 
shortly after issuance of the Final Rule, and will further reconfirm 
the transparent process by which the FAA establishes its Overflight 
Fees.
57. IATA Requests Additional Information With This Rulemaking. IATA Is 
Providing the FAA With Standard Performance & Productivity Indicators 
(PPI) Forms To Fill Out, as a Normal Practice With Other Air Navigation 
Service Providers
    FAA Response: The FAA has not completed the IATA forms as they are 
beyond the scope of this rulemaking. The FAA is not charging fees for 
providing, or making available, air navigation services to all users. 
These Fees apply only to Overflights. The FAA will be available to work 
with IATA in the future to determine how their information needs could 
be accommodated.
The Inspector General's Assessment of Cost Accounting
    On February 28, 2001, the Department of Transportation's Office of 
Inspector General (IG) issued a report (titled, ``Status Assessment of 
FAA's Cost Accounting System and Practices,'' Report No. FI-2001-023; 
Overflight Fee Docket No. FAA-00-7018, item 111) assessing the FAA's 
Cost Accounting System (CAS). This report was prepared pursuant to 
requirements of the Wendell H. Ford Aviation Investment and Reform Act 
for the 21st Century (AIR-21), which requires the IG to conduct an 
annual assessment of whether the FAA's methods for calculating and 
assigning costs to specific users are appropriate, reasonable, and 
understandable. The purpose of the IG report was to describe the status 
of CAS implementation, and to present the IG's findings to date in 
eight specific assessment areas required by AIR-21. The IG identifies 
several CAS-related issues in its assessment report. Because certain of 
these issues, as well as some criticisms of the CAS contained in the 
report, could be construed to have applicability to Overflight Fees, 
the FAA addresses the report below, and explains that the points raised 
in the IG report do not affect this rule.
    As clarified in FAA's May 17, 2001, response to the report (Docket 
item 115), and in the IG's subsequent reply of June 4, 2001, to the FAA 
(Docket item 116), the central focus of the IG assessment was not on 
this rule but, rather, on the overall progress being made by the FAA in 
implementing the CAS on a phased basis throughout the agency. The 
report recommendations are aimed at accelerating the CAS implementation 
schedule, adding resources to assure the new implementation dates are 
met, and achieving efficiencies in the operation of the CAS.
    The IG issued a separate audit report in December 1999 (titled, 
``Cost and Flight Data for Aircraft Overflights,'' report # FE-2000-
024; Docket item 10) for the explicit purpose of reviewing the 
implementation of the CAS within the Air Traffic Services (ATS) Line of 
Business (LOB), and the use of CAS data and aircraft flight activity 
data for the derivation of Overflight Fees. The FAA concurred with the 
IG findings and addressed the issues identified in that report prior to 
publication of the current Interim Final Rule on June 6, 2000. The FAA 
is using the same FY 1999 cost data for the Final Rule that were used 
for the Interim Final Rule, along with some accounting adjustments that 
result in reductions of approximately 10 percent in the Enroute fee and 
approximately 20 percent in the Oceanic fee.
    The current IG assessment makes the following general statements 
regarding the CAS:

     ``The FAA's current cost accounting system, while 
capable of calculating cost agency-wide, will not produce accurate 
and reliable results for specific activities and services.'' (at 2, 
para 5).
     ``The cost accounting system will not be effective 
until the labor distribution system is operational.'' (at 8, para 
4).
     ``* * * the cost accounting system will not be 
effective and credible without an adequate labor distribution 
system.'' (at 4, para 1).
     ``The cost accounting system should address the needs 
of FAA stakeholders such as the Congress, the aviation industry, and 
the taxpayers. If FAA is to become an effective results-oriented 
organization, the cost accounting system must produce cost 
information that satisfies the needs of external parties as well as 
FAA management.'' (at 11, para 3).

    These statements in the IG report can easily be seen as affecting 
the basis of the FAA's Overflight Fees. Various references to the CAS 
as ``unreliable,'' ``inadequate,'' ``inaccurate,'' or ``not credible'' 
apply to specific issues within the CAS, and represent generalized 
opinions. For example, not having a detailed time reporting system in 
place at the employee level (Labor Distribution Reporting, or LDR) for 
certain ATS labor categories does not render the entire CAS unreliable 
or inadequate. The FAA is currently developing the LDR system to obtain 
actual labor costs directly from each employee, so that costs can soon 
be assigned to appropriate services.
    The CAS has been under development within the FAA for several years 
now. It is being implemented on a phased basis throughout the agency, 
starting with the ATS LOBs. The FAA has stated repeatedly that, like 
all cost accounting systems, the FAA's CAS is an evolving and 
developing system, and that certain data elements, such as the LDR, 
will be improved and refined as implementation proceeds. In the 
meantime, as the CAS evolves, there are other ways, consistent with 
accepted accounting principles and practices, to reasonably allocate 
labor costs based on current capabilities. The FAA directly assigned 
much of the labor data; but where it could not, it used other methods 
as allowed under Federal Accounting Standards. For example, the FAA 
used a labor distribution system for the Research and Acquisitions 
organization and staffing standards for maintenance labor. In each 
instance, the FAA used the best available data to make such 
allocations. The IG, in fact, relied on such data in performing the 
fiscal year (FY) 1999 financial statement audit, and did not propose 
any adjustments to the financial statements related to the presentation 
of these costs.
    Specific issues raised by the IG report are addressed as follows:
    IG Statement: The IG report states, ``FAA's current cost accounting 
system, while capable of calculating cost agency wide, will not produce 
accurate and reliable results for specific activities and services. For 
example, FAA's actual cost for air traffic controller and airways 
facilities maintenance labor, estimated at $3.4 billion for FY 2001, 
cannot be tracked to specific activities and services, which would 
preclude FAA from developing potentially useful information such as the 
cost of a particular air traffic control or maintenance shift.'' (at 2, 
para 5). Further, the IG states, ``If FAA ever needs the actual cost of 
specific activities, and services, such as communication efforts 
related to En

[[Page 43712]]

Route and Oceanic services, the cost accounting system must be modified 
to accumulate cost at this level of detail. The system has not been 
designed to provide this type of information.'' (at 18, para 1).
    FAA Response: This issue does not in any way affect the integrity 
of the CAS data for the costs upon which Overflight Fees are based. The 
IG concludes that the current CAS, while capable of calculating costs 
agency-wide, will not produce accurate and reliable results for 
specific ``activities and services'' at a level of granularity that the 
IG considers to be appropriate.
    The FAA has defined the overall services provided by the ATS LOB as 
Enroute, Oceanic, Terminal, and Flight Services. While the CAS is 
designed to distribute the total costs of the ATS LOB among these four 
``Services,'' it is not designed to determine the cost of a maintenance 
shift or an individual radio communication--which are actually 
individual activities within an overall Service. This is analogous to 
the case of an aircraft manufacturer, who may know the cost of 
installing an entire landing gear assembly for a particular aircraft 
but does not know the cost of installing one individual part. 
Similarly, while the FAA knows the cost of Enroute and Oceanic Services 
for the purposes of Overflight Fees, the CAS does not provide the costs 
of specific, individual activities.
    The FAA uses the total cost of Enroute and Oceanic Services and the 
total miles flown in each ATC environment to derive unit rates for its 
Overflight Fees. The ATC and related services made available to all 
flights within each ATC environment are highly similar and are 
primarily characterized by the significant shared costs involved in the 
provision of such services. Therefore, the FAA charges the same unit 
rate to all Overflights within the Enroute environment and a single 
(lower) unit rate to all Overflights within the Oceanic environment.
    The IG report states that the FAA should consider designing the CAS 
to provide useful management information, such as the cost of a 
particular air traffic control shift or an activity within a Service, 
such as the specific costs for providing communications as a stand-
alone function. The FAA addressed this comment in its response (Docket 
item 115) to this report. The FAA said that the CAS is a tool designed 
to provide an understanding of the costs of providing ATC and related 
services at specified Service Delivery Points. When FAA began 
discussing system design of the CAS, careful consideration was given to 
what would be required of the system. In the process of determining the 
requirements of the CAS, including its use for Overflight Fees, things 
like the cost of a particular air traffic control shift and the cost of 
communications were carefully considered, but rejected, as they were 
too detailed to define and would have added a great deal of unnecessary 
complexity to the developing system--one that the IG's report already 
cites as being too complex. In addition, as stated earlier, this level 
of detail is not necessary for the derivation of Overflight Fees.
    IG Statement: The IG finds that, ``FAA's cost accounting system 
does not track actual labor cost of activities and services for its Air 
Traffic Services line of business. The cost accounting system will not 
be effective until the labor distribution system is operational. For 
example, FAA was unable to accurately report more than $424 million of 
actual air traffic controller and airway facilities maintenance labor 
and related cost by activities and services. Controller labor cost was 
assigned based on limited summary data for a 2- to 3-day period, and 
airway facilities labor cost was assigned and estimated based on 
outdated labor standards.'' (at 8, para 4).
    The IG further states, ``Since FAA labor cost is more than half its 
total cost, the cost accounting system will not be effective and 
credible without an adequate labor distribution system.'' (at 4, para 
1).
    FAA Response: The IG report noted, ``FAA initially planned to use 
only 2 or 3 days of data and outdated maintenance standards to 
distribute $424 million of air traffic controller and maintenance 
technician labor and related costs between En Route and Oceanic 
services.'' As stated in the FAA's response to the IG report (Docket 
item 115), ``We agreed with the Office of the Inspector General's 
concern that the 2-3 day sample was not of sufficient size to 
distribute costs between the enroute and oceanic services when the 
issue was first raised by the IG in December 1999. FAA subsequently 
improved its costing methodology by using a 40-day, statistically 
valid, sample of actual sign-in/sign-off data at each oceanic facility 
to further allocate $25M of air traffic controller labor cost (out of 
the $1.2 billion of directly assigned air traffic labor).'' 
Accordingly, the labor data used in FY 1999 for CAS was based on the 
40-day sample, not the 2-3 day sample. The IG accepted this revised 
approach, noting in the audit report, ``Cost and Flight Data for 
Aircraft Overflights (see Docket item 10, page 6) that it ``should 
result in a more accurate representation of air traffic controller 
labor costs by activity and service.'' The FAA used this FY 1999 data 
to derive its Overflight Fees. Once the FAA's LDR system is 
implemented, the agency will no longer need to use such sampling. But 
for now, the FAA has determined that the accounting approach taken is 
sufficient for determining the costs used to derive Overflight Fees.
    The FAA used staffing standards to allocate $219M of actual 
maintenance payroll to pieces of equipment in the Enroute and Oceanic 
Services. We note that the IG report contains references to ``outdated 
maintenance standards'' and to ``outdated labor standards'' in the 
sections on Labor Costs, and a similar reference under Assessment Area 
5 on Internal Controls. The FAA is concerned that these references 
could lead to an erroneous conclusion. While the FAA has not routinely 
updated its staffing standards for existing equipment, this does not 
mean that the standards are therefore unreliable. FAA conducts a 
significant amount of on-site research and analysis at the time its 
staffing standards are initially developed, and does not believe they 
need to be revisited every year or two to remain valid. The FAA has 
discussed this topic at length with the IG, with the resulting 
agreement that the current staffing standards represent the best 
available data source for allocating AF labor costs at the present 
time.
    The IG specifically stated in its December 1999 report (Docket item 
10, page 7), ``While FAA's labor standards currently provide the best 
available data for assigning the airway facilities maintenance costs to 
services, the revised standards should improve the accuracy of these 
costs.
    The equipment inventory will be updated and revised standards will 
be estimated based on existing technology, which should improve the 
accuracy of labor estimates. However, for the long term, a labor 
distribution system or work order system would provide a better and 
more appropriate method of accounting for maintenance labor.'' Thus 
while the FAA is working on improving this data, these labor costs used 
as the basis for Overflight Fees are adequate for this rulemaking.
    Based on a recent decision by the FAA to track actual labor, the 
agency is working aggressively to implement its new Labor Distribution 
System for the entire agency. This system should allow the FAA to 
capture actual labor costs for all agency services. Both Airway 
Facilities and Air Traffic workforces are currently in an 
implementation status. The FAA expects to collect actual time from 
these workforces by the end of FY 2002. As noted in the rule, the FAA

[[Page 43713]]

expects to revise the rule in future years to reflect improvements such 
as this in the CAS.
    IG Statement: The IG report states:

     ``FAA's cost accounting system does not properly 
collect costs associated with facilities and equipment projects 
within its Research and Acquisitions line of business. FAA 
improperly combined production overhead cost and general and 
administrative cost into one overhead cost pool. As a result, about 
$63 million annually would not have been properly added to 
facilities and equipment values had we not informed FAA of this 
problem.'' (at 4, para 3).
     ``We have not audited the overhead bases in all of 
FAA's lines of business; however, we found that the overhead cost in 
the Research and Acquisitions line of business was allocated to 
projects using inappropriate allocation basis. (at 4, para 4)'' 
``For example, during the first quarter of FY 2000, the FAA 
allocated over $1 million to project 11270101, one of the Wide Area 
Augmentation System [satellite navigation system] projects, when it 
should have allocated only about $59,000 if the correct base for 
allocating overhead cost had been used.'' (at 10, para 2).

    FAA Response: The FAA agreed with the IG that it should have more 
accurately allocated overhead costs to the Research and Acquisition 
LOB. The FAA has taken appropriate steps to ensure that its CAS will 
track these costs more accurately in the future. However, since the FY 
1999 cost basis for calculating Overflight Fees does not include 
overhead costs, the net impact of these adjustments would have resulted 
in slightly higher costs and fees for Overflights. Based on the IG's 
information, the FAA made the necessary accounting adjustment, and 
implemented procedures to ensure proper accounting treatment on a 
continuing basis in the future.
    IG Statement: The IG concludes that the ``FAA's systems for 
tracking assets are not reliable, resulting in a material internal 
control weakness. (at 15, para 2)'' ``For example, in our FY 1998 
audit, in a test of 117 items, we found 4 items valued at $50 million 
that should be removed from property records, one of which was a 
building that had been demolished 10 years earlier.'' (at 15, para 3).
    FAA Response: This issue, while appropriate to raise within the 
context of an assessment of the CAS overall, is not relevant to the 
calculation of the current Overflight Fees. The FAA fixed these 
problems between FY 1998 and FY 1999, resulting in an unqualified audit 
opinion (meaning no significant issues were identified) for FY 1999. 
For this reason, the FAA chose not to use its FY 1998 cost data and 
waited instead for its FY 1999 costs as a basis for both the Interim 
Final Rule and the Final Rule for Overflight Fees. To further improve 
this data, the FAA is implementing an automated fixed asset valuation 
system that will be used as the basis for the FY 2001 audit. This 
system is being implemented to further streamline the depreciation 
process and increase management controls.
    IG Statement: The IG reports, ``Our audit of the design of Research 
and Acquisitions'' cost accounting system included an evaluation of the 
results produced by the pilot labor distribution system. Because FAA 
does not have an adequate system of policies, procedures, practices, or 
internal controls established to detect or prevent errors in assigning 
costs, we found that about 36 percent of the first quarter FY 2000 
labor cost, or $16 million, could not be tracked to specific projects, 
activities and services. Our audit disclosed significant labor cost 
reported as `no project.' The `no project' cost could not be identified 
with specific projects by the Research and Acquisitions cost accounting 
system, which uses data from the pilot labor distribution system. FAA 
plans to resolve the no project problem by June 2001.'' (at 9, para 2).
    The IG says, ``Internal controls over timekeeping were weak. FAA 
personnel charged their labor cost to incorrect projects. For example, 
employees charged about $245,000 in labor cost to a project for the 
first quarter of FY 2000 although the project was completed in FY 
1997.'' (at 9, para 3).
    FAA Response: As the IG states, this was a pilot project intended 
to test the new labor distribution system, which provides the FAA with 
actual labor costs to be allocated to services. The FAA acknowledges 
that there were inaccuracies in data collection. This pilot project was 
a test to detect such procedural problems and take steps to fix them 
before implementing the system agency-wide. As stated in the report, 
the FAA is addressing the problems identified in the IG report. The 
current target date for resolving these concerns is February 2002.
    In any event, the issue of some costs having been assigned to ``no 
project'' has little, if any, effect on the current Overflight Fees. 
These inaccuracies would have benefited Overflights, since all of the 
``no project'' costs were allocated as overhead costs. The Overflight 
Fees do not include overhead costs. Therefore, correcting this problem 
would have resulted in slightly higher fees. As indicated earlier, the 
FAA will continue to improve future CAS cost allocations.
    In sum, after thorough and careful consideration and analysis of 
the recent IG report on the CAS, the FAA has determined that the report 
has no substantive effect on this rulemaking.

Discussion of the Final Rule

    This Final Rule completes the statutory task given to the FAA by 
Congress in 1996. Changes to the Final Rule from the Interim Final Rule 
are minimal and clarifying, except for the fee rates, where accounting 
adjustments have resulted in lower fees. As stated in the Interim Final 
Rule, for the purpose of this rulemaking, U.S.-controlled airspace 
includes all U.S. airspace either directly owned by the United States 
or allocated to the United States by the International Civil Aviation 
Organization (ICAO) or by other countries. This can further be defined 
in general as Enroute and Oceanic airspace. Enroute airspace is 
generally defined, for the purpose of this rulemaking, as airspace 
where primarily radar-based air traffic services are available. Oceanic 
airspace is generally defined, for the purpose of this rulemaking, as 
airspace where primarily procedural air traffic services are available. 
(Some Enroute services are also provided in certain oceanic areas near 
islands such as Bermuda and The Bahamas.) It is acknowledged that this 
division of airspace does not perfectly reflect all types of airspace, 
but is a simplification to allow for reasonable costs in tracking and 
billing users, as well as for the assignment of costs under the CAS. A 
description of the U.S.-controlled airspace by latitude and longitude 
has been placed in the public docket for this rulemaking (Docket item 
5).
    The Final Rule remains the same as the Interim Final Rule with the 
exception of a reduction in the fees attributable to accounting 
adjustments, better billing and collection cost estimates, and 
clarification of the language of certain sections of the rule. Upon 
further review of the FY 1999 financial statements, the FAA determined 
that it had expensed certain costs that should have been capitalized 
and depreciated over a number of years. This caused expenses to be 
overstated and depreciation costs to be understated. The net impact has 
been a reduction in FY 1999 Enroute costs of some $242 million and a 
reduction in Oceanic costs of some $20 million. The specifics of these 
adjustments are explained in the previous Discussion of Comments 
section under the comment ``The FAA expensed costs that should have 
been capitalized.'' Also, billing and collection costs were reduced by 
approximately 17 percent, based on more than 8 months of actual

[[Page 43714]]

operational experience under the Interim Final Rule. This also is 
discussed previously. The net result of these cost adjustments is a 
reduction of approximately 10-percent in Enroute fees and approximately 
20-percent in Oceanic fees. The new rates are $33.72 per 100 miles 
flown in Enroute airspace, and $15.94 per 100 miles flown in Oceanic 
airspace.
    Effective upon publication of this Final Rule, the FAA will 
implement the updated fees. The FAA will recalculate previous bills 
under the Interim Final Rule and provide credits or refunds, as 
appropriate, to users under 49 CFR part 89. The rule does not apply to 
military and civil aircraft operated by the U.S. Government or by a 
foreign government, or to Canada-to-Canada flights.

Aviation Rulemaking Committee for Overflight Fees

    As explained in the Discussion of Comments section under ``Lack of 
consultation,'' the FAA intends to establish an Aviation Rulemaking 
Committee for Overflight Fees. The FAA anticipates publishing a Notice 
in the Federal Register within the next 90 days announcing details of 
this Committee. The purpose will be to provide a forum for information 
sharing between the FAA, the users, and the public on matters relating 
to the fees and to discuss future Overflight Fee rulemaking.

Canada-to-Canada Operations

    Canada-to-Canada operations, as previously discussed, are defined 
for this rulemaking (hereafter ``Canada-to-Canada'') as flights 
conducted by any aircraft of any nationality that take off from and 
land in Canada without an intermediate stop outside of Canada that 
operate in U.S.-controlled airspace. Users are defined as operators of 
aircraft flights that neither depart from nor land in the United 
States.
    Currently, many flights between two points in Canada transit U.S.-
controlled airspace because of air traffic coordination between the 
United States and Canada. Routing through U.S.-controlled airspace by 
U.S. or Canadian ATC occurs because it is either the shortest route or 
it offers the most favorable flight conditions. This frequent and 
variable routing is done without regard to the border between Canada 
and the United States.
    As stated in the Interim Final Rule, the FAA has a long-standing 
ATC relationship with the Canadian ATC authority known as NAV CANADA 
beginning with an exchange of notes between the U.S. and Canadian 
governments in 1963. The FAA has determined that assessing fees on 
Canada-to-Canada flights would be inconsistent with 49 U.S.C. 106(l), 
40103, and 40105; and the FAA's agreements with Canada or its agent NAV 
CANADA (the most recent of which can be found in the docket, item 102). 
This determination gives maximum effect to all applicable statutes and 
agreements. Accordingly, the total potential annual billings of 
overflights are $43.2 million, but expected annual billings are 
approximately $33.5 million (the difference being attributed to the 
FAA's agreements with NAV CANADA). These totals reflect a reduction in 
fees from the Interim Final Rule of approximately 10 percent in Enroute 
airspace and 20 percent in Oceanic airspace. As discussed previously, 
the cost of fees not charged is being borne by the FAA.
    The FAA has recently learned that NAV CANADA has sent invoices for 
enroute services covered by the agreement described above. These bills 
were accompanied by a letter from NAV CANADA that stated, ``Effective 
June 1, 2001, the NAV CANADA enroute charge will apply to flights 
between two points in the U.S. entering and exiting airspace controlled 
by NAV CANADA below 49 deg.N, east of 95 deg.W by turbojet aircraft in 
commercial service with maximum take-off weight (MTOW) of 20 metric 
tonnes or more.'' The FAA is currently considering the effect of this 
action on its agreement with NAV CANADA.

The Overflight Fee

    The Fees for users (i.e., operators of flights meeting the 
definition of an Overflight) is calculated using the Great Circle 
Distance (GCD) for each segment of U.S.-controlled airspace that users 
transit, as follows:

Rij = (DOij  x  CO) + (DEij  x  CE)

Where

Rij= the fee charged to aircraft flying between entry 
point i and exit point j,
DOij= total GCD traveled in each segment of U.S.-
controlled Oceanic airspace expressed in hundreds of nautical miles 
for aircraft flying between entry point i and exit point j for each 
segment in Oceanic airspace,
CO = $15.94 per 100 nautical miles flown in Oceanic airspace,
DEij = total GCD traveled in each segment of U.S.-
controlled Enroute airspace expressed in hundreds of nautical miles 
for aircraft flying between entry point i and exit point j for each 
segment in Enroute airspace,
CE = $33.72 per 100 nautical miles flown in Enroute airspace.

This formula is based on entry and exit data available for individual 
flights in U.S.-controlled airspace. If actual data are not available, 
the FAA will use best available FAA flight data based on GCD within 
each type of airspace transited.
    The fees have been derived in a logical and reasonable manner, and 
are directly related to the costs of the FAA services provided to 
Overflights. Also, the FAA has determined that the $250-per-month 
exemption, which was established in the Interim Final Rule, is still 
appropriate for the reasons detailed in that document. Therefore, no 
fee will be assessed unless the cumulative charges exceed $250 per 
calendar month, based on Greenwich Mean Time (GMT), by any particular 
user. The FAA intends to review this Final Rule at least once every 2 
years and will issue an NPRM as needed.
    The following table illustrates the fee schedule and its 
application to hypothetical flights.

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Fee Collection Process and Enforcement

    The FAA has established and maintains data from several sources, 
including but not limited to, flight plans and radar/radio data that 
identify the point of entry and exit, aircraft registration number, and 
the type of aircraft for all aircraft entering U.S.-controlled 
airspace. Information is extracted from the database and used, along 
with the fee formula, to compute each fee. The fee includes a charge to 
cover the cost of obtaining and processing the flight data, as well as 
the cost of billing and collection.
    Under the Interim Final Rule, the FAA has been billing by sending a 
monthly statement to users pursuant to 49 CFR, part 89. Affected 
commercial users have been requested to designate and submit to the FAA 
the name and address of a U.S. agent for billing. Users not providing a 
billing address are billed at the address of record of the aircraft 
owner as maintained in the country where the aircraft is registered. If 
the FAA cannot identify a user, the registered owner of the aircraft is 
billed. This process will continue unchanged.
    As provided in Sec. 187.15(d), monthly remittance of fees of $1,000 
or more are to be paid by electronic funds transfer. Monthly 
remittances of less than $1,000 may be paid by electronic funds 
transfer, check, money order, credit card, or draft. All payments must 
be in U.S. currency.
    Invoices that become delinquent will be charged administrative 
charges and interest and will be collected according to 49 CFR, part 
89. The FAA intends to pursue vigorously all delinquent balances to the 
extent provided by law. As noted above, the FAA will recalculate all 
bills under the Interim Final Rule and will give credits or refunds, as 
appropriate, for overpayment.
    If any adjustments are necessary in the fees billed or collected, 
the FAA will follow the procedures in 49 CFR part 89 to settle debts of 
users. This includes issuing credits and refunds to users as 
appropriate and authorized by law.

Justification for Immediate Adoption

    The Administrative Procedure Act (APA), 5 U.S.C. 553 et. seq., 
requires that prior to the issuance of a final rule, an agency will 
give notice to the public and seek comment on a proposed rule. Also, 
when a rule is adopted immediately, justification is required under the 
APA. On June 6, 2000, the FAA published the Interim Final Rule without 
public notice, pursuant to specific Congressional authority (the Act, 
49 U.S.C. 45301(b)(2)), which in itself has been recognized by the 
courts as a specific exception to the APA. At that time, the FAA sought 
comments, which are addressed in this document. Congress directed that 
after the FAA has obtained public comments, it should then issue a 
Final Rule. This Final Rule is issued, without further notice or 
request for comments, with immediate adoption because this action 
reduces fees and collection charges. No additional notice or request 
for comment is required by 49 U.S.C. 45301 or by the APA, since the 
only change in the rule is an administrative reduction of fees. To 
delay adoption would merely defer the reduction of the fees, and 
thereby increase the burden on the users. Furthermore, in light of the 
express direction from Congress, notice and comment would be 
inappropriate and not in the public interest.

Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3507(d)), the information collection requirements 
associated with this Final Rule were submitted to the Office of 
Management and Budget (OMB) for review and approval. The OMB control 
number associated with this collection is Number 2120-0618. There are 
no new requirements for the information collection associated with this 
Final Rule. Under the IFR, an estimated 300 to 600 aircraft operators 
were requested to provide the FAA the name, the address, and phone 
number of any operator obtaining Overflight services. This was a one-
time collection unless the user needed to change any of the information 
provided to the FAA.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid OMB control number.

International Compatibility

    In keeping with U.S. obligations under the Convention on 
International Civil Aviation, it is FAA policy to comply with ICAO 
Standards and Recommended Practices to the maximum extent practicable. 
The FAA has reviewed the corresponding ICAO Standards and Recommended 
Practices and has identified no differences with these regulations.

Economic Evaluation Summary

    Proposed changes to Federal regulations must undergo several 
economic analyses. First, Executive Order 12866 directs each Federal 
agency to propose or adopt a regulation only if the agency makes a 
reasoned determination that the benefits of the intended regulation 
justify its costs. Second, the Regulatory Flexibility Act of 1980 
requires agencies to analyze the economic impact of regulatory changes 
on small entities. Third, the Trade Agreements Act (19 U.S.C. section 
2531-2533) prohibits agencies from setting standards that create 
unnecessary obstacles to the foreign commerce of the United States. In 
developing U.S. standards, this Trade Act requires agencies to consider 
international standards. Where appropriate, agencies are directed to 
use those international standards as the basis of U.S. standards. And 
fourth, the Unfunded Mandates Reform Act of 1995 requires agencies to 
prepare a written assessment of the costs, benefits and other effects 
of proposed or final rules. This requirement applies only to rules that 
include a Federal mandate on State, local or tribal governments or the 
private sector, likely to result in a total expenditure of $100 million 
or more in any one year (adjusted for inflation).
    In conducting these analyses, the FAA has determined that this 
rule: (1) has benefits which do justify its costs, is a ``significant 
regulatory action'' as defined in the Executive Order, and is 
``significant'' as defined in DOT's Regulatory Policies and Procedures; 
(2) will not have a significant impact on a substantial number of small 
entities; (3) reduces barriers to international trade; and (4) does not 
impose an unfunded mandate on State, local, or tribal governments, or 
on the private sector. The FAA has placed these analyses in the docket 
(as part of the Regulatory Evaluation accompanying this Final Rule) and 
summarized them below.
    Several benefits will be realized from the imposition of these 
fees. The fees establish a mechanism whereby the users pay for the cost 
of resources they use. These revenues (up to $50 million) will be made 
available to fund the Essential Air Service (EAS) program, as directed 
by Congress (49 U.S.C. 41742). For these reasons, charging Overflight 
Fees is expected to result in a more efficient allocation of scarce 
public resources. The more efficient allocation of resources will 
benefit the public at large because more resources will become 
available for other services demanded by the public and because EAS 
will be funded with fewer tax dollars.
    The effect of the rule will be to collect the cost of providing and 
making available certain ATC services from the users of the services. 
The FAA estimates that the annual cost of billing and collections 
associated with this rule is $1.46 million. This includes a one-time 
development cost of $1.47 million

[[Page 43717]]

(which is being amortized over 2 years beginning with the 
implementation of the Interim Final Rule (IFR)) and an annual operating 
cost of approximately $725,000. This is a reduction from the IFR 
billing and collections costs.
    The cost of billing and collections is expected to be reviewed at 
least once every 2 years and user fee rates will be subject to 
adjustment to reflect the current costs of providing Overflight 
services. The next review is expected no later than 2 years from the 
date of publication of the Final Rule.

Regulatory Flexibility Determination

    The Regulatory Flexibility Act of 1980 (RFA) establishes ``as a 
principle of regulatory issuance that agencies shall endeavor, 
consistent with the objective of the rule and of applicable statutes, 
to fit regulatory and informational requirements to the scale of the 
business, organizations, and governmental jurisdictions subject to 
regulation.'' To achieve that principle, the Act requires agencies to 
solicit and consider flexible regulatory proposals and to explain the 
rationale for their actions. The RFA covers a wide-range of small 
entities, including small businesses, not-for-profit organizations and 
small governmental jurisdictions.
    Agencies must perform a review to determine whether a proposed or 
final rule will have a significant economic impact on a substantial 
number of small entities. If the determination is that it will, the 
agency must prepare a regulatory flexibility analysis as described in 
the RFA.
    However, if an agency determines that a proposed or final rule is 
not expected to have a significant economic impact on a substantial 
number of small entities, section 605(b) of the 1980 act provides that 
the head of the agency may so certify and an regulatory flexibility 
analysis is not required. The certification must include a statement 
providing the factual basis for this determination, and the reasoning 
should be clear.
    The Overflight Fees primarily affect foreign users. Since the RFA 
applies to domestic entities and does not apply to foreign entities, 
the FAA certifies that this rule will not have a significant economic 
impact on a substantial number of domestic small entities. In addition, 
the FAA believes that the effect of the Final Rule on small domestic 
operators will be negligible.

International Trade Impact Assessment

    The Trade Agreement Act of 1979 prohibits Federal agencies from 
engaging in any standards or related activities that create unnecessary 
obstacles to the foreign commerce of the United States. Legitimate 
domestic objectives, such as safety, are not considered unnecessary 
obstacles. The statute also requires consideration of international 
standards and where appropriate, that they be the basis for U.S. 
standards. In addition, consistent with the Administration's belief in 
the general superiority and desirability of free trade, it is the 
policy of the Administration to remove or diminish to the extent 
feasible, barriers to international trade, including both barriers 
affecting the export of American goods and services to foreign 
countries and barriers affecting the import of foreign goods and 
services into the United States.
    In accordance with the above statute and policy, the FAA has 
assessed the potential effect of this final rule. The Final Rule will 
primarily affect foreign users, generally commercial users. Most 
commercial aircraft are designed to operate more efficiently at 
altitudes above 18,000 feet. All operations at altitudes at or above 
18,000 feet controlled by the United States must use ATC. The FAA 
believes that it is highly unlikely that foreign commercial users will 
alter their behavior to avoid using ATC and related services (although 
there are some questions about foreign non-commercial users). In 
addition, to some extent, commercial users are able to pass the 
Overflight Fees on to their passengers and cargo customers.
    The Final Rule may have a favorable competitive impact on U.S. 
commercial operators. Prior to the implementation of the June 6, 2000, 
Overflight Fee IFR, U.S. commercial operators were at a possible 
comparative disadvantage with foreign counterparts when users (U.S. and 
foreign) paid user fees to transverse other countries' airspace while 
foreign users did not have to pay a fee to transverse U.S.-controlled 
airspace. The Final Rule could enhance the competitiveness of domestic 
commercial operators in international markets.

Unfunded Mandates Assessment

    The Unfunded Mandates Reform Act of 1995, enacted as Pub. L. 104-4 
on March 22, 1995, is intended, among other things, to curb the 
practice of imposing unfunded Federal mandates on State, local, and 
tribal governments.
    Title II of the Unfunded Mandates Reform Act of 1995 requires each 
Federal agency to prepare a written statement assessing the effects of 
any Federal mandate in a proposed or final agency rule that may result 
in a $100 million or more expenditure (adjusted annually for inflation) 
in any one year by State, local, and tribal governments, in the 
aggregate, or by the private sector.
    This Final Rule does not contain such a mandate. Therefore, the 
requirements of Title II of the Unfunded Mandates Reform Act of 1995 do 
not apply.

Executive Order 13132, Federalism

    The FAA has analyzed this Final Rule under the principles and 
criteria of Executive Order 13132, Federalism. We determined that this 
action will not have a substantial direct effect on the States, or the 
relationship between the national Government and the States, or on the 
distribution of power and responsibilities among the various levels of 
government. Therefore, we determined that this Final Rule does not have 
federalism implications.

Environmental Analysis

    FAA Order 1050.1D defines FAA actions that may be categorically 
excluded from preparation of a National Environmental Policy Act 
environmental assessment or environmental impact statement. In 
accordance with FAA Order 1050.1D, appendix 4, paragraph 4(j), this 
rulemaking action qualifies for a categorical exclusion.

Energy Impact Determination

    The energy impact of the Final Rule has been assessed in accordance 
with the Energy Policy and Conservation Act (EPCA), Pub.L. 94-163, and 
FAA Order 1053.1. It has been determined that the Final Rule is not a 
major regulatory action under the provisions of the EPCA.

List of Subjects in 14 CFR Part 187

    Administrative practice and procedure, and Air transportation.

The Amendment

    In consideration of the foregoing, the Federal Aviation 
Administration amends part 187 of title 14, Code of Federal Regulations 
as follows:

PART 187--FEES

    1. The authority citation for part 187 continues to read as 
follows:

    Authority: 31 U.S.C. 9701, 49 U.S.C. 106(g), 49 U.S.C. 
106(l)(6), 40104-40105, 40109, 40113-40114, 44702.

    2. In Sec. 187.1, revise the last two sentences to read as follows:


Sec. 187.1  Scope.

    * * * Appendix A to this part prescribes the methodology for 
computation of fees for certification services performed outside the 
United States. Appendix B to this part

[[Page 43718]]

prescribes the fees for certain aircraft flights that transit U.S.-
controlled airspace.

    3. In Sec. 187.15, paragraph (d) is revised to read as follows:


Sec. 187.15  Payment of fees.

* * * * *
    (d) The fees described in appendix B of this part are payable to 
the Federal Aviation Administration in U.S. currency. Remittance of 
fees of $1,000 or more are to be paid by electronic funds transfer. 
Remittance of amounts less than $1,000 may be paid by electronic funds 
transfer, check, money order, credit card, or draft.

    4. In part 187, Appendix B is revised to read as follows:

Appendix B--Fees for FAA Services for Certain Flights

    (a) Applicability. Except as provided in paragraphs (b) and (c) 
of this appendix, this appendix applies to any person who conducts a 
flight through U.S.-controlled airspace that does not include a 
landing or takeoff in the United States. U.S.-controlled airspace is 
defined as all U.S. airspace either directly owned by the United 
States or allocated to the United States by the International Civil 
Aviation Organization (ICAO) or by other countries. This is further 
defined, for this section only, as Enroute and Oceanic airspace. 
Enroute airspace is defined, for this section only, as airspace 
where primarily radar-based air traffic services are provided. 
Oceanic airspace is defined, for this section only, as airspace 
where primarily procedural air traffic services are provided.
    (b) Governmental flights. This appendix does not apply to any 
military or civilian flight operated by the United States Government 
or by any foreign government.
    (c) Canada-to-Canada flights. This appendix will not apply to 
any operator of a flight that takes off and lands in Canada, without 
an intermediate stop outside Canada, that operates in U.S.-
controlled airspace.
    (d) Services. Persons covered by paragraph (a) of this appendix 
must pay a fee for the FAA's rendering or providing certain 
services, including but not limited to the following:
    (1) Air traffic management.
    (2) Communications.
    (3) Navigation.
    (4) Radar surveillance, including separation services.
    (5) Flight information services.
    (6) Procedural control.
    (7) Emergency services and training.
    (e) Methodology for the computation of fees.
    (1) For the services listed in paragraph (d) of this appendix, 
the fee is computed based on the distance flown in either enroute or 
oceanic airspace (U.S.-controlled airspace.) Distance flown is based 
on the great circle distance (GCD) for the point of entry and the 
point of exit of U.S.-controlled airspace based on FAA flight data. 
Fees are assessed using the methodology presented in paragraph 
(e)(2) of this appendix. Where actual entry and exit points are not 
available, the best available FAA flight data will be used to 
calculate the entry and exit points.
    (2) A User (operator of an overflight) is assessed a fee for 
each 100 nautical miles (or portion thereof) flown in each segment 
and type of U.S.-controlled airspace. Separate calculations are made 
for transiting Enroute and Oceanic airspace. The total fee charged 
for an Overflight between any entry and exit points is equal to the 
sum of these two charges. This relationship is summarized as:

Rij = $15.94*DOij + $33.72*DEij,

Where

Rij = the fee charged to aircraft flying between entry 
point i and exit point j,
DOij= total great circle distance traveled in each 
segment of U.S.-controlled oceanic airspace expressed in hundreds of 
nautical miles for aircraft flying between entry point i and exit 
point j for each segment of oceanic airspace.
DEij = total great circle distance traveled in each 
segment of U.S.-controlled enroute airspace expressed in hundreds of 
nautical miles for aircraft flying between entry point i and exit 
point j for each segment of enroute airspace.

    (f) Billing and payment procedures.
    (1) Billing. The FAA will send an invoice to each user that is 
covered by this appendix when fees are owed to the FAA. If the FAA 
cannot identify the user, then an invoice will be sent to the 
registered owner. No invoice will be sent unless the monthly (based 
on Greenwich Mean Time) fees for service equal or exceed $250. Users 
will be billed at the address of record in the country where the 
aircraft is registered, unless a billing address is otherwise 
provided.
    (2) Payment. Payment must be made by one of the methods 
described in Sec. 187.15(d).
    (g) Review of rule. The rule prescribed in this appendix will be 
reviewed at least once every 2 years and adjusted to reflect the 
current costs of the services covered by this appendix.

    Issued in Washington, DC, on August 13, 2001.
Jane F. Garvey,
Administrator.
[FR Doc. 01-20691 Filed 8-17-01; 8:45 am]
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