UNITED STATES COURT OF APPEALS FOR THE D.C. CIRCUIT


CITY OF LOS ANGELES

v.

DOT


98-1071a

D.C. Cir. 1999


*	*	*


Silberman, Circuit Judge: The City of Los Angeles in- creased the
landing fees at Los Angeles International Air- port, and the airlines
challenged those fees as unreasonable  before the Department of
Transportation. The DOT set  aside the increased fees, reasoning that
the City's attempt to  recoup its "opportunity costs" through the fees
was impermis- sible as a matter of statute. In City of Los Angeles v.
DOT,  103 F.3d 1027 (D.C. Cir. 1997), we rejected that statutory 
interpretation and remanded for the DOT to consider the  opportunity
cost issue as a matter of policy. The DOT did so,  concluding that the
City's claimed entitlement to recover its  opportunity costs was
unreasonable, and rejected the fees.  The City petitions for review.
We deny the petition.


I.


Until 1993, the City of Los Angeles, pursuant to a contrac- tual
agreement with the airlines, established landing fees at 


the Los Angeles International Airport (LAX) based on a  residual
methodology. Under that technique, the City esti- mated the revenue
and cost attributable to non-aeronautical  operations--such as parking
contracts and concession fran- chising--for the coming fiscal year.
Expected non- aeronautical surplus, if any, was then applied toward
the  anticipated cost of aeronautical operations. Landing fees  were
set (based on estimated landed weight) at a sufficient  level to make
up for the remaining aeronautical cost. In  1992, the last year in
which the City used this methodology,  the fee was $.51 per 1,000
pounds of landed weight. In 1993,  the expiration of the City's
contract with the airlines opened  the door for the City to adopt the
potentially more lucrative  compensatory fee methodology. That
approach treats aero- nautical operations separately from
non-aeronautical opera- tions; the airport sets landing fees at a
sufficient level to  compensate it for the entirety of its
aeronautical costs, and  any surplus or deficit from non-aeronautical


The City also decided in 1993, for the first time, to include  in its
estimated aeronautical costs a charge reflecting the  current annual
fair market rental value of the land on which  the airfield rests. The
City thought itself entitled to recover  this "opportunity cost," for
only then would the City be  compensated fully for the cost of using
the land as an airport  instead of pursuing its alternative
opportunity to earn profits  by renting the land.1 The City appraised
the current fair  market value of the land at $150,000 per acre. (The
City had  purchased most of the 1,780.3 acres on which the airport is 
built over 50 years ago at an average price of $2,427 per  acre.)
Adjusting for the effects of federal grants and con- verting to an
annual rental value, the City arrived at a figure  of $8,348 per acre
per year, or $14,861,900 per year for the  entire 1,780.3 acres
occupied by the airport. Putting this fair 




__________

n 1 A leading economics text defines "opportunity cost" in this  way:
"[M]aking a choice in effect costs us the opportunity to do  something
else. The alternative forgone is called the opportunity  cost...."
Paul A. Samuelson & William D. Nordhaus, Economics  128 (16th ed.


market rental value, among other costs, into its compensatory  fee
calculation, the City computed a landing fee of $1.56 per  1,000
pounds of landed weight (effective July 1, 1993), an  increase of more
than $1.00 over the 1992 fee. When contract  negotiations looking to a
compensatory fee agreement be- tween the City and the airlines broke
down, the City unilater- ally imposed the $1.56 fee by ordinance,
informing the airlines  that they could not land at LAX unless they
paid the in- creased fee.


The airlines challenged the fee increase pursuant to an  expedited
administrative procedure in which the Department  of Transportation
has authority to set aside unreasonable  fees. See 49 U.S.C. s 47129
(1994); see also Anti-Head Tax  Act, 49 U.S.C. s 40116(e)(2) (1994)
(providing that a political  subdivision of a State may levy or
collect "reasonable ...  landing fees"); 49 U.S.C. s 47107(a)(1)
(1994) (requiring fed- eral airport grant recipients to assure the DOT
in writing  that "the airport will be available for public use on
reasonable  conditions"). The Department determined the fee unreason-
able, reasoning that the Anti-Head Tax Act's "requirement of 
reasonable fees ... mandat[es] the use of historic cost for  airfield
land"--i.e., the original acquisition cost of the land on  which the
airport was built--and thereby forbids consider- ation of opportunity
cost. Los Angeles Int'l Airport Rates  Proceeding, Order No. 95-6-36,
at 24 (June 30, 1995). In the  meantime, the City had announced a new
landing fee in 1995  of $2.06 per 1,000 pounds of landed weight
(effective July 1,  1995), again including among its costs its claimed
"opportuni- ty cost," i.e., the forgone fair rental value of the
airfield land.  The airlines challenged this fee before the DOT, and
the  Department set the fee aside for the same reason given in 
rejecting the 1993 fee. Second Los Angeles Int'l Airport  Rates


In City of Los Angeles v. DOT (LAX I), 103 F.3d 1027  (D.C. Cir. 1997),
we granted the City's petition for review of  the Department's
decision regarding the 1993 fee. (We had  stayed proceedings relating
to the 1995 fee pending our  review of the Department's decision on
the 1993 fee.) We  concluded that the Department had no basis for its
view that 


the Anti-Head Tax Act forbade the consideration of opportu- nity costs
in determining the reasonableness of landing fees  and permitted only
the consideration of historic costs. Id. at  1032. Although we noted
that "[h]istoric cost is ... one  permissible measure of costs in
cost-of-service rate-making,"  we rejected the "Secretary's view of
historic cost as the  apodictically indicated measure of 'actual
cost.' " Id. Ac- cordingly, we vacated the Secretary's decision and
remanded  "for his fuller consideration of the respective merits of
the  historic cost and [opportunity cost] methodologies here at 
issue." Id. We granted the Department's request for a  remand of the
1995 fee proceeding to conduct a similar policy  evaluation of the
competing methodologies. See Air Trans- port Ass'n of Am. v. DOT, No.
96-1018 (D.C. Cir. March 7,  1997) (per curiam order).


On remand, the DOT consolidated the 1993 and 1995 fee  proceedings. As
before, the Department held that the 1993  and 1995 fees should be set
aside because it was unreasonable  for the City to recover its claimed
"opportunity cost." Los  Angeles Int'l Airport Rates Proceeding and
Second Los  Angeles Int'l Airport Rates Proceeding (Remand Decision), 
Order 97-12-31 (December 23, 1997). But this time the  Department
rested its decision explicitly on policy grounds.  It pointed to the
airport's obligation as a federal airport grant  recipient to keep the
airport "available for public use," 49  U.S.C. s 47107(a)(1), and to
another provision that bars a  grant recipient from making any
alteration to the airport's  layout unless the Secretary decides that
the change will not  "adversely affect the safety, utility, or
efficiency of the air- port," id. s 47107(a)(16)(C). See Remand
Decision at 13.  These provisions forbid the City from converting the
airfield  land to rental property; the City at present has no lawful 
opportunity to use the land in any capacity other than as an  airport.
(Although the Department and the City seem to  disagree on precisely
when the City's grant assurance obli- gation will expire, it is
undisputed that the grant assurance  obligation is currently in
force.) The Department therefore  concluded that it would be


recover compensation through its landing fees for a "lost 
opportunity" that does not lawfully exist. See id. at 14.


Alternatively, the DOT held that even if the City were  thought to
incur opportunity costs, the fees should be set  aside because the
City's "benefits" from operating LAX al- ready sufficed to cover the
City's opportunity costs. The  Department viewed the City, rather than
the airport, as the  relevant economic actor; pursuing the rental
opportunity  would require the City either to build a new airport (or 
expand an existing minor airport such as Long Beach or  Orange
County), or else simply to go without a major airport.  The latter
option, according to the Department, would entail  an enormous loss to
the City; a 1992 study quantified the  benefits of LAX "in terms of
jobs (402,000); direct, indirect,  and induced economic impacts ($37
billion per year); and  state and local taxes ($1.7 billion per
year)." Id. at 17. And  the City would sacrifice the current revenue
the City earns  from its airfield and non-airfield activities at LAX.
In the  Department's view, these losses far outweigh any reasonable 
forecast of rental revenue--the City's estimate of that reve- nue,
recall, was a mere $14,861,900 per year. In short, the  stream of
benefits from using the land as rental property  rather than as an
airport would be smaller than the stream of  benefits from operating
the airport--i.e., the opportunity cost  of using the land as an
airport was already being covered.  And the Department thought the
calculus would not be much  different if the City, rather than going
without a major  airport, attempted to build a new major airport or
expand  existing minor airports. Relying on the City's own appraisal 
firm's report that the "relocation of the Los Angeles Interna- tional
Airport (LAX) is practically impossible" given the  paucity of
alternative airport development sites and the pro- hibitive costs of
acquiring such a site, the Department con- cluded that once these
costs were taken into account, the net  profit from renting the LAX
land would again be outweighed  by the benefits of using the LAX land
as an airport. Id. at  18-19. In the end, the Department concluded
that the City's  analysis of its opportunity costs--which treated only


the annual rental income of $14,861,900--was overly simplis- tic, and
therefore rejected the City's attempt to include its  self-described
"opportunity costs" in calculating its landing  fees.


We should briefly mention a related proceeding, the DOT's  effort to
fulfill its statutory mandate under 49 U.S.C.  s 47129(b)(2) to
publish final regulations, policy statements,  or guidelines
establishing the "standards or guidelines that  shall be used by the
Secretary in determining ... whether an  airport fee is reasonable."
In June 1996, the Secretary  published a regulation entitled the
"Policy Regarding Airport  Rates and Charges." See 61 Fed. Reg. 31,994
(June 21,  1996). The regulation required airports to value their air-
field assets at historic cost, but allowed airports to use "any 
reasonable methodology" in valuing their non-airfield assets.  Id. In
Air Transport Association v. DOT, 119 F.3d 38 (D.C.  Cir. 1997), we
vacated the regulation, challenged both by the  airlines and Los
Angeles, because, inter alia, the Secretary  "simply ha[d] not
explained why fair market valuation may be  appropriate for other
portions of the airport, but too difficult  to use in valuing airfield
assets." Id. at 44. The Secretary is  presently in the process of
formulating a new regulation on  airport fees, and has issued an
advance notice of proposed  rulemaking asking for comments on what
cost methodologies  should be required for airfield and non-airfield
fees. See 63  Fed. Reg. 43,228 (Aug. 12, 1998). The City contends that
our  vacatur of the Department's regulation in Air Transport 
Association somehow casts doubt on the Remand Decision  presently
before us. But the Department did not rely on its  vacated regulation,
see Remand Decision at 8, and has not  yet adopted a new regulation on
the appropriate methodology  for non-airfield fees as compared to


II.


The City and the Department before us principally dispute  the
reasonableness of the City's methodology of fee calcula- tion, not the
reasonableness of the magnitude of the resulting  fees.


A.


Reiterating its first reason for rejecting the City's fee  methodology,
the Department submits that it is unreasonable  to attempt to include
as an airfield cost the "opportunity cost"  of employing the land as
an airport rather than as rental  property, for the proposed
opportunity does not lawfully exist  at present. As one of the members
of the panel observed, in  paraphrasing the DOT's argument, the City
is like an owner  of a hot dog stand who claims his opportunity cost
is the  revenue he would earn by selling cocaine rather than hot 
dogs. The City contends, however, that the Department has  adopted an
erroneous conception of opportunity cost; for an  economist, we are
told, the present impossibility of pursuing  the opportunity to rent
the airfield land does not mean that  no opportunity cost has been


At bottom, the parties' dispute as to the concept of opportu- nity cost
seems to rest on a single question: Should the legal  barrier to
pursuing the opportunity be treated as immutable?  If opportunity
costs are measured as of now and the grant  assurance obligation is
viewed as fixed, then the Depart- ment's view would seem inevitable.
For then the City would  have no opportunity to use the land in any
non-airport  capacity--the City at least would face enormous
transition  costs (the cost of violating the law or perhaps of buying
a  release from the obligation) in pursuing the opportunity,  which
alone could render the potential profit from that oppor- tunity small
or even negative. But if we ignore (i.e., treat as  changeable at zero
cost) the present legal hurdle to pursuing  the opportunity, then the
City's position is much stronger.


To be sure, an economist formulating an efficient plan for  regulating
the City's monopoly over landing space might well  take the City's
view, treating all regulatory tools--including  existing grant
assurance obligations--as easily changeable.  Cf. William J. Baumol &
J. Gregory Sidak, Transmission  Pricing and Stranded Costs in the
Electric Power Industry  53 (1995). But the airlines' expert suggested
otherwise when  he testified that "[s]ometimes the opportunity is
virtually nil,  in which case there is no opportunity cost." In any


that some or many economists would disapprove of the De- partment's
approach does not answer the question presented  to us. In reviewing
the Department's order, we do not sit as  a panel of referees on a
professional economics journal, but as  a panel of generalist judges
obliged to defer to a reasonable  judgment by an agency acting
pursuant to congressionally  delegated authority. See Air Canada v.
DOT, 148 F.3d 1142,  1151 (D.C. Cir. 1998); LAX I, 103 F.3d at 1031
(citing  Northwest Airlines v. County of Kent, 510 U.S. 355, 366-68 
(1994)); see generally Motor Vehicle Mfrs. Ass'n v. State  Farm Mut.
Auto. Ins. Co., 463 U.S. 29, 43 (1983). The City  submits that our
review should be more strict given that the  Department arrived at the
same result on remand as it had  reached in its initial decision, but
that proposition strikes us  as flatly inconsistent with the Chenery
doctrine. See SEC v.  Chenery Corp. (Chenery I), 318 U.S. 80 (1943);
SEC v.  Chenery Corp. (Chenery II), 332 U.S. 194, 200 (1947) ("We 
held no more and no less [in Chenery I] than that the  Commission's
first order was unsupportable for the reasons  supplied by that
agency."). To be sure, there is some support  for the City's view in
our cases. See, e.g., Greyhound Corp. v.  ICC, 668 F.2d 1354, 1358
(D.C. Cir. 1981). But as we have  more recently explained, "[w]hile we
are mindful that [the  agency] has adhered to the position it first
took in the  decision that we remanded, cf. [Greyhound], our review is
still  a matter of determining whether the agency's final decision 
'was based on a consideration of the relevant factors and  whether
there has been a clear error of judgment.' " Com- petitive Enter.
Inst. v. NHTSA, 45 F.3d 481, 484 (D.C. Cir.  1995) (quoting State


Here we cannot say it was irrational for the Department to  treat the
grant assurances as a given and evaluate the City's  proposed
methodology from that perspective. And the grant  assurance
obligations may in fact be a fixed point for the  DOT. Although the
Department has some control over grant  assurances insofar as the
grant recipient ab initio promises  the Department to keep the airport
open for public use, see  49 U.S.C. s 47107(a)(1), it is unclear


is free at this stage to release an airport from its promise--to  do
so might violate the statute.2


The City argues that the Department's "no opportunity,  hence no
opportunity cost" rationale attempts an "end run"  around our holding
in LAX I that the Anti-Head Tax Act, 49  U.S.C. s 40116(e)(2), does
not itself proscribe consideration of  opportunity costs in
establishing reasonable landing fees.  See LAX I, 103 F.3d at 1032.
The City explains that under  the Remand Decision, no airport that
accepts federal grants  (and thus gives grant assurances) could ever
justify the  recovery of opportunity costs--the result is a "per se
rule"  against using opportunity costs in calculating landing fees, 
which is another way for the Department to claim that it is  legally
mandated to reject the opportunity cost methodology.  But the
Department did not say that it was obliged to take  into account the
federal grants. Even if it were, in LAX I,  we addressed only the
Anti-Head Tax Act and the expedited  review provision, see LAX I, 103
F.3d at 1032 ("Nothing in  the Anti-Head Tax Act or [the expedited
review provision]  ... prescribes an accounting rather than an
economic concep- tion of cost in airport ratemaking."), and did not
analyze any  argument based upon the federal airport grant


Intervenor Airports Council International (ACI) points to a  different
alleged problem with the Department's "no opportu- nity, hence no
opportunity costs" rationale: ACI submits that  DOT has retroactively
added new conditions to the City's  grant assurances by relying on
those grant assurances to  deprive the City of the ability to recover
its opportunity costs, 




__________

n 2 In a contention related to its attack on the Remand Decision  as
economically unsound, the City argues that the airlines, as 
proponents of an order setting aside the fees, failed to carry the 
burden of persuasion assigned to them by the Administrative  Procedure
Act. See 5 U.S.C. s 556(d) (1994); Air Canada, 148  F.3d at 1155-56
(citing Director, Office of Workers' Compensation  Programs, Dep't of
Labor v. Greenwich Collieries, 512 U.S. 267, 272  (1994)). We think
this argument lacks merit, given that the airlines  did introduce in
evidence the City's grant assurances, and that the  Department's
conclusions turned on its own policy determination.  See Air Canada,


which ACI claims conflicts with the "clear statement" re- quirement of
Pennhurst State School & Hospital v. Halder- man, 451 U.S. 1, 17
(1981). But we do not view the Depart- ment's reasoning as adding new
conditions to the grant.  Rather, the Department focused on a
consequence of an  unambiguously imposed condition--that the airport
would be  kept open for public use--that was present from the


B.


Even were we to hold the Department's first rationale  unlawful, we
would uphold its order. We cannot say--and  the City does not
seriously argue--that the DOT's alternative  rationale, that if the
City is deemed to incur opportunity  costs, those costs are already
covered by the existing "bene- fits" enjoyed by the City, is an
unreasonable one. See Air  Canada, 148 F.3d at 1142; LAX I, 103 F.3d
at 1031; State  Farm, 463 U.S. at 43. The City does argue that the
Depart- ment's "comprehensive opportunity cost analysis" rationale 
runs into a separate legal problem. By taking into account  the
current non-airfield revenue at LAX in deciding whether  the City's
opportunity costs are presently covered, it is  claimed that the
Department deprives the City of its right to  use the compensatory fee
methodology by forbidding the City  from valuing its airfield assets
without considering non- airfield revenues.3 The compensatory fee
methodology, the  City reminds us, was recognized by the Supreme Court
in  Northwest Airlines, 510 U.S. at 369, and codified by Con- gress,
see 49 U.S.C. s 47129(a)(2) ("A fee subject to a deter- mination of
reasonableness under this section may be calcu- lated pursuant to
either a compensatory or residual fee  methodology or any combination
thereof."). This is a clever  argument, but not persuasive because the
Department in no  sense adopted a general requirement that airports




__________

n 3 The compensatory fee methodology, recall, permits an airport  to
set landing fees at a sufficient level to cover its airfield costs
and,  unlike the residual methodology, does not require an airport to 
apply any surplus from non-airfield activities toward those airfield 
costs.


credit their non-airfield surpluses toward their airfield costs.  The
DOT is only taking into account non-airfield revenues, as  well as all
other economic benefits the City enjoys, in deter- mining whether Los
Angeles really has an uncovered oppor- tunity cost. It is the City
itself, by using the opportunity  costs concept, that has invited the
Department to think  broadly about how such costs should be measured.
And we  cannot hold that it was unreasonable for the DOT, when faced 
for a demand for an economic analysis, to consider factors  that an
economist might take into account.4


III.


The City argues that the setting aside of its fees amounted  to an
unconstitutional taking. The question is entirely one of  the adequacy
of the fee the Department permits the City to  charge; the Takings
Clause has nothing to do with the  methodology of ratemaking. See
Duquesne Light Co. v.  Barasch, 488 U.S. 299, 314 (1989); FPC v. Hope
Natural Gas  Co., 320 U.S. 591, 602 (1944) ("It is not the theory but
the  impact of the rate order which counts."); Jersey Central  Power &
Light Co. v. FERC, 810 F.2d 1168, 1176 (D.C. Cir.  1987) (en banc).
Determining whether a taking has occurred  in the ratemaking context
requires us to examine whether the  authorized rate reveals that the
agency has reasonably bal- anced the investor and consumer interests
at stake. Jersey  Central, 810 F.2d at 1177-78. The "legitimate
investor inter- est" is a question of


the financial integrity of the company whose rates are  being
regulated. From the investor or company point of  view it is important
that there be enough revenue not  only for operating expenses but also
for the capital costs  of the business. These include service on the
debt and 




__________

n 4 Intervenor ACI objects that the Department's "comprehen- sive
opportunity costs analysis," carried to its logical conclusion,  could
prevent airports from charging landing fees at all, depending  on the
level of benefit provided to the residents and businesses of  the
city-owner. But the Department has not in fact pursued that 
approach--to do so would raise a serious Takings Clause question.


dividends on the stock. [The return] should be sufficient  to assure
confidence in the financial integrity of the  enterprise, so as to
maintain its credit and to attract  capital.


Id. at 1176 (quoting Hope, 320 U.S. at 603).


The Department contends, and we agree, that these princi- ples do not
precisely carry over to the situation presented  here of a
municipally-owned airport as the regulated entity.  A municipality has
no stockholders, so it makes little sense to  analyze the proper
return on equity. That is not to say that  the Takings Clause has no
application here. The Supreme  Court has explained that the Clause
applies to the federal  government's condemnation of property owned by
a local  government, see United States v. 50 Acres of Land, 469 U.S. 
24, 31 (1984), and we see no logical reason why a different  rule
should apply in the ratemaking context. Although the  City (LAX) does
not have equity investors, it does have  bondholders, and it makes
perfect sense to ask whether the  entity's rates are sufficient "to
maintain its credit" and to  "assure confidence in the financial
integrity of the enter- prise." Hope, 320 U.S. at 603; cf. 49 U.S.C. s
47101(a)(13)  (providing that it is the policy of the United States
"that  airports should be as self-sustaining as possible").


The only suggested "hardship" under the current fees is a  lack of
flexibility in undertaking airport improvement pro- jects. (The thrust
of the City's argument is the oblique claim  that the City is being
denied a "fair" rate of return.) The  City has never alleged that its
current fees jeopardize the  financial integrity of LAX, and therefore
the City had no  right to a hearing before the Department on its
Takings  Clause claim. Compare Jersey Central, 810 F.2d at 1181-82 
(regulated entity was entitled to a hearing where it "present- ed
allegations, which, if true, suggest that the rate order  almost
certainly does not meet the requirements of Hope  Natural Gas, for the
company has been shut off from long- term capital, is wholly dependent
for short-term capital on a 


revolving credit arrangement that can be cancelled at any  time, and
has been unable to pay dividends for four years").


* * * *


For the foregoing reasons, the petition for review is


Denied.