oversight

National Airspace System: Issues in Allocating Costs for Air Traffic Services to DOD and Other Users

Published by the Government Accountability Office on 1997-04-25.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to Congressional Committees,
                  Executive Agencies, and the National
                  Civil Aviation Review Commission


April 1997
                  NATIONAL AIRSPACE
                  SYSTEM
                  Issues in Allocating
                  Costs for Air Traffic
                  Services to DOD and
                  Other Users




GAO/RCED-97-106
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-275249

      April 25, 1997

      Congressional Committees, Executive Agencies, and the National Civil
      Aviation Review Commission

      The United States government operates a joint civil-military air traffic
      control and navigation system. The Federal Aviation Administration (FAA)
      has the primary responsibility under federal law for the development and
      operation of the system for both military and civil aircraft in the nation’s
      airspace.1 The Department of Defense (DOD), in coordination with FAA,
      provides air traffic services to military aircraft, in support of its national
      defense mission, and also to civil users.

      Over the past decade, the growth of domestic and international air travel
      has increased the demand for FAA’s services. At the same time, FAA and
      other federal agencies, including DOD, have operated in an environment of
      increasingly tight federal resources. FAA anticipates funding shortfalls of
      several billion dollars over the next several years, according to current
      assumptions about future growth in air traffic and costs. These resource
      constraints, in addition to the pressures to finance additional safety and
      security improvements and FAA’s efforts to modernize air traffic control
      (ATC), contribute to the projected funding shortfalls. The Congress has
      recognized the seriousness of FAA’s financing problems and, under the
      Federal Aviation Reauthorization Act of 1996,2 called for an independent
      assessment of FAA’s financial requirements and created the National Civil
      Aviation Review Commission, which was charged with recommending
      how best to finance FAA.

      The imposition of user fees for FAA’s services is being considered as one
      option for helping FAA to meet its future financial requirements.3 Because
      DOD is a user of FAA’s air traffic services, some have advocated that it “pay”
      for the services it receives from FAA. Unlike other users, however, DOD also
      contributes to the operation of the nation’s airspace and navigation
      system, including the provision of air traffic services to military and civil
      users. Before making a decision about the application of user fees, the
      Congress sought additional information. In the 1996 Reauthorization Act, it

      1
       49 U.S.C. 40103 and 47103.
      2
       P.L. 104-264.
      3
       At present, FAA receives its financing from two sources: the Airport and Airway Trust Fund and the
      Treasury’s general fund. In recent years, the Trust Fund has generally financed about 75 percent of
      FAA’s budget; the general fund has contributed the remaining 25 percent. Revenues for the Trust Fund
      are largely derived from the excise tax on domestic airline tickets—currently, the tax is 10 percent of
      the fares paid by passengers—and other taxes on commercial and general aviation users.



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             directed GAO to report on the manner in which the costs of air traffic
             services are allocated between FAA and DOD. The Congress also directed us
             to identify opportunities to increase the efficiency of the air traffic
             services provided by FAA and DOD.

             In response to the act and as agreed with the House and Senate aviation
             subcommittees, this report discusses the issues that must be resolved in
             allocating the costs of air traffic services to DOD and other users. It also
             discusses funding options for DOD’s share of costs if DOD is found to owe a
             payment to FAA. As for opportunities to increase the efficiency of air traffic
             services, we explored the potential for better management of special-use
             airspace. (Information on this subject is provided in app. I.) Our review did
             not focus on DOD’s costs of providing air traffic services to the military or
             the merits of moving to a user fee system. (App. II provides detailed
             information on our objectives, scope, and methodology.)


             The U.S. airspace system, which is in continuous operation 24 hours a day,
Background   365 days a year, is commonly referred to as the National Airspace System
             (NAS). The principal component of the NAS is the ATC system—a vast
             network of radars; automated data processing, navigation, and
             communication equipment; and traffic control facilities. It is through the
             ATC system that FAA and DOD provide services such as controlling takeoffs
             and landings and managing the flow of traffic between airports.4 Other
             components of the NAS include airports or landing areas; aeronautical
             charts, information, and services; rules, regulations, and procedures;
             technical information; and personnel and material. Furthermore, portions
             of certain components of the ATC system, such as long-range radars, are
             shared jointly between FAA and DOD.

             Since 1958, as established by the Federal Aviation Act, FAA and DOD have
             been partners in jointly operating the NAS and in providing air traffic
             services. They also cooperate in various other areas, such as air defense,
             drug interdiction, and weather research. The details of how FAA and DOD

             4
              FAA uses three types of facilities to control traffic. Airport towers direct aircraft on the ground,
             before landing, and after takeoff when they are about 5 nautical miles from the airport and up to about
             3,000 feet above the airport. Terminal radar approach control facilities sequence and separate aircraft
             as they approach and leave busy airports, beginning about 5 nautical miles and ending about 50
             nautical miles from the airport and generally up to 10,000 feet above the ground. Air route traffic
             control centers, called en route centers, control planes in transit and during approaches to some
             airports. Most of the en route centers’ controlled airspace extends above 18,000 feet for commercial
             aircraft. En route centers also handle lower altitudes when dealing directly with a tower, or when
             agreed upon with a terminal facility. DOD also operates tower and approach control facilities. FAA
             provides additional services, such as weather and pilot briefings, through a network of flight service
             stations.



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                       work together are embodied in joint manuals and hundreds of letters of
                       agreements at both the national and regional levels. For example,
                       Patuxent Naval Air Traffic Control Facility in Patuxent River, Maryland,
                       provides radar coverage for a geographic area of about 6,400 square miles;
                       its boundaries stretch from Bethany Beach, Delaware, along the Atlantic
                       coast to Leedstan, Virginia. Patuxent has entered into a letter of agreement
                       with FAA’s Washington Air Route Traffic Control Center in Leesburg,
                       Virginia, to provide approach control services during certain hours as
                       stipulated in the agreement. Similar agreements exist between FAA’s
                       facilities and DOD’s facilities across the United States.

                       In fiscal year 1995, FAA reported that it handled about 150 million aircraft
                       movements, such as airport arrivals and departures. About 10 million, or 7
                       percent, of these movements involved DOD aircraft. DOD reported that it
                       handled 18 million aircraft movements. Civil aircraft accounted for about
                       4 million, or 20 percent, of the aircraft movements handled by DOD.5 For
                       the same period, FAA and DOD reported that the cost of providing ATC
                       services—including the costs associated with operating and modernizing
                       the system—totaled about $6.9 billion—$6.3 billion spent by FAA and
                       $0.6 billion spent by DOD. (See app. III for more details on the air traffic
                       services provided by FAA and DOD.)


                       In the development of user fees for air traffic services, important data,
Results in Brief       conceptual, and policy issues need to be resolved in allocating ATC costs to
                       the users of the system, including DOD. These issues include:

                   •   Accurate and reliable cost data will enhance efforts to develop cost-based
                       user fees for air traffic services. Currently, FAA and DOD have limited ability
                       to accumulate such data, and both plan to improve their cost-accounting
                       capabilities. Despite FAA’s lack of a cost-accounting system, an
                       independent contractor’s review found that it is possible, on an interim
                       basis, to attribute FAA’s costs to broad categories of users.
                   •   Notwithstanding the deficiencies in FAA’s and DOD’s capabilities to assign
                       costs, the data currently available indicate that a large portion—55 percent

                       5
                        We use the term “aircraft movements” to include services, such as arrivals and departures, that FAA
                       and DOD provide to aircraft in the tower, terminal, and en route airspaces. Total aircraft movements
                       between DOD and FAA are not entirely comparable. For example, while movements handled by DOD
                       include only services in terminal and tower facilities, a large portion of the services provided by FAA
                       are in en route facilities. According to FAA, en route services are considerably more expensive to
                       provide than other air traffic services. Additionally, in 1995, FAA reported that it provided over
                       35 million services through its flight service stations. DOD does not operate en route centers or flight
                       service stations. We did not verify any of the data and were unable to reconcile the data provided by
                       FAA and DOD because consistent definitions of the types of services do not exist. As a result, we did
                       not total the aircraft movements.



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                           of FAA’s costs—are “common,” or not directly related to any particular
                           user. The method for allocating common costs could have a profound
                           impact on the costs assigned to various users. For example, under one
                           method for assigning these costs, the total costs assigned to DOD for air
                           traffic services would be more than twice as much as under another
                           method. Policy issues—such as the effects of the allocation on economic
                           efficiency, equity across users, and DOD’s mission—are involved in
                           determining what share, if any, of these common costs should be assigned
                           to DOD. FAA and DOD strongly disagree about how the common costs should
                           be allocated.
                       •   Another issue that needs to be resolved is whether and to what extent
                           DOD’s costs of providing air traffic services to civil users should be
                           included in the development of user fees. If DOD’s costs are included, fees
                           could be collected from civil users for the services provided by DOD,
                           thereby providing an offset to what DOD may owe FAA. Theoretically, DOD
                           could receive a net inflow of funds if the amount it is owed for providing
                           services to civil users exceeds the amount it owes for the services
                           provided to it by FAA. While DOD spends considerable amounts in support
                           of the National Airspace System ($622 million on air traffic services alone
                           in fiscal year 1995), most of this expenditure goes to support the military
                           mission, and only a portion of DOD’s costs should be assigned to civil users.

                           A move to user fees would likely eliminate the general fund appropriation
                           that FAA currently receives for a significant part of its budget. Policy issues
                           are also involved in deciding on a funding source for DOD’s share if the
                           Department is found to owe a payment for the consumption of FAA’s
                           services. This payment could be funded in various ways. One option is to
                           require DOD to pay user fees directly to FAA. In this case, DOD could be
                           appropriated the additional funds for this payment or it could be required
                           to absorb this expense out of its regular appropriations. Another option is
                           that DOD would not pay user fees and that an appropriation would be made
                           from the general fund directly to FAA to cover DOD’s payment. FAA and DOD
                           have different views on how various options would affect their missions
                           and partnership in providing air traffic services.


                           Important issues must be resolved in determining the shares of ATC costs
Issues Require             to be allocated to DOD and other users. Once allocation decisions are
Resolution in              made, attention can be turned to how DOD’s share of the costs should be
Allocating and             funded if the Department is found to owe a payment for its use of FAA’s
                           services. While these decisions are related, they are also separable in that
Funding the Cost of        even if a policy choice is made to exempt DOD from the payment of user
Air Traffic Services       fees, the Department should still be included in the allocation process.


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                    This inclusion will help ensure that the directly assignable costs of DOD’s
                    use of FAA’s services are not passed on to other users.

                    Allocation decisions involve data accuracy and reliability, the treatment of
                    common costs, and the inclusion of DOD’s costs of providing civil air traffic
                    services. (See apps. IV and V for a more detailed discussion of cost
                    allocation issues.) Additionally, choices exist for the source of funds for
                    paying DOD’s share of ATC costs if the Department is found to owe a
                    payment.


Data Accuracy and   Cost-based financing systems rely on the accumulation of accurate and
Reliability         reliable cost data. Without such data, it would be difficult to determine the
                    costs of providing air traffic services or to assign costs to the users.
                    Currently, FAA and DOD have limited capabilities to accumulate accurate,
                    reliable cost data.

                    Our reviews have found that FAA lacks a cost-accounting capability and, in
                    lieu of one, relies on an assortment of accounting and financial
                    management systems. However, these systems do not capture all relevant
                    costs.6 The February 1997 Coopers and Lybrand report on FAA’s financial
                    requirements notes that despite FAA’s lack of a cost-accounting system, it
                    is possible, on an interim basis, to attribute FAA’s costs to broad categories
                    of users. The report further states that if FAA is required to adopt a
                    comprehensive system of user fees, a modern cost-accounting system
                    should be implemented to more reliably assign costs to specific products
                    and services.7 FAA is developing a cost-accounting system as required by
                    the 1996 Reauthorization Act and plans to have the system in place by
                    October 1997.

                    As DOD has acknowledged and our financial statement audit work has
                    consistently confirmed, significant problems exist with the
                    comprehensiveness and accuracy of DOD’s reported cost information. In
                    fact, in our recent high-risk report on defense financial management, we
                    noted that DOD’s inability to accumulate accurate cost information is one
                    of six areas presenting the greatest challenge to the agency as it seeks to




                    6
                     See Air Traffic Control: Improved Cost Information Needed to Make Billion Dollar Modernization
                    Investment Decisions (GAO/AIMD-97-20, Jan. 22, 1997).
                    7
                     Federal Aviation Administration: Independent Financial Assessment (Feb. 28, 1997).



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                      put in place an effective financial management structure.8 DOD is
                      undertaking reforms to strengthen its cost-accounting practices.

                      If DOD’s costs are included in the allocation of ATC costs, the issue of
                      comparability between FAA’s and DOD’s cost data also becomes important.
                      FAA and DOD would need to define and agree on specific definitions of
                      services and associated cost categories for which data would be
                      accumulated.


Treatment of Common   A significant portion of FAA’s costs have been found to be costs that are
Costs                 not directly associated with the use of the system by particular users.9 The
                      allocation of these large common costs could have a profound impact on
                      the share of total costs assigned to each user. In allocating common costs,
                      assumptions and judgments must be made, and the goals of enhancing
                      economic efficiency and maintaining equitable treatment of multiple user
                      groups should be considered. Different user groups are likely to have
                      diverging opinions about what constitutes an equitable cost allocation.

                      A March 1997 study by GRA, Inc.,10—a contractor to FAA—found that FAA’s
                      costs directly assignable to DOD, or the marginal cost of DOD’s use, totaled
                      just over $100 million, or about 2.6 percent of the total directly allocable
                      costs for fiscal year 1995. However, the study, using an allocation method
                      based on “Ramsey” pricing,11 assigned about $430 million, or about
                      9 percent of FAA’s common costs, to DOD.12 Ramsey pricing assigns higher

                      8
                       High-Risk Series: Defense Financial Management (GAO/HR-97-3, Feb. 1997).
                      9
                       In many other production processes, costs that are not attributable to particular outputs, such as
                      administration, are likely to be “overhead.” For ATC services, on the other hand, large facilities, such
                      as en route centers, are needed for the production of many different outputs and services provided to
                      various users. Some of the large common costs of ATC services are attributable to particular facilities,
                      but not to particular users, and some costs are not attributable to particular facilities or users. For the
                      remainder of this report we will refer to both of these types of costs as “common” costs, even though
                      some are fixed and some are pure common costs.
                      10
                          A Cost Allocation Study of FAA’s FY 1995 Costs (Mar. 19, 1997).
                      11
                        Ramsey pricing is a commonly used method for pricing services such as electricity and
                      telecommunications because these industries, like ATC services, have large facilities costs that need to
                      be allocated to users in order to recoup adequate revenues.
                      12
                        The high level of common costs allocated to DOD results from how the Ramsey-based method
                      assigns those costs. In particular, because ATC costs are minor in terms of DOD’s total flight costs, the
                      agency’s sensitivity to price changes for ATC services is calculated to be less than most other groups’.
                      These differential flight costs are due, in part, to DOD’s longer average flight distance.The high level of
                      common costs allocated to DOD results from how the Ramsey-based method assigns those costs. In
                      particular, because ATC costs are minor in terms of DOD’s total flight costs, the agency’s sensitivity to
                      price changes for ATC services is calculated to be less than most other groups’. These differential
                      flight costs are due, in part, to DOD’s longer average flight distance.



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prices to those users who are less likely to reduce their consumption of air
traffic services in response to price increases.

According to economic theory, the application of Ramsey pricing leads to
the most economically efficient pricing of services provided to multiple
user groups. The better the data are, the more confidence can be placed in
the Ramsey-based allocation method. In this case, however, the large
percentage of common costs, in combination with the fact that little is
known about users’ actual sensitivity to changes in the price of air traffic
services, raises concerns about the level of confidence that can be placed
in the Ramsey-based method to provide the most efficient outcome.

The application of Ramsey pricing will likely assign considerable common
costs to DOD because the Department, in performing its mission, would
have little discretion to reduce its use of air traffic services in response to
higher prices. A policy decision could be made, based on a concern about
the Department’s national defense mission, to exclude DOD from a
Ramsey-based allocation.13 However, such a decision would have
implications for other policy goals, such as the promotion of equity across
user groups and economic efficiency. In particular, because the exclusion
of DOD results in nonmilitary users’ being allocated a greater share of costs,
this may be viewed as unfair and may diminish those users’ support for
user fees. Also, excluding DOD (or any user group) would lead to a less
efficient outcome because the higher prices faced by other users could
cause them to reduce their use of ATC services. Ultimately, various policy
goals—including economic efficiency, equity across users, and protecting
DOD’s national defense mission—need to be weighed in deciding how to
allocate common costs among users.

At our request, GRA, Inc., provided an alternative allocation of common
costs in which all user groups received a share of common costs that was
a proportionate increase over their directly assigned costs for air traffic
services. Under this scenario, common costs were allocated very
differently than under the allocation mechanism employed by the
contractor. For example, under the Ramsey-based method, the total
allocation for domestic jet carriers was $4,616 million and for DOD,
$530 million. Under the proportional allocation method, these two user
groups’ total allocations were $4,031 million and $230 million, respectively.
Commuter carriers and general aviation users received a much higher
share of common costs under the proportional method. As a result, the

13
 As long as the marginal costs of DOD’s use are not passed on to other users and any additional
common costs allocated to other users does not raise their cost share above their “stand-alone” level
(what they would pay if they were the only system users), there would be no subsidy to DOD.



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                           total cost assigned to general aviation increased by about 50 percent, and
                           the total cost for commuter carriers increased by nearly 100 percent. If the
                           proportional allocations were the basis for user fees, prices for the latter
                           groups could be so high that their use of FAA’s services would likely
                           decline considerably. According to FAA, the development of user fees using
                           other than the Ramsey-based method for the allocation of common costs
                           could be expected to cause more significant shifts in consumption of its
                           services because more costs would be allocated to the more
                           price-sensitive users.

                           Regardless of which allocation method is used, DOD contends that the
                           military should not bear any of FAA’s common costs because DOD is only a
                           marginal user of FAA’s air traffic services and has a minor impact on FAA’s
                           cost structure. While it is clear that DOD consumes a small percentage of
                           FAA’s services, the same is true of other users such as air taxi operators.
                           The exclusion of DOD or any minor user from the allocation of common
                           costs would result in these other users’ being allocated a larger share of
                           total costs.


Inclusion of DOD’s Costs   Another major issue to resolve is whether and to what extent DOD’s costs
                           of providing air traffic services to civil users should be included in the
                           development of user fees. In essence, addressing this issue is part of a
                           broader issue of whether the development of user fees should be designed
                           to recover the total costs to the federal government or strictly FAA’s costs.
                           If DOD’s costs are included, fees could be collected from civil users for the
                           services provided by DOD, thereby providing an offset to what DOD may
                           owe FAA.14 DOD could even receive a net inflow of funds if its costs of
                           providing civil ATC services exceed the costs it imposes on FAA. While DOD
                           spends considerable amounts on air traffic services ($622 million in fiscal
                           year 1995 alone), most of this expenditure goes to support the military
                           mission, and only the portion of these costs that are related to providing
                           services to civil users should be assigned to them.

                           According to the Statement of Federal Financial Accounting Standards
                           number 4, federal agencies providing services to other agencies are




                           14
                            If a decision is made to include DOD’s costs in the development of user fees, a collection mechanism
                           would be necessary. Establishing two separate collection systems—one for FAA and one for
                           DOD—would not seem to be an appropriate use of federal resources. (See Office of Management and
                           Budget Circular A-25, secs. 7(e) and (f)).



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    directed to account for all of the costs of providing those services.15
    Although DOD’s services are provided directly to civil users rather than to
    FAA, this standard could be interpreted to mean that all air traffic services
    provided by FAA and DOD are required to be counted for the purposes of
    cost allocation for the development of user fees.

    If DOD’s costs are included, issues need to be addressed about which of
    DOD’s costs to include and how its air traffic services should be valued:16


•   One issue needing resolution is whether DOD’s common costs of providing
    ATC services are considered relevant for the purpose of developing user
    fees. On the one hand, DOD’s ATC infrastructure was designed and built
    primarily to support the Department’s military mission, and according to
    DOD, the provision of ATC services to civil users is incidental to DOD’s air
    traffic system. As a result, a policy decision could be made to pass on only
    the marginal costs of DOD’s civil services to these users. On the other hand,
    DOD’s system still handles nearly 4 million civil aircraft movements
    annually, which is 20 percent of DOD’s total ATC workload. At many
    locations, the Department’s services provided to civil users can be
    substantial.17 Therefore, the decision could be made to allocate some of
    DOD’s overhead or common costs to civil users since they do benefit from
    the entire military ATC infrastructure.
•   A second issue to address is whether to value DOD’s provision of air traffic
    services to civil users on the basis of the actual costs incurred by DOD or
    on the costs that FAA “avoids” because DOD provides these services in lieu
    of FAA. We believe that the most appropriate valuation of these services is
    based on the actual cost to DOD in providing them, rather than on FAA’s
    avoided costs. Our reasoning is twofold. First, federal law establishes that
    the goal of user fees is generally to recoup the actual costs of a
    government agency’s provision of services to users.18 While other factors,
    such as the value of services to users, may influence the fees—for


    15
      The Statement of Federal Financial Accounting Standards no. 4, Managerial Cost Accounting
    Concepts and Standards for the Federal Government, is effective for fiscal periods beginning after
    September 30, 1996. Under this standard, the full cost of a project is described as the sum of (1) the
    costs of resources consumed by the project that directly or indirectly contribute to the output and
    (2) the costs of identifiable supporting services provided by other organizations within the reporting
    entity and by other reporting entities.
    16
     Although the inclusion of DOD’s costs may be appropriate, it is important to note that the cost of
    undertaking the analysis necessary to include these costs may be viewed as high relative to the
    benefits to be derived.
    17
      For example, at Eglin Air Force Base in Florida, civil traffic accounted for about a third of total
    aircraft movements.
    18
      31 U.S.C. § 9701.



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                             example, the value of services could be used to charge one group of users
                             higher prices than another—user fees in the aggregate are usually
                             designed to recoup only the actual costs. Second, it would be very difficult
                             to identify FAA’s avoided costs because it is questionable whether FAA
                             would provide the same services to users if DOD was not providing them.19
                         •   A third issue needing resolution is whether the costs of the military’s
                             satellite constellation—called the Global Positioning System (GPS)20
                             —should be passed on to ATC users. This system provides a variety of
                             navigation and other applications for military and other users, including
                             pilots, truckers, and hikers. DOD contends that its GPS costs should be
                             considered as part of its support of the NAS. However, the nature of GPS
                             services makes it virtually impossible to measure who uses the system and
                             assign costs to them. FAA contends that the costs to build the system are
                             not relevant for allocating ATC costs because GPS was developed for
                             military purposes. Nevertheless, FAA recognizes that DOD must modify the
                             system to accommodate civil transportation needs, and the Department of
                             Transportation (DOT) and DOD have negotiated a cost-sharing agreement to
                             pay for the added costs. In our view, when future costs for GPS can be
                             shown to specifically benefit civil aviation users or result from their use, it
                             would be appropriate to include those added costs in undertaking a cost
                             allocation. For example, some portion of the $371 million that DOD expects
                             to spend on its Navigation Warfare (NAVWAR) project, which DOD must
                             undertake to protect its military mission while accommodating civil use of
                             GPS, should be included as part of the cost allocation. Of course, if any GPS
                             costs are passed on to civil users, the Congress may choose to reduce
                             DOD’s appropriation for GPS by a commensurate amount.



Source of Funds to Pay       A move to user fees would likely eliminate the general fund appropriation
Amounts That May Be          that FAA currently receives for a significant part of its budget. Under user
Owed by DOD                  financing, all users—including DOD—would be assigned a share of the
                             costs of air traffic services. Policy issues are involved in deciding on a
                             funding source for DOD’s share if DOD is found to owe a payment to FAA.
                             This payment could be funded in various ways.21 One option is for these
                             costs to be recovered from DOD itself as a user fee. In this case, DOD could

                             19
                               FAA does have establishment criteria that provide some guidance on the types and levels of service
                             that could be provided at the locations currently served by DOD.
                             20
                               GPS is a satellite constellation developed by the military to support missions such as air, land, and
                             sea navigation; missile guidance; search and rescue activities; and precision surveying. Currently, FAA
                             is undertaking a major initiative to augment the GPS to enable civil aviation users to use it as a primary
                             means for navigation and permit FAA to eventually replace the land-based systems now in place.
                             21
                              If DOD’s costs are included in the development of user fees, any payment that DOD owes FAA would
                             be the net amount after factoring in fees collected from users of DOD’s air traffic services.



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be appropriated the additional funds to pay FAA or it could be required to
absorb this cost out of its regular appropriation. Another option is that DOD
would not pay user fees and that FAA would be provided with an
appropriation from the general fund designed specifically to cover what
DOD owed FAA. FAA and DOD have different views on how these various
options would affect their missions and partnership in providing air traffic
services.

DOD  argues that its capability to perform its mission could be reduced if
the Congress does not provide DOD with a compensatory increase to cover
any payment it might owe to FAA. DOD has noted that nearly every activity
in which the Department is engaged—including training, transporting
troops and cargo, and testing weapons—requires using the airspace.
Although DOD provides for many of its air traffic needs through its own
facilities and personnel, FAA provides over 40 percent of the ATC services
consumed by DOD. If DOD’s funding is reduced or it does not receive
additional funding to pay for these mission-critical services provided by
FAA, it would have fewer resources available to carry out its other
activities.

On the other hand, FAA officials expressed a concern that the agency’s
dependence on the appropriation process to pay for DOD’s share could
leave the agency at risk in future years of not getting the necessary
funding. Since it is unlikely that FAA could deny service to military aircraft,
FAA may be forced to pass DOD’s costs on to other users. Such a
circumstance would raise equity concerns among other users.

As for changes in the partnership between FAA and DOD, FAA concedes that
some changes may result but does not foresee any fundamental changes
that would affect the provision of ATC services. DOD foresees a change—a
potentially dramatic change—in the nature of DOD’s partnership with FAA if
it is required to pay for FAA’s services. DOD notes that the current
partnership has evolved over nearly 40 years, has led to the provision of
seamless ATC services, and is viewed by other nations as a model. In
addition to the hundreds of agreements spelling out the formal aspects of
the relationship, a fair amount of informal interchange, especially at the
staff level, also takes place. Therefore, according to DOD, the result of
putting the relationship on a businesslike basis—when FAA and DOD begin
to weigh the cost and value of every interaction—could lead to a gradual
unraveling of the very fabric of the partnership.




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                  B-275249




                  Financing FAA over the long term involves tough decisions. There are no
Conclusions       easy answers, and policy issues will arise in deciding how the users of air
                  traffic services will contribute to financing FAA. One key issue that
                  policymakers will need to decide is whether all of the government’s costs
                  of air traffic services, including those borne by DOD, should be recouped
                  from user fees. Our report discusses the data, conceptual, and policy
                  issues at hand in determining (1) how cost allocations for ATC services
                  should be made across user groups and (2) how any costs that may be
                  assigned to DOD could be funded. These two issues are distinct. Even if it is
                  decided as a matter of policy that DOD will not have to pay for the services
                  from FAA that it uses, the Department should be included in the allocation
                  process because the costs that it imposes on FAA are important to
                  understand. This knowledge will help to ensure that, in the development of
                  user fees, any directly assignable costs related to DOD’s use of FAA’s
                  services are not passed on to commercial and other nonmilitary users.

                  Decisionmakers in the Congress and the administration will make policy
                  judgments about cost allocation and the funding of DOD’s assigned share.
                  As a result, we did not consider it appropriate to suggest a particular
                  allocation method, quantify DOD’s share of ATC costs, or recommend a
                  particular funding option. Therefore, this report contains no
                  recommendations.


                  On March 18, 1997, we provided a draft of this report to DOT, DOD, and FAA
Agency Comments   for review and comment. We met with officials from the Office of the
                  Secretary of Transportation and FAA, including FAA’s Director, Office of
                  Aviation Policy and Plans. DOT and FAA officials stated that the report was
                  balanced, professional, and insightful in discussing key issues that the
                  National Civil Aviation Review Commission will be considering. They also
                  provided a variety of detailed comments that have been incorporated in
                  our final report as appropriate.

                  On March 31, DOD provided written comments. The Department stated that
                  it believes strongly that it should not pay user fees because the DOD makes
                  substantial contributions to the National Airspace System that outweigh
                  the “marginal financial burden” that the Department imposes on the
                  annual cost of FAA’s operations. DOD stated that requiring the Department
                  to pay fees runs the risk of adversely affecting defense readiness, aviation
                  safety, and its partnership with FAA. Furthermore, DOD’s comments, signed
                  by the Assistant Secretary of Defense for Command, Control,
                  Communications, and Intelligence, expressed concern about several



                  Page 12                                 GAO/RCED-97-106 National Airspace System
B-275249




aspects of our report. In particular, DOD stated that (1) the scope of the
study was too narrow and that we seemed preoccupied with user fee
determinations; (2) we did not accurately depict DOD’s partnership with
FAA in managing the NAS; and (3) we relied too heavily on a contractor’s
study, which used the Ramsey-based method for allocating common costs.
DOD officials also provided a variety of specific comments.


We revised the report to respond to many of DOD’s concerns. However, we
disagree with DOD’s contention that the report is very narrow in scope and
that we were preoccupied with user fee determinations. It is important to
note that section 274 of the Reauthorization Act, which contained the
mandate for this review, directed that the issues surrounding user-based
financing of FAA’s budget be explored. In response, we examined a broad
range of issues—data, conceptual, and policy—that would need to be
considered before imposing user fees for air traffic services.

We believe the report provides significant information about the
partnership between DOD and FAA in operating the National Airspace
System. We emphasize that DOD is unlike other users in that it is a
coprovider of air traffic services and makes large contributions to the
National Airspace System. In both the background section of the letter as
well as in appendix III, we provide information about the level of services
provided by each agency.

Although DOD believes that we relied too heavily on the GRA, Inc., study, we
believe it is the only detailed analysis of the cost allocation of air traffic
services available. We reviewed this work and found it to be well
constructed and a good starting point for our own analysis. Both the
February 1997 Coopers and Lybrand report and an unpublished Arthur
Andersen review found that the GRA, Inc., study provides an acceptable
interim basis for the analysis of potential user fees. At the same time, our
report raises several concerns about the study, including the application of
Ramsey pricing for the allocation of common costs to DOD. Moreover,
while the GRA, Inc., study focused on the recovery of FAA’s costs, we raise
the issue of whether DOD’s costs in providing civil air traffic services
should also be included in the development of user fees.

After considering FAA’s and DOD’s comments on our draft report, we
provided a revised draft to FAA and DOD on April 17, 1997. On April 21, FAA’s
Director, Office of Aviation Policy and Plans, expressed concern that we
had not adequately explained the implications of a policy decision to
exclude DOD from a Ramsey-based allocation of common costs. We revised



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the report to detail these implications—for example, a decision to exclude
DOD would result in other users’ being assigned a greater share of common
costs. That same day, DOD provided us with written comments on the
revised draft. The Department stated that the presentation of issues and
uncertainties in our report was more comprehensive, even-handed, and
clear. They continued to believe that Ramsey pricing is not an acceptable
means for allocating common costs for air traffic services.

The complete text of DOD’s April 21 and March 31 written comments and
our response appear in appendix VI.


As directed by the 1996 Reauthorization Act, this report is being sent to the
Administrator, FAA, and the Secretary of Defense. In addition, we are
sending copies of this report to the Secretary of Transportation; the
Director, Office of Management and Budget; and other interested parties.
We will send copies to others upon request.

If you have questions, please call me at (202) 512-2834. Major contributors
to this report are listed in appendix VII.




John H. Anderson, Jr.
Director, Transportation Issues




Page 14                                GAO/RCED-97-106 National Airspace System
                     B-275249




                     The Honorable John McCain
List of Recipients   Chairman
                     The Honorable Ernest F. Hollings
                     Ranking Minority Member
                     Committee on Commerce, Science,
                       and Transportation
                     United States Senate

                     The Honorable Slade Gorton
                     Chairman
                     The Honorable Wendell H. Ford
                     Ranking Minority Member
                     Subcommittee on Aviation
                     Committee on Commerce, Science,
                       and Transportation
                     United States Senate

                     The Honorable Bud Shuster
                     Chairman
                     The Honorable James L. Oberstar
                     Ranking Democratic Member
                     Committee on Transportation
                       and Infrastructure
                     House of Representatives

                     The Honorable John J. Duncan, Jr.
                     Chairman
                     The Honorable William O. Lipinski
                     Ranking Democratic Member
                     Subcommittee on Aviation
                     Committee on Transportation
                       and Infrastructure
                     House of Representatives

                     The Honorable Norman Y. Mineta
                     Chairman, National Civil Aviation Review Commission

                     The Honorable Barry L. Valentine
                     Acting Administrator
                     Federal Aviation Administration
                     Department of Transportation




                     Page 15                             GAO/RCED-97-106 National Airspace System
B-275249




The Honorable William S. Cohen
The Secretary of Defense




Page 16                          GAO/RCED-97-106 National Airspace System
Page 17   GAO/RCED-97-106 National Airspace System
Contents



Letter                                                                                               1


Appendix I                                                                                          22

Users Have Raised
Concerns About the
Management of
Special-Use Airspace
Appendix II                                                                                         26

Objectives, Scope,
and Methodology
Appendix III                                                                                        28

FAA and DOD Provide
ATC Services
Appendix IV                                                                                         33
                        Conceptual and Policy Issues Involved in the Allocation of                  33
Assessing Options for      Common Costs
Allocating ATC Costs    Issues Need to Be Addressed About Whether DOD’s Costs of                    41
                           Providing Air Traffic Services to Civil Users Should Be Assigned
Involves Conceptual        to Those Users to Offset What Costs DOD May Owe FAA
and Policy Issues
Appendix V                                                                                          45
                        Definitions of “Line of Business” and “User Group”                          45
Overview of GRA’s       Data Sources and Assignment of Costs to Lines of Business                   46
Model of Cost           Allocation of Costs to Users for Non-Air-Traffic Services                   47
                        Overview of Econometric Model for Costs of Air Traffic Services             47
Allocation              Allocation of Common and Fixed Costs to User Groups:                        49
                           Ramsey-Based Method




                        Page 18                                GAO/RCED-97-106 National Airspace System
                        Contents




Appendix VI                                                                                        52
                        GAO’s Comments                                                             68
Comments From the       GAO’s Response to DOD’s Specific Comments                                  71
Department of
Defense
Appendix VII                                                                                       77

Major Contributors to
This Report
Glossary of Cost                                                                                   78

Terms
Tables                  Table 1: Military Traffic Counts, by Branch of Service and                 31
                         Category of User, 1995
                        Table IV.1: GRA’s Allocation of Directly Assignable, Common,               36
                         and Total Costs to User Types Under Ramsey Pricing, Fiscal Year
                         1995
                        Table IV.2: Changes in Common Cost Allocations due to                      38
                         Alternative Elasticities of Demand, Fiscal Year 1995
                        Table IV.3: GRA’s Allocation of Directly Assignable, Common,               40
                         and Total Costs to User Types Under Proportional Assignment of
                         Common Cost, Fiscal Year 1995

Figure                  Figure 1: Depiction of Flights Through the NAS                             29




                        Page 19                               GAO/RCED-97-106 National Airspace System
Contents




Abbreviations

AFB        Air Force Base
AIMD       Accounting and Information Management Division
ATC        air traffic control
ARTCC      Air Route Traffic Control Center
ATS        air traffic services
DAFIS      Departmental Accounting and Financial Information System
DOD        Department of Defense
DOT        Department of Transportation
FAA        Federal Aviation Administration
FSS        Flight Service Stations
GPS        Global Positioning System
IFR        instrument flight rules
MOA        military operations area
NAS        National Airspace System
NAVWAR     Navigation Warfare
RCED       Resources, Community, and Economic Development
SUA        special-use airspace
TRACON     Terminal Radar Approach Control
VFR        visual flight rules


Page 20                            GAO/RCED-97-106 National Airspace System
Page 21   GAO/RCED-97-106 National Airspace System
Appendix I

Users Have Raised Concerns About the
Management of Special-Use Airspace

                                Within the National Airspace System (NAS), some airspace is designated for
                                use by the Department of Defense (DOD) and other federal agencies to
                                carry out special research, testing, training, and other activities.
                                Nonparticipating aircraft—both civil and military—may be restricted from
                                flying into such areas. Although special-use airspace (SUA) serves the
                                important safety function of segregating hazardous or incompatible
                                activity from non-participating aircraft, civil users have voiced concerns
                                about whether SUA is being efficiently managed.


FAA Has Designated Six          Special-use airspace is generally defined as airspace within the NAS where
Categories of Special-Use       activities must be confined because of their nature, or where limitations
Airspace                        may be imposed upon aircraft operations that are not a part of those
                                activities. Although the majority of SUA is for military use, the Department
                                of Energy, the National Aeronautics and Space Administration, and
                                civilian, nongovernment users have designated airspace for their use. The
                                Federal Aviation Administration (FAA) has six categories of SUA.

                            •   Prohibited areas are designated when it is determined to be necessary to
                                prohibit flight over a surface area in the interest of national security and
                                welfare. No person may operate an aircraft within a prohibited area
                                without the permission of the using agency. Examples of prohibited areas
                                are the airspaces around the White House, the Capitol, and national
                                monuments. There are nine prohibited areas, none of which are used by
                                DOD.
                            •   Restricted areas are designated when it is determined to be necessary to
                                confine or segregate activities considered hazardous to nonparticipating
                                aircraft. A restricted area is airspace within which the flight of aircraft,
                                while not wholly prohibited, is subject to restriction. Examples include the
                                Department of Energy and its contractors’ weapons, radiation, and
                                laser-testing areas.
                            •   Military operations areas (MOA) are established below 18,000 feet to
                                separate and segregate certain nonhazardous military activities, such as air
                                combat maneuvers, air intercepts, and acrobatics, from instrument flight
                                rules (IFR) traffic and to identify for visual flight rules (VFR) traffic where
                                these activities are conducted.1 MOAs are established to contain military
                                activities in airspace as free as practicable from nonparticipating aircraft.
                                Officially, nonparticipating aircraft operating under VFR may fly through


                                1
                                 In general, a pilot flying under instrument flight rules is flying at a specific altitude, route, and time. To
                                fly IFR, the pilot must file a flight plan and receive approval to operate from ATC personnel. Generally,
                                a pilot flying under visual flight rules must observe minimum visibility requirements and is responsible
                                for maintaining separation from other aircraft and objects.



                                Page 22                                                  GAO/RCED-97-106 National Airspace System
                               Appendix I
                               Users Have Raised Concerns About the
                               Management of Special-Use Airspace




                               the areas even if they are “active.” No hazardous activities may take place
                               in a MOA.
                           •   Warning areas are designated over domestic or international waters that
                               extend 3 nautical miles from the coast of the United States to contain
                               activity that may be hazardous to nonparticipating aircraft. The purpose of
                               such warning areas is to warn nonparticipating pilots of potential danger.
                               Because international agreements do not prohibit flight in international
                               airspace, no restriction on flight is imposed.
                           •   Alert areas are used to inform pilots of specific areas where a high volume
                               of pilot training or an unusual type of aeronautical activity is taking place.
                               The activity within an alert area must be conducted in accordance with
                               Federal Aviation Regulations, without waiver, and pilots of participating
                               aircraft, as well as pilots transitting the area, are equally responsible for
                               avoiding collisions. The establishment of alert areas does not impose any
                               flight restrictions or special communication requirements. Examples of
                               alert areas include areas around Miami, Florida, where heavy flight
                               training takes place, and areas around McConnell Air Force Base (AFB) and
                               Wichita, Kansas, where a high volume of air traffic exists associated with
                               military training flights at McConnell AFB and with flight test aircraft
                               transiting to and from Cessna, Beech, and Boeing manufacturing facilities.
                           •   Controlled firing areas are established to provide a controlled environment
                               for activities of short duration or that are capable of immediate
                               suspension, which would otherwise be hazardous to aircraft. Users are
                               responsible for terminating activities to protect nonparticipating aircraft.
                               Examples of activities in this airspace are the firing of missiles and rockets
                               and the disposal of ordnance.

                               The airspace under the first two categories—prohibited and restricted
                               areas—can be designated or changed only through rulemaking action.
                               Most SUA proposals are subject to (1) an aeronautical study by FAA, (2) an
                               environmental impact analysis, and (3) public comment. FAA headquarters
                               is the final approval authority for all SUA except controlled firing areas,
                               which are approved at FAA’s regional offices. Except for controlled firing
                               areas, SUA is included on aeronautical charts so that pilots know of its
                               location.


Special-Use Airspace Can       FAA has established a policy of joint use, meaning that when the military is
Affect Civil Users             not using it, special-use airspace is returned to the national airspace
                               system for use by civil users. Notwithstanding this policy and the fact that
                               special-use airspace is established to accommodate a specific military
                               mission requirement, SUA can and does preclude civil use of the airspace.



                               Page 23                                 GAO/RCED-97-106 National Airspace System
Appendix I
Users Have Raised Concerns About the
Management of Special-Use Airspace




Also, by its location, SUA can limit air traffic to and from a particular
location. For example, congestion often occurs in the southern to central
California area, particularly in the area around Edwards Air Force Base
known as R2508 Complex, partly because of the location of the SUA and
also because of other factors such as inclement weather.

In 1988, we examined FAA’s and DOD’s use and management of SUA and
made recommendations aimed at improving the effectiveness of these
efforts.2 We found that FAA did not have adequate data to ensure the
efficient and appropriate use of the airspace. Furthermore, even if such
data existed, FAA had not established guidance for its regions to reduce or
eliminate SUA that was inefficiently or inappropriately used. However, the
management of SUA’s use has improved since our 1988 report. FAA and DOD
have worked together to develop procedures to re-route traffic through
SUA on the East Coast when severe thunderstorms occur. Additionally,
many letters of agreement between FAA and DOD contain provisions for FAA
to gain access to SUA to accommodate emergency situations and/or peak
traffic periods. In consideration of the congested airspace on the West
Coast, DOD schedules its use of SUA around “push” times for aircraft
departing the Los Angeles Basin eastbound. Furthermore, DOD has had a
long-standing policy of returning SUA to the FAA when not in use.

Also in response to our 1988 report, FAA and DOD began to develop new
systems to track the usage and enhance the management of SUA. However,
both DOD and FAA have had difficulty in developing these systems,
developing a common interface between the two systems, and making
real-time information available to all civil users. While FAA, DOD, and
industry officials have told us that the management of SUA has improved
since the late 1980s and that the current policy of joint use of SUA is sound,
these officials note that room for improvement exists. According to these
officials, the real-time exchange of the information about when SUA is
available for commercial use would lead to more efficient use of the
airspace. DOD and others believe that it is FAA’s role as manager of the
nation’s airspace to inform civil users about the status of SUA. While FAA
does not disagree, it points out that the information on availability is not
always provided by DOD. DOD, on the other hand, believes that it makes a
concerted effort to turn back SUA to the FAA when not in use. Moreover,
DOD indicates that, in many cases, attempts to return SUA when not in use
are refused by the FAA. FAA officials told us that it may not accept the
airspace if sufficient time is not available to adjust the flow of civil traffic.

2
Airspace Use: FAA Needs to Improve Its Management of Special Use Airspace (GAO/RCED-88-147,
Aug. 5, 1988).



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Appendix I
Users Have Raised Concerns About the
Management of Special-Use Airspace




SUA has become a much more urgent issue because of the aviation
community’s movement toward “free flight.” Under a “free flight”
operating concept, the users of the system would have more freedom to
select preferred routes free of many of the current restrictions as long as
such routes do not interfere with safety, capacity, and SUA airspace. In
1995, the RTCA Free Flight Task Force, a joint government/industry group,
made several recommendations to improve civil aviation’s use of SUA when
the airspace is not being used by the military.3 A key recommendation
from the task force is the establishment of a “real-time” system to notify
commercial users of the availability of SUA. FAA and airline officials told us
that at a minimum, airlines need 2 hours’ notice to take advantage of SUA.

The effective management of SUA is, in part, a function of the commitment
and cooperation between DOD and FAA working together to resolve
conflicting demands for access to airspace. Other important factors
include communications capabilities between FAA and DOD agencies using
the airspace and consultation with users in implementing procedures to
improve the flow of information. One example of cooperation is the
government/industry task force that is presently conducting an operational
test at the R2508 Complex at Edwards AFB in California. The current trial
being conducted at the R2508 complex is an outgrowth of a site visit in
September 1996 when government and industry officials reviewed the
information exchange between FAA and DOD and found it to be efficient.
Now, representatives are exploring new procedures that may prove
beneficial to civil users without disrupting DOD’s activities. In particular,
air carriers are seeking to streamline the approval of routing through the
R2508 complex before take-off in both directions, particularly from the
Bay Area going southeast. The results of this operational test and others
that are planned could go a long way toward resolving civil users’
concerns that the lack of real-time information about the availability of SUA
inhibits the efficient use of the airspace.




3
 Final Report of the RTCA Task Force 3, Free Flight Implementation (Oct. 1995).



Page 25                                             GAO/RCED-97-106 National Airspace System
Appendix II

Objectives, Scope, and Methodology


              To identify the issues related to the allocation and recovery of costs for
              ATC services, we analyzed the draft fiscal year 1995 cost allocation study
              prepared by GRA, Inc., for FAA and the DOD-supplied data on the
              Department’s total contributions to the National Airspace System. We
              analyzed the study’s findings and underlying assumptions. We met with
              contractor officials to discuss their econometric model (see app. V for a
              description of the cost allocation model).1 For a further understanding of
              the application of Ramsey pricing, we consulted with leading economists
              who have written extensively about and/or applied Ramsey pricing in the
              context of production enterprises. We also consulted with DOD officials
              from the Office of the Executive Director, DOD Policy Board for Federal
              Aviation, and FAA’s Acting Assistant Administrator for Policy, Planning,
              and International Aviation on the options for allocating and recovering
              DOD’s cost of ATC services. We reviewed the congressional hearing record
              and consulted with staff from the House and Senate aviation
              subcommittees for background information on the issues related to cost
              allocation between FAA and DOD.

              To identify the volume and total costs of ATC services, we obtained data on
              total aircraft movements from FAA’s Office of Aviation Policy and DOD’s
              Integrated Product Team for NAS Costs. Combined data for total ATC
              aircraft movements do not exist. FAA collects data on the traffic handled by
              FAA-operated and contractor-operated facilities, but it does not collect data
              on DOD-provided services. Furthermore, DOD does not routinely collect data
              on its ATC aircraft movements, and the officials had to request traffic
              counts and cost data from the individual services and component units.
              FAA’s cost data were taken from the draft of FAA’s 1995 cost allocation
              study prepared by GRA, Inc. We did not verify the service or cost data
              provided by FAA and DOD.

              To identify opportunities to increase the efficiency of air traffic services
              between FAA and DOD, we consulted with subcommittee staff and met with
              officials from FAA’s Offices of Air Traffic Airspace Management and Air
              Traffic Operations and DOD’s Integrated Product Team for NAS Costs. We
              met with aviation industry representatives, including air traffic officials
              from the Air Transport Association, the Aircraft Owners and Pilots
              Association, and the National Business Aircraft Association to discuss the
              management of special-use airspace. We reviewed materials on special-use
              airspace prepared under the auspices of the RTCA free flight task force.



              1
               The final report, A Cost Allocation study of FAA’s FY 1995 Costs, was released on March 19, 1997.



              Page 26                                              GAO/RCED-97-106 National Airspace System
Appendix II
Objectives, Scope, and Methodology




We performed our review from November 1996 through March 1997 in
accordance with generally accepted government auditing standards. The
majority of our review was performed at FAA and DOD headquarters in
Washington, D.C. To observe DOD’s ATC aircraft movements, including the
facilities and procedures related to special-use airspace, we visited three
DOD facilities. These were the Patuxent Naval Air Station at Patuxent
River, Maryland; McGuire Air Force Base in New Jersey; and Oceana Naval
Air Station in Virginia Beach, Virginia. We did not visit any FAA facilities
because the team performing the review was very familiar with FAA’s
operations and has toured numerous FAA facilities.




Page 27                                GAO/RCED-97-106 National Airspace System
Appendix III

FAA and DOD Provide ATC Services


                       Since 1958, FAA and DOD have acted as partners in providing ATC services
                       daily to thousands of civil and military users. In fiscal year 1995, FAA and
                       DOD reported that they spent a combined total of $6.9 billion to provide
                       these services.


FAA and DOD Jointly    The ATC system is the principal component of the National Airspace
Operate the National   System. It is through the ATC system that FAA and DOD provide services
Airspace System        such as controlling take-offs and landings and managing the flow of traffic
                       between airports. In addition to providing ATC services, they also
                       cooperate in various other areas, such as air defense, drug interdiction,
                       and weather research. The details of how FAA and DOD work together are
                       embodied in joint manuals and hundreds of letters of agreements at both
                       the national and regional levels.

                       In general, the types of services that FAA and DOD provide depend on a
                       number of factors such as the specific user, destination, length of flight,
                       and geographic location. Many users file a flight plan and receive
                       instructions from ATC personnel on how to depart the airport and
                       surrounding airspace and the necessary route to merge with the intended
                       route of flight.1 After the pilot receives an approved clearance from an
                       airport tower, the flight begins with take-off and departure from the
                       airport. Once airborne and clear of the immediate airport vicinity, the
                       tower controller hands the aircraft over to a controller in the terminal
                       radar approach control facility who is responsible for the specific airspace
                       through which the flight will transit.

                       As the flight climbs, it will transition into en route airspace and be handed
                       over to an air traffic controller in an en route center. Depending on the
                       length of the flight, a particular aircraft can pass through several en route
                       centers and be handled by many en route controllers. As the aircraft
                       approaches the arrival airport, the process is reversed. The aircraft is
                       passed from the last en route center to a terminal facility and finally to a
                       tower for landing. Except for en route centers, which only FAA operates, a
                       flight could be handled by a combination of FAA and DOD facilities and
                       controllers. Because of the seamless nature of the system, the user may
                       not be aware of who provided the service along the flight path. See figure 1
                       for examples of flights handled by military and civil ATC facilities.




                       1
                        One exception may be a pilot flying under visual flight rules.



                       Page 28                                                GAO/RCED-97-106 National Airspace System
                                          Appendix III
                                          FAA and DOD Provide ATC Services




Figure 1: Depiction of Flights Through the NAS



   Profile 1




                                                                 Kennedy
                                                               McGuire


                                                             Dover
                                                             Patuxent
                                                             River

                                                 Richmond


   Legend
         Civilian
         Military




                                          Profile 1: A general aviation aircraft takes off from Richmond, Virginia, on
                                          a flight to Kennedy International Airport, New York. Shortly after take-off,
                                          it is handed off to approach control at the Naval Air Station, Patuxent
                                          River, Maryland; to the approach control at Dover Air Force Base,
                                          Delaware; to the approach control at McGuire AFB, New Jersey; and finally
                                          to the terminal radar approach control in New York. DOD estimates that
                                          approximately 80 percent of this flight receives service from military
                                          approach controls. While this example represents one route, mainly for
                                          low-altitude aircraft, FAA officials did note, however, that most commercial
                                          users and many general aviation users would receive services from FAA
                                          terminal and en route facilities because they would fly at higher altitudes.

                                          Profile 2: A B-52 training mission takes off from Barksdale AFB, Louisiana,
                                          on a bomb/navigation training mission to Nellis AFB, Nevada. The flight to
                                          Nellis has the aircraft in contact with a variety of military and civil air
                                          traffic control facilities. Its take-off is controlled by Barksdale tower,




                                          Page 29                                GAO/RCED-97-106 National Airspace System
                                              Appendix III
                                              FAA and DOD Provide ATC Services




                                              which hands off to approach control at Shreveport, Louisiana; to the en
                                              route center at Fort Worth, Texas; to the en route center at Albuquerque,
                                              New Mexico; to the en route center at Denver, Colorado; to approach
                                              control at Nellis AFB, Nevada; to range control at Nellis, Nevada; to a
                                              landing controlled by the tower at Salt Lake City, Utah.




Profile 2
                                      Salt Lake City
                          Nellis
                          Range
                                                 Denver
                 Nellis
                 AFB


                                   Albuquerque

                                                                       Shreveport
                                                          Fort Worth
                                                                           Barksdale
                                                                           AFB




Legend
      Civilian
      Military




                                              In fiscal year 1995, FAA reported that it handled about 150 million aircraft
                                              movements, such as airport arrivals and departures. About 10 million, or 7
                                              percent, of this total involved DOD aircraft. As shown in table 1, DOD
                                              reported that it handled 18 million aircraft movements. Civil aircraft
                                              accounted for about 4 million, or 20 percent, of the aircraft movements
                                              handled by DOD. The largest amount is provided to general aviation users
                                              by Air Force facilities.




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                                       Appendix III
                                       FAA and DOD Provide ATC Services




Table 1: Military Traffic Counts, by
Branch of Service and Category of      Numbers in thousands
User, 1995 (Tower and Radar Control                                     Air Force       Navy/Marines                      Army              Total
Traffic Combined)
                                       Military                              4,838                4,564                   5,288           14,690
                                       General aviation                      1,752                  613                    584             2,949
                                       Commercial                              395                  252                    116                763
                                       aviation
                                       Total civil aviationa                 2,147                  865                    700             3,712
                                       Grand total                           6,985                5,429                   5,988           18,402
                                       a
                                           Total civil aviation is the sum of general aviation and commercial aviation.

                                       Source: DOD’s data.



                                       We did not verify the data provided by FAA or DOD. For a number of years,
                                       FAA has collected and published data on air traffic activity generated by
                                       FAA-operated and contractor facilities.2 FAA-generated data do not include
                                       any traffic handled by the military. For this review, we requested and
                                       received data from DOD on its air traffic operations. DOD does not routinely
                                       collect these data, and officials had to request this information from each
                                       of the services and component units. A more standardized collection
                                       process within DOD and between FAA and DOD would facilitate future
                                       analyses of costs and services.


FAA and DOD Collectively               The FAA’s entire mission is aviation-related; therefore, its entire budget
Spend Billions on Air                  may be attributed to the provision of mission activities. FAA is organized
Traffic Control Services               along lines of business, one of which is air traffic services. In fiscal year
                                       1995, the total cost allocated to this line of business was $6.3 billion, which
                                       includes the operation and modernization of FAA’s ATC system.

                                       DOD’s  mission, on the other hand, is to provide for the nation’s defense. Air
                                       traffic control, while important, is a very small part of DOD’s overall budget.
                                       DOD maintains air traffic control facilities and trains its ATC personnel in
                                       order to facilitate troop and equipment deployment. For fiscal year 1995,
                                       DOD reported that it spent $622 million to provide air traffic services to
                                       itself and to civil users. Included in this amount are operating,
                                       modernization, and some research, development, test, and evaluation
                                       costs. DOD officials told us that although 20 percent of DOD’s ATC workload
                                       is service to civil aircraft, it would be difficult to assign a specific cost to
                                       those services.

                                       2
                                       See for example, FAA Air Traffic Activity Fiscal Year 1994, Office of Aviation Policy and Plans (FAA
                                       APO-95-11). FAA officials indicated that data for fiscal year 1995 will only be available electronically.



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As with the traffic data, we did not verify the cost data. As we have
previously noted, both FAA and DOD have limited ability to accumulate and
report accurate and reliable costs.




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Appendix IV

Assessing Options for Allocating ATC Costs
Involves Conceptual and Policy Issues

                         This appendix provides further discussion on several important
                         conceptual and policy issues that need to be resolved in determining the
                         allocation of ATC costs to DOD and other users. In particular, further details
                         are provided on issues surrounding (1) the treatment of common costs and
                         (2) the inclusion of DOD’s costs of providing civil air traffic services in the
                         allocation of air traffic costs to users.


                         A considerable percentage of FAA’s costs are not directly associated with
Conceptual and Policy    the use of the system by any particular user group. That is, many costs
Issues Involved in the   have been found to be common costs. These large common costs may, in
Allocation of            part, result from FAA’s current accounting practices, which do not provide
                         detailed costing information. But at the same time, these common costs
Common Costs             are also likely to be an outcome of the nature of producing FAA’s services
                         because the same facilities provide many different services for many
                         different types of users.1

                         Large common costs render the task of determining the costs imposed by
                         particular users difficult because of the lack of a direct cost-based
                         assignment method. Assumptions and judgments must be made in order to
                         allocate these costs. Because considerable judgment is involved, different
                         user groups often will have significantly diverging opinions about how
                         cost allocation should be done.




                         1
                          In fact, other production processes, such as telecommunications or electric utilities, that are
                         characterized by large facilities costs and low marginal costs also tend to have high common costs that
                         are not attributable to any particular user. The new accounting system that is being developed for FAA
                         may help to provide more detailed cost information that will reduce the measured common costs.
                         However, to the extent that common costs are more related to the production process itself, accurate
                         cost data may only go so far in reducing the level of common costs.



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                            Assessing Options for Allocating ATC Costs
                            Involves Conceptual and Policy Issues




Recent Cost Allocation      FAA has undertaken several analyses of the costs that various users of its
Study Allocates Common      services impose on the air traffic system. FAA contracted with GRA, Inc., for
Costs on the Basis of       the most recent cost allocation study. GRA used data on FAA’s 1995
                            obligations2 to allocate the budget over 12 user groups, one of which is
Users’ Willingness to Pay   DOD (see app. V for a more detailed discussion of the GRA cost allocation
for Services                model).3

                            To undertake the cost allocation, GRA first determined what components of
                            FAA’s 1995 total obligations of $8.6 billion4 could be directly assigned to
                            specific user groups—that is, what costs could be directly traced to the
                            use by each group. Only 45 percent of the total obligations could be
                            allocated to users in this fashion, leaving the remaining 55
                            percent—approximately $4.8 billion—as the sum of common costs.

                            In order to assign the common costs to specific user groups, the GRA
                            analysts employed a commonly used method known as Ramsey pricing. In
                            particular, this method relies on measures of users’ sensitivity to price
                            changes—known as elasticities of demand—to set prices across user
                            groups. In this context, the Ramsey-based method assigns more common
                            costs to users who will not change their consumption of the service much
                            in response to a price increase and assigns less common costs to users
                            who would reduce their consumption of the service considerably in
                            response to such an increase. The Ramsey-based method is often used in
                            such industries as telecommunications and electricity that, like ATC
                            services, have large facilities and overhead costs and low marginal costs of
                            production. These circumstances will lead to an inability to price services
                            at marginal costs because such pricing will not cover all costs. By setting
                            prices according to the Ramsey rule, the least possible distortion in
                            economic efficiency is caused while total costs are recouped through
                            prices or fees.


                            2
                             Obligations are definite commitments that create a legal liability of the federal government for the
                            payment of appropriated funds for goods and services ordered or received.
                            3
                             Many assumptions were made in performing this analysis. For example, the goal of the study was to
                            allocate FAA’s entire budget to direct users of FAA’s services. Therefore, the costs of air traffic as well
                            as other FAA services, such as Airport Improvement Program grants, were included. Coopers and
                            Lybrand, in its recent report, noted that the categories of users to whom final costs are attributable
                            should be broadened to include—in addition to air traffic system users—those who use and/or benefit
                            from FAA’s other services. Also, because the actual cost data were not available, obligations were used
                            instead on the assumption that obligations are a reasonably good indicator of the government’s
                            resource commitments in a given year. Although obligation data do not represent the true cost of
                            activities in any one period, over the long term, these two measures will tend to be close.
                            4
                             The 1995 fiscal year budget was actually $8.7 billion, but some small accounts were excluded from the
                            allocation study and only $8.6 billion was allocated. For simplicity, we refer to the 1995 budget as
                            being $8.6 billion throughout this report.



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With little available information about how the 12 user groups would
respond to price changes, the GRA analysts made what may be considered
a “neutral” assumption: If the cost of flying a flight rises by 10 percent, a
user will fly 10 percent fewer flights.5 This assumption was used for 11 of
the 12 user categories; an assumption of a greater price sensitivity for
general aviation piston users was used.6

GRA found that DOD imposed just over $100 million, or about 2.6 percent, of
the directly assignable FAA costs. However, as explained in footnote 5,
because DOD was treated as a user that would, in effect, be relatively
insensitive to price increases, it was allocated $428 million, or 9 percent of
the common costs. Table IV.1 shows GRA’s allocation of directly
assignable, common, and total costs for the user groups.




5
 Although this model maximizes consumer well-being over the number of flights each user group is
taking, the component of flight costs that is being adjusted through the model is only the air traffic
costs—one component of flight costs that includes many components, such as fuel, crew, and so forth.
Therefore, for a given user group, the smaller the share of total costs that are due to air traffic costs,
the less total flight costs will change from a given change in air traffic costs. In essence, an implied
elasticity of demand for air traffic costs is being measured within the model on the basis of the relative
share of total costs that air traffic costs represent. The costs of flying military aircraft are high, and the
cost of air traffic services makes up a small percentage of the total costs of flying. As such, the implied
elasticity of demand for the military that is used in the model is smaller than for most other user
groups.
6
 According to information from several studies, all user groups except general aviation piston users
were assigned an elasticity of demand of –1 for flights. On the assumption that general aviation piston
users are more sensitive to price changes, this category of users was assigned an elasticity of demand
of –1.5—meaning that a 10-percent increase in flight costs will lead to a 15-percent decline in flights
taken by these users.



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                                           Appendix IV
                                           Assessing Options for Allocating ATC Costs
                                           Involves Conceptual and Policy Issues




Table IV.1: GRA’s Allocation of Directly
Assignable, Common, and Total Costs        Dollars in millions
to User Types Under Ramsey Pricing,                                                                     Common costs
Fiscal Year 1995                                                                        Directly          assigned by                        Total
                                           User                                      assignable         Ramsey-based                        costs
                                           type                                           costs               method                    assigneda
                                           Domestic jet carrier                            $1,972                  $2,644                   $4,616
                                           Charter                                              46                     102                      148
                                           Cargo                                              243                      488                      731
                                           International                                      199                      328                      527
                                           Commuter                                           472                      202                      674
                                           Air taxi                                           183                       88                      271
                                           General aviation                                   622                      385                   1,007
                                           Military                                           102                      428                      530
                                           Other public user                                    23                      19                          42
                                           Overflights                                          13                      77                          90
                                           Total costsa                                    $3,875                  $4,761                   $8,634
                                           Note: Over $1 billion of directly allocable costs for domestic jet carriers is for Airport Improvement
                                           Program grants to airports. Because grants are based on enplanements, and most enplanements
                                           are for jet commercial flights, most of these funds were allocated to the domestic jet carrier users.
                                           The high level of common costs allocated to DOD results from how the Ramsey-based method
                                           assigns those costs. In particular, because ATC costs are minor in terms of DOD’s total flight
                                           costs, the agency’s sensitivity to price changes for ATC services is calculated to be less than
                                           most other groups’. These differential flight costs are due, in part, to DOD’s longer average flight
                                           distance.
                                           a
                                               Columns and rows may not add due to rounding.

                                           Source: Cost Allocation Study of FAA’s FY 1995 Costs, prepared by GRA, Inc., for FAA, Mar. 19,
                                           1997.



                                           FAA officials told us that they do not believe that justification exists for
                                           treating DOD differently than any other user group in the cost allocation
                                           analysis. They noted that although DOD’s use of the system is relatively
                                           minor, its requirements create significant costs in areas such as the
                                           coordination of military airspace and FAA-controlled airspace. Additionally,
                                           FAA officials told us that certain aspects of the current infrastructure, such
                                           as equipment to allow DOD to operate in all weather conditions, are
                                           necessary for DOD to perform its mission and that FAA’s entire
                                           infrastructure could become a part of DOD during a national emergency.
                                           Therefore, although civil traffic uses most of the ATC services, the ATC
                                           system also serves a national security function. Finally, FAA officials also
                                           noted that every group that uses FAA’s services—except the domestic jet
                                           carriers—could make the argument that its use imposes only marginal




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costs on FAA. Accepting this reasoning would result in all of the common
costs being assigned to and recovered from domestic jet carriers.

DOD  officials told us they do not believe that DOD should be assigned any of
FAA’s common costs. In particular, they told us that DOD is a marginal user
of FAA’s system and its use has a minimal impact on FAA’s infrastructure.
DOD officials do not believe that it is appropriate for DOD to be assigned the
costs of a system infrastructure that was put into place to meet
commercial needs.

DOD  officials also noted that they were concerned about the use of the
Ramsey-based method to allocate common costs. They noted that this
method assigned common costs on the basis of users’ willingness to pay
rather than why those costs are incurred. They stated that despite the fact
that FAA’s basic infrastructure is in place for the needs of commercial users
and that DOD itself imposes none of these costs, DOD is still assigned a
share of common costs because of the nature of this method.

We found that the high level of common costs of providing air traffic
services makes an assessment of cost allocations across users
fundamentally difficult and subject to considerable judgment. In
particular, if cost allocations are to be the basis for user fees, the general
criteria for developing such fees require the consideration of the costs to
the government, the benefits to the service’s recipient, and the
consideration of public policy goals,7 such as economic efficiency, equity,
and ease of administration.8 Additional considerations involve the
allocation of ATC costs to DOD. Our analysis focused on (1) whether
Ramsey pricing can be relied upon to provide economically efficient
pricing in this case, (2) whether including DOD as a user group in a Ramsey
model poses particular concerns, (3) how alternative allocations would
assign common costs, and (4) the implications of assigning to DOD only the
marginal costs of its use.




7
 31 U.S.C. § 9701.
8
 The recent Coopers and Lybrand report notes that if the FAA is required to adopt a comprehensive
system of user fees, two additional steps should be undertaken prior to the implementation of such a
system. First, FAA’s products and services should be defined with greater precision, and second, a
modern cost-accounting system should be implemented to more reliably assign costs to specific
products and services.



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                                      Assessing Options for Allocating ATC Costs
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Ramsey Pricing and                    Although a variety of methods can be used to allocate common costs for
Economic Efficiency                   the purposes of cost recovery, the Ramsey-based method will cause the
                                      least possible distortion from economic efficiency9 while allowing the total
                                      costs of providing the service to be recouped through fees or prices. The
                                      smaller the common costs that are being allocated via the Ramsey rule, the
                                      more confidence that can be placed in the results leading to the most
                                      economically efficient outcome. In the case of FAA costs, the large
                                      common costs, in combination with the lack of information on users’
                                      demand elasticities, raises concerns about the level of confidence that can
                                      be placed in the Ramsey-based method to provide the most economically
                                      efficient result.

                                      In particular, because the high level of common costs makes the
                                      Ramsey-based method have more influence in the final cost allocations,
                                      the need for precise elasticities becomes of greater concern. At our
                                      request, and with FAA’s permission, GRA used alternative elasticities in their
                                      Ramsey allocations in order to examine the sensitivity of the results to
                                      these changes. The information provided by GRA shows that under
                                      alternative assumptions about how two user groups will respond to price
                                      changes, the allocation of common costs can be very different (see table
                                      IV.2). The results indicate that the combination of large common costs
                                      with imprecise measures of price sensitivity pose problems for the
                                      application of the Ramsey pricing method.10

Table IV.2: Changes in Common Cost
Allocations Due to Alternative        Dollars in millions
Elasticities of Demand, Fiscal Year                                                             Common costs
1995
                                                                                                                           Air carriers are
                                      User                                                         Military is less              less price
                                      group                             GRA’s base case            price sensitive                sensitive
                                      Air Carriers                                   $2,643                  $2,374                  $3,114
                                      Military                                         $428                    $835                       $261

                                      All others                                     $1,691                  $1,554                  $1,388
                                      Note: In the base case, both the military and air carriers are assigned an elasticity of demand of
                                      –1. In each of the other cases, the group assumed to be less price sensitive is assigned an
                                      elasticity of –0.5, while the other group is still assigned an elasticity of –1.

                                      Source: GRA, Inc.’s analysis for GAO.


                                      9
                                       That is, the Ramsey-based method provides that prices are set in a manner that minimizes the
                                      economic distortion from what would occur under marginal cost pricing. Thus, it provides for the most
                                      allocatively efficient level of service.
                                      10
                                        The elasticity changes employed in these sensitivity analyses were reasonably large: 50-percent
                                      reductions in each case.



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                             Assessing Options for Allocating ATC Costs
                             Involves Conceptual and Policy Issues




Inclusion of DOD as a User   While commercial users’ elasticities are tied to the willingness of their
Group in Ramsey Model        customers to pay for the passenger travel, cargo, and other services they
                             are being provided, the “customers” of the military are U.S. citizens who
                             do not directly have the option to make different decisions about military
                             operations in response to a price change. Assigning the DOD a share of
                             common costs through the Ramsey-based method requires assigning to
                             them an elasticity of demand.

                             The application of Ramsey pricing will likely assign considerable common
                             costs to DOD because the Department, in performing its mission, would
                             have little discretion to reduce its use of air traffic services in response to
                             higher prices. A policy decision could be made, based on a concern about
                             the Department’s national defense mission, to exclude DOD from a
                             Ramsey-based allocation. 11 However, such a decision would have
                             implications for other policy goals, such as the promotion of equity across
                             user groups and economic efficiency. In particular, because it results in
                             non-military users being allocated a greater share of costs, the exclusion of
                             DOD from a Ramsey-based allocation may be viewed as unfair and may
                             diminish those users’ support for user fees. Also, excluding DOD (or any
                             user group) would lead to a less economically efficient set of prices than a
                             full application of the Ramsey-based method. Ultimately, various policy
                             goals—including economic efficiency, equity across user groups, and
                             protecting DOD’s national defense mission—need to be weighed in deciding
                             how to allocate common costs among users.


Allocation of Common         In order to examine how cost allocations would vary under an alternative
Costs Based on               approach, we asked GRA to provide us with an allocation of common costs
Proportional Allocation      based on a proportional markup for all user groups. Such an allocation
                             may have an appeal based on “fairness” since each group is receiving a
                             share of the common costs that is a proportional increase over the
                             marginal costs of the services they receive. These results are provided in
                             table IV.3.




                             11
                               See FN 38.



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                                           Assessing Options for Allocating ATC Costs
                                           Involves Conceptual and Policy Issues




Table IV.3: GRA’s Allocation of Directly
Assignable, Common, and Total Costs        Dollars in millions
to User Types Under Proportional           User                                       Directly          Common costs                  Total costs
Assignment of Common Cost, Fiscal          type                               assignable costs              assigned                   assigneda
Year 1995
                                           Domestic jet carrier                            $1,972                  $2,059                   $4,031
                                           Charter                                              46                      58                      104
                                           Cargo                                              243                      341                      584
                                           International                                      199                      165                      364
                                           Commuter                                           472                      833                   1,305
                                           Air taxi                                           183                      231                      414
                                           General aviation                                   622                      885                   1,507
                                           Military                                           102                      128                      230
                                           Other public user                                    23                      32                          55
                                           Overflights                                          13                      32                          45
                                           Total costsa                                    $3,875                  $4,764                   $8,639
                                           Note: Over $1 billion of directly allocable costs for domestic jet carriers is for Airport Improvement
                                           Program grants to airports. Because grants are based on enplanements, and most enplanements
                                           are for jet commercial flights, most of these funds were allocated to the domestic jet carrier users.
                                           The high level of common costs allocated to DOD results from how the Ramsey-based method
                                           assigns those costs. In particular, because ATC costs are minor in terms of DOD’s total flight
                                           costs, the agency’s sensitivity to price changes for ATC services is calculated to be less than
                                           most other groups’. These differential flight costs are due, in part, to DOD’s longer average flight
                                           distance.
                                           a
                                               Columns and rows may not add due to rounding.

                                           Source: GRA, Inc.’s analysis for GAO.



                                           Compared to the original Ramsey-based allocation, common costs are
                                           assigned very differently under a proportional assignment. Under the
                                           Ramsey-based method, the total allocation was $4,616 million for domestic
                                           jet carriers and $530 million for DOD. Under the proportional allocation
                                           method, these user groups’ total allocations were $4,031 million and
                                           $230 million, respectively. Commuter aviation and general aviation piston
                                           users would be allocated higher levels of common cost. As a result, these
                                           users’ demands for FAA’s services could decline considerably. Therefore,
                                           while a proportional allocation provides a useful tool for understanding
                                           how costs would be assigned under another method, this method may
                                           result in prohibitive prices for some users.




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                           Assessing Options for Allocating ATC Costs
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Implications of Charging   Assigning large amounts of common costs to users may require making
DOD Only Marginal Costs    judgments and policy decisions about why the air traffic system looks as it
of Use                     does, which users’ requirements influenced the system’s present structure,
                           and how the system is “stressed” by various users.12 If policymakers
                           believe that most aspects of the current infrastructure of the ATC system
                           can be attributable to satisfying certain commercial users’ needs, despite
                           the inability to measure this on the basis of direct cost assignments, it may
                           be appropriate to assign DOD minimal common costs.

                           At the same time, while DOD is indeed a small user of FAA’s services, other
                           user groups could make the argument: Their use is minimal and imposes
                           only marginal costs on FAA. Thus, it would be difficult to justify an
                           acceptance of this argument for DOD only. Ultimately, however, policy
                           considerations, such as the desire to support DOD’s national defense
                           mission, may exist for excluding DOD from being assigned some common
                           costs. If such a determination is made, equity concerns would require that
                           the marginal costs of DOD’s use of FAA’s services not be passed onto other
                           users.


                           Allocating air traffic costs to the military or other user groups by using
Issues Need to Be          only FAA’s costs provides an incomplete representation of total system
Addressed About            costs. Because DOD also provides services to civil, public, and other federal
Whether DOD’s Costs        users as well as military users, the larger issue of what the U.S.
                           government spends in providing air traffic services to civil and nonmilitary
of Providing Air           users may be a more appropriate focus. If DOD’s costs are included in
Traffic Services to        allocating costs for the development of user fees, any payment owed by
                           DOD will be offset by fees collected from other users for the services
Civil Users Should Be      provided by DOD. Under the new Statement of Federal Financial
Assigned to Those          Accounting Standards no. 4, a reporting entity is required to accumulate
Users to Offset What       and report the cost of its activities for management reporting purposes.
                           Although DOD’s civil services are provided directly to users rather than to
Costs DOD May Owe          the FAA, the new accounting standard could be interpreted to mean that
FAA
                           12
                             Because of data limitations, the GRA study did not account for how different users stress the system
                           in terms of their use during peak time periods or within congested areas. This might be of particular
                           concern in terms of the military because, we were told, they tend not to fly into some of the most
                           congested air traffic areas. Similarly, military officials told us that DOD’s concentration of flights
                           during the day does not match the peak timing of commercial flights. This would imply that DOD may
                           stress the system less than commercial traffic, for which congestion issues are key. On the other hand,
                           a military presence in some remote locations might require FAA’s facilities to be located in areas
                           where they otherwise might not be. Also, the location of special-use airspace near congested areas
                           may exacerbate congestion among commercial users of FAA-controlled airspace, even if DOD itself
                           does not fly much into the FAA-controlled airspace in that region. In short, the influences of congestion
                           and peak time-of-day usage are not easily determined.



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                          these services are required to be included as part of the total systems’
                          costs of air traffic services.


FAA Contends That DOD     FAA officials told us that they undertook a cost analysis based on the
Provides Civil Services   congressional and administrative directive to begin the process of
Directly to Users         allocating and recovering their budget. These officials do not believe that
                          the costs of the services provided by DOD to civil users are relevant for
                          such an analysis. In particular, these officials told us that the recovery of
                          DOD’s civil air traffic costs is a matter separate from FAA’s budget allocation
                          and recovery.14 Furthermore, FAA officials stated that if DOD’s costs are
                          included, the costs of the Global Positioning System should not be passed
                          on to civil air traffic users because (1) the system was primarily developed
                          for military purposes and (2) the benefits of GPS that are enjoyed by civil
                          users make its financing through taxes (rather than user fees) appropriate.
                          Moreover, they noted that the costs for FAA’s augmentation to GPS, which
                          will provide benefits more directly related to aviation, will, in fact, be
                          passed on to users through fees.


DOD Believes That It      DOD  officials told us that the Department should not have to pay for any of
Makes a Large             the FAA-provided ATC services it uses because these costs are more than
Contribution to the NAS   offset by DOD’s large contribution to the NAS and provision of services to
                          civil users. In particular, they noted that approximately 20 percent of DOD’s
                          total ATC services are provided to civil users. Officials also noted that while
                          the actual cost to DOD of handling this traffic may be small, its efforts save
                          the FAA considerable costs because DOD’s salary structure is much lower
                          than FAA’s. DOD officials also noted that FAA radars are sited on DOD bases,
                          thereby saving FAA the cost of locating the radars on private land.
                          Furthermore, DOD officials also told us that the Department’s development
                          and implementation of GPS, on which it will have spent $9.8 billion in fiscal
                          1997 and prior years, provides large benefits to FAA and its users. DOD
                          officials claim that billions of dollars will be spent on GPS in the coming
                          years and that this system will have saved the FAA the cost of such a
                          satellite navigation system. DOD officials also noted that many other
                          aspects of their operations are important to the NAS.



                          14
                            If a decision is made to recover DOD’s costs of providing ATC services, a collection mechanism
                          would be necessary. Establishing two separate collection systems would not seem to be an
                          appropriate use of federal resources. Furthermore, the potential added cost to system users of two
                          collection mechanisms must also be considered. (See Office of Management and Budget Circular A-25,
                          secs. 7(e) and (f)). Regardless of the collection mechanism, both DOD and FAA currently are limited in
                          their capabilities to collect accurate cost data.



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GAO’s Analysis of the              If the policy decision is made to recoup all of the government’s costs of
Military Cost of Air Traffic       ATC services through user fees, the costs of DOD’s services to civil users

Services                           should be included. Theoretically, DOD could receive a net inflow of funds
                                   if the receipts it is owed for the civilian traffic it handles exceed its
                                   assigned cost burden on FAA. However, not all of DOD’s contributions to the
                                   NAS may be relevant for the development of user fees for civilian services.
                                   In this connection, several issues about how to measure and value these
                                   services need to be addressed such as (1) whether civil users should bear
                                   any costs beyond the marginal costs of their use of DOD’s services,
                                   (2) whether these services should be valued at what it cost DOD to provide
                                   them or at what DOD’s providing the service “saved” FAA, and (3) whether
                                   other costs, most notably those for GPS, should be passed onto civil users.15


                               •   Because DOD officials told us that DOD’s air traffic operations are geared
                                   primarily toward military operations and that any civil traffic handled is
                                   largely a by-product of that system, the additional costs DOD may incur to
                                   handle civil traffic may be incidental.16 As a result, it may be appropriate to
                                   pass on to these users only the marginal costs of DOD’s civil services. On
                                   the other hand, DOD’s system still handles nearly four million civil aircraft
                                   movements annually, which is 20 percent of DOD’s workload. Therefore, a
                                   policy decision could be made to allocate some of DOD’s overhead or
                                   common costs to civil users, since they benefit from the entire military
                                   infrastructure.
                               •   For two reasons, we do not believe that valuing DOD’s provision of civil
                                   services at the costs “avoided” by FAA is appropriate. First, when
                                   government agencies determine the costs of a service provided to users,
                                   the focus is generally on recouping the government’s aggregate cost, not
                                   on the economic value of those services to users.17 For example, in
                                   connection with the siting of FAA’s radars on DOD bases, we believe that
                                   because no additional costs to the federal government are incurred, FAA’s
                                   “avoided” costs would not be relevant. Second, it would be very difficult to
                                   measure “avoided” costs. One could try to determine what FAA would have
                                   spent to provide those services if DOD had never provided them, or what
                                   costs FAA would incur to begin providing those services if DOD ceased


                                   15
                                     The cost of undertaking the analysis necessary to include DOD’s costs may be viewed as high relative
                                   to the benefit to be derived.
                                   16
                                    For example, because the military uses UHF radio frequencies for communication and civilians use
                                   VHF, military air traffic installations need to be equipped with VHF communications equipment.
                                   17
                                    Although the value of services to users may also be factored into user fees, particularly in
                                   determining different fees for different users, the goal of user fees is generally to recoup the
                                   government’s total aggregate cost.



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    Appendix IV
    Assessing Options for Allocating ATC Costs
    Involves Conceptual and Policy Issues




    providing them. However, using the types and levels of service currently
    provided by DOD as a starting point may bias such an analysis because it is
    unknown whether FAA, if faced with DOD’s withdrawal of service, would
    choose to provide the same level of service to these users or what the
    costs of the services they provide would be.18
•   While there is no doubt that GPS will have large benefits for air traffic
    users, this system was developed for military purposes, and DOD officials
    told us that very little of its design and operation to date was modified for
    civil users’ needs.19 Also, it would be difficult, if not impossible, to
    determine how much of its costs should be allocated to civil air traffic
    users.20 GPS now has a variety of civil applications, such as tracking the
    locations of trucks and boats, in addition to air navigation. There is no
    direct mechanism for measuring who uses the system, and it would be
    inappropriate for air traffic users to be assigned the costs for services
    received by others. As a result, it may not be feasible to allocate any of
    DOD’s GPS expenditures to civil air traffic users. However, when future
    costs for GPS can be shown to specifically benefit civil aviation users or
    result from their use, it would be appropriate to include those added costs
    if a cost allocation is undertaken. For example, some portion of the
    $371 million that DOD expects to spend on its Navigation Warfare (NAVWAR)
    project, which DOD must undertake to protect its military mission while
    accommodating civil use of GPS, could be included as part of the cost
    allocation.




    18
     FAA does, however, maintain establishment criteria that provide some guidance on the nature of
    service that would be provided at locations currently served by DOD.
    19
      They did note, however, that more costs in the future will be related to the nature of civilian use.
    20
      Two recent reports on GPS support the conclusion that it would be difficult or nearly impossible to
    calculate user fees for GPS use. See The Global Positioning System: Charting the Future by a panel of
    the National Academy of Public Administration (May 1995) and The Global Positioning System:
    Assessing National Policies by RAND (May 1996). In particular, the National Academy’s report stated
    that “it is impossible to calculate the amount of an ’equitable’ user charge, given current and likely
    available data; it is not even technically possible to determine who uses the GPS signal or how much
    they use it.”



    Page 44                                                 GAO/RCED-97-106 National Airspace System
Appendix V

Overview of GRA’s Model of Cost Allocation


                          This appendix describes FAA’s most recent cost-allocation study, which
                          was developed by GRA, Inc. (formerly Gellman Research Associates). That
                          study was designed to assess the costs that various users of FAA’s services
                          impose on the system and to allocate to each user group an appropriate
                          share of FAA’s total fiscal year 1995 obligations. Because the nature of the
                          process in which air traffic and related services are produced, many of
                          FAA’s costs are not clearly attributable to any particular user group. Thus, a
                          key focus of the study is determining what costs are assignable to
                          particular users and developing a method whereby nonassignable or
                          “common” costs are allocated. In this study, a Ramsey pricing method is
                          used in which common costs are assigned on the basis of how sensitive
                          the user groups are to changes in the price of the service.

                          This appendix (1) describes the lines of business and the user groups to
                          which FAA’s costs are to be assigned, (2) describes the data sources and
                          assignments of costs to FAA’s lines of business, (3) describes how costs
                          from all non-air-traffic lines of business are assigned to particular user
                          groups, (4) provides an overview of the econometric model developed to
                          estimate the air traffic costs that are attributable to particular users, and
                          (5) outlines the application of the Ramsey-based method.


                          GRA first assigned all of FAA’s costs to the lines of business produced by the
Definitions of “Line of   agency and then to specific user groups within those lines of business. In
Business” and “User       order to do so, both lines of business and the set of users were defined.
Group”
                          According to FAA, the agency provides services within seven lines of
                          business. However, because two of the seven represented services that
                          certain parts of FAA perform for internal customers, the costs for these
                          lines of business were reallocated to the remaining five, which represented
                          the production of “outputs,” or services, to external customers. The five
                          lines of business include Air Traffic Services (ATS), Aviation Regulation
                          and Certification, Civil Aviation Security, Airport Development, and
                          Commercial Space. A sizable majority of FAA’s costs were devoted to the
                          provision of air traffic services.

                          Four major user groups are used for the study, three of which have
                          subgroups. In total, the GRA study uses 12 user classifications.1 The goal of

                          1
                           While the lines-of-business classifications were derived directly from FAA’s data sources, the decision
                          about user groups was not straightforward. Some entities that may use or benefit from FAA’s services
                          are not directly included. For example, aircraft manufacturers may be considered a user, or the public
                          at large, which benefits from aviation safety. For the purposes of this study, users were defined as
                          those who are flying planes and thereby using FAA’s services.



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                           Appendix V
                           Overview of GRA’s Model of Cost Allocation




                           the GRA model is to allocate all of FAA’s fiscal year 1995 budget to these 12
                           user groups. The classifications are as follows:

                           1. Commercial users, including

                       •   domestic jet flights, charter flights, cargo flights, international flights,
                           commuter flights, and air taxi flights.

                           2. General aviation, including

                       •   general aviation piston flights, general aviation turbine flights, and
                           rotocraft flights.

                           3. Public users, including

                       •   military flights and other public flights.

                           4. Overflights.2


                           All data for the GRA study were obtained from FAA data sources. The
Data Sources and           primary data on costs were derived from FAA’s Departmental Accounting
Assignment of Costs        Financial Information System (DAFIS). DAFIS provided detailed information
to Lines of Business       on obligations within four major categories (Operations; Facilities and
                           Equipment; Research, Engineering, and Development; and Airport
                           Improvement Program) and also contained more detailed information that
                           enabled GRA to assign specific costs in various ways. Information for the
                           1995 study used the DAFIS information on fiscal year 1995 obligations
                           except for certain categories of capital costs for which average levels of
                           obligations over a longer period of time were used in order to more
                           appropriately deal with the costs of items that will have productive
                           capacity over a period of time.3

                           To start, GRA used the DAFIS information to assign obligations to “tiers,” or
                           geographic levels at which FAA’s obligations were classified. Costs were
                           assigned to a total of five tiers. Tiers 1-3 represented the costs that were
                           obligated to headquarters or other national FAA programs, while tiers 4 and

                           2
                            Overflights originate and terminate within foreign countries but pass through U.S. airspace along their
                           route.
                           3
                            FAA does not have a standard cost accounting system from which depreciation can be used as a
                           measure of the portion of accumulated capital costs that are “spent” towards production in a given
                           year. In the method used here, the average costs for the capital categories over several years are used
                           to provide a proxy for costs over a period of time.



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                           Appendix V
                           Overview of GRA’s Model of Cost Allocation




                           5 were the costs for regional and field facilities, such as en route centers,
                           towers, and so forth. Field facilities, the tier 5 costs, accounted for the
                           largest percentage of total costs—$3.2 billion of FAA’s total budget of
                           $8.6 billion for fiscal year 1995.

                           After these geographical assignments were made, GRA divided the costs at
                           each tier into costs within specific lines of business. For tiers 1-4, these
                           allocations could be made by using other information available from FAA
                           that would indicate what the costs were at various locations. Similarly,
                           some tier costs were allocated to lines of business through the use of some
                           activity measures of functions performed. For tier 5 facilities, the DAFIS
                           information usually indicated how the costs should be assigned to lines of
                           business. For example, the cost of an en route center would be assigned to
                           the air traffic line of business, while the cost of an aircraft certification
                           office would be assigned to aviation regulation and certification. In the
                           final allocations, $6.3 billion of FAA’s total fiscal year 1995 budget of
                           $8.6 billion was assigned to air traffic services.


                           GRA attempted to assign to users the costs that their use imposed on FAA. In
Allocation of Costs to     general, various workload measures were used to assign some of these
Users for                  costs across the 12 user categories. For example, the data on work hours
Non-Air-Traffic            for airline certification were used to allocate certification costs across
                           user groups. Although direct assignments using workload measures were
Services                   made, considerable costs in these lines of business were not directly
                           assignable to any user group. Of the $2.3 billion dollars in these four lines
                           of business, GRA was able to directly allocate only $1.6 billion. However,
                           the remaining $700 million is common to the provision of these services
                           across all user groups and could not be specifically assigned to any user
                           type. These costs are allocated via the Ramsey-based method at the last
                           step in the model.


                           In order to estimate the costs imposed by a particular user type at
Overview of                particular types of air traffic facilities, an econometric model was used to
Econometric Model          estimate the marginal costs of providing services to each of the 12 user
for Costs of Air Traffic   groups at each type of facility. The theory underlying this method is that
                           given the data available on the costs and services provided at FAA’s
Services                   facilities across the entire country, one could estimate the cost imposed by
                           additional services provided to particular users through a cross-sectional
                           model that relates outputs for various users to the total costs at each




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Appendix V
Overview of GRA’s Model of Cost Allocation




facility. This calculation would provide estimates of the marginal costs
imposed by each kind of user in each kind of facility.

Much of the costs that fed into this part of the allocation model were from
tier 5, which had costs broken out by individual facilities, but some costs
from each of the other tiers could also be assigned to particular facilities.
Although a total of $6.3 billion is assigned to the air traffic line of business,
only $3.8 billion of that cost is analyzed in the econometric model. This
occurred because only the costs that could be directly attributed to
particular facilities could be analyzed in this fashion.

In order to develop the model, activity data are used for each type of site
to measure the proportion of site activities provided to each user group.
The measure of activity varies across the types of sites: For ARTCCs, the
measure is departures and overflights; for TRACONs, the measure is primary
operations, secondary operations, and overflights; for FSSs,4 the measures
are contacts and advisories. There are separate regression models for each
type of facility. For example, one regression is for TRACONs (35
observations), another for radar towers (150 observations), and so forth.

The models are specified as linear equations where:

TC j = a + b1 + b2...+MC1Q1 + MC2Q2 + . . .

where j is a particular location for a particular kind of FAA facility, the Q’s
are the level of services provided to a particular type of user,5 and the b’s
are other characteristics of particular facilities that need to be controlled
for because they may affect the cost of one facility as compared with
another.6 The results will provide a coefficient which is the measure of
marginal cost for a particular user group at a particular kind of FAA facility.
The constant, a, is a measure of the fixed costs of that type of site that
cannot be allocated across user groups at the site.

The model’s results were generally very significant. In most cases, the
marginal cost of handling one type of user was not different from the
marginal cost of handling a different type of user. For example, for the
regression for domestic en route centers, the fixed cost, as measured by

4
 ARTCCs, FSSs and TRACONs are names of different kinds of FAA air traffic facilities.
5
 That is, Q1 might be the number of operations performed for domestic jet carriers, while Q2 is the
number of operations performed for cargo carriers.
6
 For example, in some models a dummy variable was included if the facility was located in Alaska
because the costs of services are systematically higher in that location.



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                        Overview of GRA’s Model of Cost Allocation




                        the constant term, was found to be $32 million per facility, and the
                        marginal cost of a departure (for any type of user) was found to be $52.
                        For flight service stations, the marginal costs were found to differ for
                        different kinds of services, such as pilot briefs ($8 each) and air contacts
                        ($4 each). The model’s results indicate that of the $3.8 billion attributable
                        to specific facilities, $2.2 billion was accounted for in the marginal cost
                        assignable to particular user groups and the $1.6 billion in site costs was
                        the fixed costs of the facilities that were not assignable to any particular
                        user. These site fixed costs are allocated via the Ramsey pricing method as
                        the last step of this study.


                        After the attributable costs for the five lines of business are assigned to
Allocation of           user groups, a large portion of FAA’s total costs are not assigned. These are
Common and Fixed        costs that are either common in the provision of services across many
Costs to User Groups:   users, or the fixed costs of some facility (which are also common among
                        various users at that facility). Thus, they cannot be directly attributed to
Ramsey-Based            any particular user. According to the GRA model, common and fixed costs
Method                  account for more than half of FAA’s fiscal year 1995 budget. Only
                        $1.6 billion of non-ATS costs was assignable to users, and the econometric
                        model for the ATS costs leads to the assignment of an additional $2.2 billion
                        in the marginal costs of using various facilities. This leaves $4.8 billion, or
                        approximately 55 percent, of the total $8.6 billion fiscal year budget to be
                        allocated as common costs.

                        When common and/or fixed costs are large, charging the users the
                        marginal costs of their use (which would be most efficient from an
                        economic standpoint) will not recover the total costs of production.
                        Therefore, some method needs to be employed to assign to users the
                        common costs. While there are several methods that have been used over
                        the years for the allocation of common costs, one of the most compelling
                        is known as the Ramsey pricing method. The Ramsey-based method uses
                        measures of various users’ “willingness to pay” in assigning costs so that
                        those groups that are willing and able to pay more for the service are
                        assigned a larger share of common costs than user groups who will not
                        pay much additional cost and instead would reduce their consumption of
                        the good. The Ramsey pricing method, which assigns common costs to
                        users in inverse proportion to their elasticities of demand, is thus said to
                        result in the least distortion from an economically efficient outcome
                        because it minimizes the degree to which users alter their consumption
                        from what would have occurred under marginal cost pricing.




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Appendix V
Overview of GRA’s Model of Cost Allocation




In applying the Ramsey-based method, an analyst needs to develop
information about the demand functions of the user groups. But first, a
decision needs to be made about what “product” the user is making
decisions about. In this case, although the specific services being provided
by FAA are such items as “handles,” “take-offs,” “radio contacts,” and so
forth, modelling user demands for these FAA services would not have been
straightforward. First, users consume several of these services in a bundle
when they undertake air travel; therefore, determining the demand for
each service would have been made complicated by the interrelated
demands for FAA’s other services. Moreover, there is very little in the way
of empirical information about users’ demands (and therefore demand
elasticities) for these specific services. Because of these problems, GRA
assumed that users are making decisions about whether they take a flight.
Once a user decides to make a flight, he or she simultaneously makes a
decision to use all associated air traffic services.

The use of flights as the primary output that users make decisions about
implies that the decision to use ATS services is wrapped up within the
larger decision. This implication allowed GRA to apply the Ramsey-based
method by developing information about users’ demands for flights and, in
doing so, their demands for ATS services are inferred. Similarly, the cost of
a flight is the relevant “price” variable facing the user groups within the
model. These total flight costs are derived from FAA’s data on the costs of
operations for various users (that is, private costs of flying such as fuel,
crew, etc.), along with the marginal cost information from the econometric
models on the ATS costs.

Because there is little empirically based data on measures of elasticities
for flights by various users, GRA assigned an elasticity of –1 for all groups
except general aviation piston, which was assigned a value of –1.5 for
elasticity of demand.7 Nevertheless, because the ATS costs make up a
differential percentage of the overall costs of flights across users, a given
change in the ATS costs implies different percentage changes in the overall
cost of a flight for different users. As such, the implied elasticities of
demand for the ATS services among user groups are, in fact, different. They


7
 GRA noted in its paper that studies of elasticity of demand by airline passengers were reviewed for
FAA’s recent study on child safety seats. A significant range of elasticities were found. However, these
measures were for passengers rather than for carriers, and it may be difficult to infer the latter from
the former. In choosing a value of –1 for an elasticity, GRA made what is often considered a “neutral”
choice when good data are not available and one has no theoretical reason for anything else. This
occurred because an elasticity of –1 is considered neither inelastic (expenditure will rise with a price
increase) nor elastic (expenditures will decline with a price increase). Instead, a user’s expenditures
are expected to stay the same as the price changes. A 10-percent increase in price elicits a 10-percent
decline in purchases.



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Appendix V
Overview of GRA’s Model of Cost Allocation




differ because the model is asking how changes in ATS costs, tracked
through the demand for flights, will affect consumption choices. In
particular, air carriers, for whom the ATS costs make up only a small
percentage of their overall costs, have a lower implied elasticity of demand
for ATS than, for example, an air taxi company because the costs of ATS are
a smaller proportion of the total costs of flying on the carrier’s flight.

The Ramsey-based method is implemented via a constrained optimization
problem wherein consumer well-being is maximized subject to the
constraint that all of FAA’s budget is recovered. Each user group enters the
optimization problem for several distance blocks in which a typical flight
by that user group over a given distance range is used to measure the
demand for flights by that user group within that distance block.
Well-being is measured by the area under each demand curve minus the
costs paid for the representative flight. The costs include all private costs
incurred by the user as well as the FAA costs to be assigned. A primary
output of the model is to provide estimates of the costs assigned for each
user type/distance block. By subtracting the marginal costs of ATS services
for that flight, the allocation of joint and common costs can be calculated.
In sum, over $4.8 billion of FAA’s costs are allocated via the Ramsey pricing
method.




Page 51                                      GAO/RCED-97-106 National Airspace System
Appendix VI

Comments From the Department of Defense


Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




                             Page 52   GAO/RCED-97-106 National Airspace System
Appendix VI
Comments From the Department of Defense




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Appendix VI
Comments From the Department of Defense




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                 Appendix VI
                 Comments From the Department of Defense




See comment 1.




See comment 2.




See comment 3.




                 Page 55                                   GAO/RCED-97-106 National Airspace System
                 Appendix VI
                 Comments From the Department of Defense




See comment 4.




See comment 5.




See comment 6.




See comment 7.




See comment 7.




See comment 8.




                 Page 56                                   GAO/RCED-97-106 National Airspace System
                  Appendix VI
                  Comments From the Department of Defense




See comment 3.




See comment 9.




See comment 10.




See comment 11.




                  Page 57                                   GAO/RCED-97-106 National Airspace System
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                  Comments From the Department of Defense




See comment 12.




See comment 13.




Now on p. 1.
See comment 14.




See comment 15.




See comment 16.




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                   Appendix VI
                   Comments From the Department of Defense




Now on p. 2. See
comment 17.




Now on p. 3. See
comment 18.




                   Page 59                                   GAO/RCED-97-106 National Airspace System
                  Appendix VI
                  Comments From the Department of Defense




Now on p. 6.
See comment 19.




Now on p. 8.
See comment 20.



Now on p. 9.
See comment 21.




                  Page 60                                   GAO/RCED-97-106 National Airspace System
                  Appendix VI
                  Comments From the Department of Defense




Now on p. 9.
See comment 22.




See comment 23.




Now on p. 9.
See comment 24.




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                  Appendix VI
                  Comments From the Department of Defense




Now on p. 10.
See comment 25.




See comment 26.




Now on p. 27.
See comment 27.


Now on p. 22.
See comment 28.




See comment 28.




Now on p. 22.
See comment 29.




                  Page 62                                   GAO/RCED-97-106 National Airspace System
                    Appendix VI
                    Comments From the Department of Defense




Now on p. 22.
See comment 30.



Now on p. 24.
See comment 31.




Now on p. 24.
See comment 32.




Now on p. 24. See
comment 33.




Now on p. 24.



See comment 34.




                    Page 63                                   GAO/RCED-97-106 National Airspace System
                  Appendix VI
                  Comments From the Department of Defense




Now on p. 25.
See comment 35.




See comment 36.




Now on p. 31.
See comment 37.




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                    Appendix VI
                    Comments From the Department of Defense




See comment 38.




Now on p. 42.
See comment 39.




Now on p. 41.
See comment 40.




Now on pp. 42-44.
See comment 41.




Now on p. 43.
See comment 42.




                    Page 65                                   GAO/RCED-97-106 National Airspace System
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                        Comments From the Department of Defense




Now on p. 45.
See comment 43.




See comment 44.




See comment 45.




See comment 46.




Now on pp. 36 and 46.
See comment 47.




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Appendix VI
Comments From the Department of Defense




Page 67                                   GAO/RCED-97-106 National Airspace System
                 Appendix VI
                 Comments From the Department of Defense




                 The following are GAO’s comments on the Department of Defense’s letter
GAO’s Comments   dated March 31, 1997.

                 1. We disagree that our report is very narrow in scope and lacks historical
                 perspective. We point out a broad range of issues—data, conceptual, and
                 policy—that would need to be considered before a decision is made to
                 impose user fees on DOD. The issues we address are not bounded by time
                 and would be relevant to any discussion of fee-for-service methods of
                 financing air traffic services. DOD’s comments, while providing more
                 historical details on its contribution to the NAS, do not surface additional
                 issues for our consideration.

                 2. The report specifically states that DOD and FAA are partners (see report,
                 p. 2-3). Moreover, appendix III is devoted entirely to describing the
                 partnership in detail (see report, pp. 28-32). In response to DOD’s
                 comments, however, we supplemented the report’s background
                 information on the partnership (see report, p. 3). We disagree that the
                 report treats DOD merely as a customer of FAA. While DOD is a user of FAA’s
                 services, the report discusses numerous policy issues that are relevant
                 because DOD also provides air traffic services. As for changes in the
                 partnership, the report specifically discusses FAA’s and DOD’s views (see
                 report, p. 11). While we agree that the partnership would probably change
                 to some degree, it is unclear to us why the imposition of user fees alone
                 should cause the partnership to dissolve. DOD would continue to provide
                 ATC services to itself and could continue to serve civil, public, and other
                 federal users.

                 DOD’s  contributions to the NAS in terms of equipment are discussed in the
                 background (see report, pp 2-3) and in appendix III. The creation and
                 deployment of the Global Positioning System, which was funded by
                 taxpayers through appropriations to DOD, is discussed on p. 10 and in
                 appendix IV. Undoubtedly policy decisions, in addition to the ones we note
                 in this report, may be relevant in deciding if, and to what extent, user fees
                 are imposed on DOD. The implications for changes in international policy
                 may be one such policy decision that would require the involvement of the
                 Departments of State and Transportation.

                 3. As part of our analysis, GAO did draw on a study conducted by GRA, Inc.,
                 a contractor to FAA. In the course of our work, we reviewed the study and
                 found it to be a reasonable starting point for the development of user fees
                 for ATC services. In particular, the entire study was well documented and
                 constructed and in line with economic theory and applications. Despite



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Comments From the Department of Defense




some concerns about the model, two independent reviews reached similar
conclusions. Coopers and Lybrand noted that “the GRA cost allocation
study provides an acceptable interim basis for attributing costs to broad
categories of users.” Arthur Andersen concluded that the GRA model
“represents a reasonable tool to meet the FAA’s short-term needs.”

At the same time, however, our report expresses some concerns about the
study, particularly in connection with the use of Ramsey pricing for
determining the costs assigned to DOD, (see report, pp. 7-8 and 37-41). In
particular, we expressed concern about the high level of common costs
and the lack of elasticity information with which to apply Ramsey pricing.
We also noted that various policy goals would need to be weighed in
deciding whether to exclude DOD from a Ramsey-based allocation.
Additionally, the focus of the GRA study was on the allocation of FAA’s cost
across user groups, and we provide considerable discussion about the
relevance of including DOD’s costs of providing ATC services to civil users in
the development of user fees (see report pp. 4, 8-10, and 41-44). If DOD’s
costs are included, fees could be collected from civil users for the services
provided by DOD, thereby providing an offset to what DOD might owe FAA.
Finally, we do not find the use of Ramsey pricing in the GRA study to be in
violation of the Statement of Federal Financial Accounting Standards
(SFFAS) no. 4 because it is being used to allocate costs as a basis for
determining potential prices. It is a well-established standard (see, for
example, 31 U.S.C. § 9701.) that government price setting should take
costs into account but that other factors, such as the value of services to
users, are also to be considered. For a further discussion about the
difference between costing and pricing see Federal Aviation
Administration: Independent Financial Assessment, pp. IX-7 to IX-8,
Coopers and Lybrand, L.L.P. (Feb. 28, 1997).

In response to DOD’s comment that the Department did not have access to
the GRA draft report prior to its public release on March 19, 1997, access to
this work was controlled by FAA, not GAO.

4. We agree and noted in our report that there are public policy issues at
stake in making the decision to include the DOD in the Ramsey pricing
model. (See report pp. 7 and 39). We also note that charging DOD only the
marginal cost of its use is a policy option that could be made, but choosing
this option means that other users will pay more for their services (see
report, p. 41). In short, our view, as discussed throughout our report, is
that the allocation process, as part of the development of user fees, entails




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Comments From the Department of Defense




many policy choices that should be evaluated from the standpoint of their
effects on a variety of, and sometimes conflicting, public policy goals.

5. Our report does not explicitly endorse the use of Ramsey pricing. In any
case, if user fees were imposed and it were determined that DOD will pay
for its use of FAA’s services, we do not believe that this would “violate . . .
budget integrity” because such a payment would represent costs that are
incurred in order for DOD to perform its mission much like the costs of
other goods and services used by the military.

6. As noted above, we do not believe that the use of Ramsey pricing within
the GRA model is inconsistent with SFFAS no. 4 because it is being used for
the purpose of determining potential fees for users. Other applicable
federal standards and law (for example, 31 U.S.C. § 9701) note that while
costs should be considered in setting user fees, other issues, such as the
benefit of services to users, should also be considered. The Ramsey
method is a widely used and accepted pricing tool for situations in which,
like ATC services, the production process entails low marginal costs but
considerable common costs because the same facilities provide services
for many uses and user groups.

7. We agree with DOD that using the Ramsey method is highly dependent on
knowledge of elasticities of demand across the various user groups (see
report, pp. 7 and 38-40). Contrary to the implication in DOD’s comment, GAO
is not endorsing the elasticities chosen by GRA. We agree that the use of
Ramsey pricing by FAA would be enhanced by better empirical data about
users’ response to price changes. Unfortunately, little information is
currently available. Moreover, it is crucial to understand that any
allocation mechanism—whether Ramsey or something else—must assume
a set of price elasticities. For example, under a proportionate allocation
method of assigning common costs, if it is assumed that users will
continue to consume the same amount of a service after their prices rise,
an implicit assumption is being made that all users have a demand
elasticity of zero. This is a highly unlikely assumption.

8. While our report discusses several concerns about the application of the
Ramsey-based method, we believe that DOD’s comments actually present
an argument for the use of the Ramsey method. DOD is suggesting that
economic forces will cause response to price increases in the form of
reduced flights taken or changes in flight patterns (to bypass
FAA-controlled airspace). If, as DOD suggests, it would reroute its own
flights out of FAA-controlled airspace, it may need to be viewed as a highly



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                    Comments From the Department of Defense




                    price sensitive user group if it were included in a Ramsey pricing model.
                    Thus, it would not be assigned much of the common costs of ATC services.

                    9. We agree that the report does not provide an estimate of the cost of
                    administering a user fee system based on cost recovery. Estimating such
                    costs were outside of the scope of our review. However, it is important to
                    note that a primary purpose of a user fee system is to assign the cost of the
                    system’s use to those who benefit from the services provided. Raising
                    revenue through general taxation, while it may raise the same amount of
                    revenue, would not tie system use to the revenues collected. With respect
                    to collection, the report acknowledges that a mechanism would be
                    necessary and that establishing two collection mechanisms—one by DOD,
                    if its costs are included, and one by FAA—would not seem to be an efficient
                    use of resources (see footnote 14, p. 42).


                    10. We revised the title.
GAO’s Response to
DOD’s Specific      11. We added a statement that the United States government operates a
Comments            joint civil-military air traffic control and navigation system (see p. 1).

                    12. Sentence changed to: “At the same time, FAA and other federal
                    agencies, including DOD, have operated in an environment of increasingly
                    tight federal resources.”

                    13. No changes made. Members of the National Civil Aviation Review
                    Commission were appointed by the administration and by the leadership
                    of the Congress. We understand that the Commission will hold public
                    hearings, thereby providing DOD and other aviation system users with an
                    opportunity to present their views.

                    14. No changes made. DOD is a user of FAA’s air traffic services. The next
                    sentence in that paragraph states quite clearly that DOD also provides air
                    traffic services; therefore, DOD is unique among users.

                    15. Again, this sentence does not treat DOD as any other user. Throughout
                    the report, we are careful to note that a policy decision is involved in
                    deciding about the sources of funds to pay DOD’s share. A congressional
                    decision to exempt DOD from paying user fees is one option that we
                    discuss in the report.

                    16. We made the suggested change.



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Comments From the Department of Defense




17. We made the suggested change.

18. The Results in Brief section of a GAO report is intended to summarize
the results of our review. While the points that DOD makes are important,
we do not believe it is appropriate to include them in the summary section
of this report. DOD could make these points to the National Civil Aviation
Review Commission. In connection with charging other users, FAA does
allocate a share of the cost to other public users, which would include
state and local governments as well as other federal agencies (see tables
on pp. 36 and 40). We did not discuss these users because our scope was
to look at the use and provision of services by DOD. However, if FAA moved
to a user fee system, then a decision would need to be made about
recouping fees from other public users.

19. As discussed earlier, we believe that the use of the Ramsey-based
method violates no federal standard because the standards on price setting
and user fees suggest that value of service as well as cost can be taken into
account. We agree that our discussion of the assignment of costs to the
DOD should be premised on the notion that DOD’s costs are important to
understand for the development of user fees even if a policy decision is
made to exempt the Department from having to pay user fees itself. We
revised the report to make this clearer. Finally, we note that DOD has stated
that requiring the Department to pay for ATC services without a
compensatory increase in its appropriation could have ramifications for
the Department’s mission (see report p. 11). We believe that the issue of
the source of funds for DOD’s share of ATC costs, if user fees are imposed,
should be resolved by policymakers in the Congress and the
administration.

20. We agree that DOD is a unique user of FAA’s services because it is also a
provider of those services and contributes to the NAS (see report p. 3 and
app. III). The point we are making in the paragraph is that DOD’s status as a
minor user is not justification alone for DOD’s being relieved of paying any
common costs of FAA’s service. Instead, a decision to relieve DOD of the
responsibility of paying common costs could be made by policymakers on
the basis of policy goals such as protecting DOD’s role in providing national
defense and security.

21. We revised the report to reflect the volume of civil traffic that DOD
provides. We did not include suggested language about the percentage of
FAA’s workload that DOD comprises because it is not relevant to a




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Comments From the Department of Defense




discussion of which DOD costs—common or marginal— should be included
for the purposes of cost allocation.

22. The change suggested above was inserted in the indented portion of
the paragraph. While we do not disagree that DOD’s system was designed to
be an integral part of a common ATC system, it is primarily for DOD’s
military mission and is supported by taxpayers. This paragraph discusses
the appropriate costs to be included in allocating costs to ATC system
users.

23. We deleted the sentence as DOD suggested.

24. In this comment, DOD is taking exception to our view that its costs of
providing civil services should be valued at actual cost. Instead, DOD’s view
has been that it should get credit for the costs it saves the FAA by providing
civil services. In connection with the study that DOD suggests GAO
undertake, such an analysis would be very difficult to do because it is not
possible to determine how or whether FAA would provide the same level of
service that was being provided by DOD (see report pp. 10 and 44).
Furthermore, it is also difficult to determine what costs would be incurred
by FAA for whatever level of service it chooses to provide in lieu of DOD’s
provision. However, the criteria developed by FAA for determining where
to establish air traffic facilities may provide some useful guidance on this
issue. These criteria, which lay out rules for the level of service that FAA
provides in various locations on the basis of traffic levels and patterns,
would provide some sense of the nature of FAA’s likely service at various
locations if DOD were to abandon providing civil services.

25. We do not agree that four options exist for the payment of DOD’s share
of ATC costs if user fees are adopted. Under user fees, DOD, as the user,
would be required to pay for the costs of ATC services. Therefore, the
option would be for DOD to pay FAA out of its regular appropriation with or
without a compensatory increase. A decision could be made that the funds
would be appropriated from the general fund to FAA for DOD’s use of the
system. Such an appropriation would be specifically designed to cover
DOD’s cost burden on FAA but, since it is not a user fee, would not be an
option if it has been decided that DOD should pay. DOD stated that
continuing the current practice would be best for both agencies and would
eliminate the accounting drill required by having DOD pay out of its
appropriations. However, it is important to note that DOD’s air traffic
service costs are necessary for the Department to perform its mission and
not unlike the costs of other goods and services used by the military.



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Comments From the Department of Defense




Furthermore, appropriating the funds to FAA would require that FAA
annually attempt to justify the appropriations to cover DOD’s share of the
costs of air traffic services.

26. The funding options section has changed and the sentence referred to
has been deleted. The report notes that FAA and DOD disagree on how
funding options would affect their missions and partnership and provides
opinions from both FAA and DOD. (See report p. 11).

27. We revised the report as DOD suggested.

28. We revised the report as DOD suggested.

29. We revised the report as DOD suggested.

30. We revised the report as DOD suggested.

31. We revised the report as DOD suggested.

32. We revised the report as DOD suggested.

33. We concur with most of the change as suggested and have revised the
report accordingly. The last sentence concerning “soundness of the policy”
is already included in the report on page 24.

34. We revised the report to incorporate the suggested change made by
DOD  about its policy of turning SUA back to the FAA. We included FAA’s
rationale for why the agency may refuse to accept SUA that DOD attempts to
return to the NAS.

35. We revised the report to incorporate all of the changes except the
sentence about the major challenge confronting the more efficient
management of the airspace. As acknowledged in the RTCA
recommendations, an important element to improve the efficient use of
the airspace is the establishment of a real-time system to notify users of
availability. As we state in the report, both FAA and DOD have had difficulty
in developing such systems to enhance the management of SUA (see report
p. 24).

36. We do not concur with the suggested changes because relevant points
about information exchange are already made in the report (see p. 24).




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Comments From the Department of Defense




37. We revised the report as DOD suggested.

38. We do not concur with the suggested deletion because we believe that
the statement as written is supported by DOD’s admission that special
equipment is needed for its mission activities.

39. In this comment, DOD takes exception with a view presented by FAA. We
include FAA’s views in this report as we include DOD’s views on many
issues. On this particular issue, DOD’s views are presented in the paragraph
following the one expressing the FAA view (see report p. 42).

40. We revised the report as DOD suggested.

41. We agree that the backbone of FAA’s ability to develop its space-based
navigation system is the GPS. GPS is being paid for by the U.S. taxpayers
through appropriations to DOD. We noted in our report that to the extent
that future costs of GPS can be shown to benefit civil aviation or arise from
its use, those costs could be appropriately passed on to these users
through user fees (see report p. 44).

42. The concern that DOD expresses does not directly relate to the point we
are making. In our report, we are discussing the issue of valuing DOD’s
services at actual or saved costs, and we express the view that actual cost
is the more appropriate measurement. DOD’s comment suggests that there
are specific (and actual) costs that it incurs in order to maintain the
seamless nature of the NAS. We would agree that any costs incurred above
and beyond those that are necessary for providing for DOD’s military
activities would be relevant to include as DOD’s costs of providing civilian
services. Such costs should be viewed as “additional,” or “marginal,” costs
of providing civil services.

43. We agree that the lack of good cost-accounting information reduces
the reliability of FAA’s cost information. However, the limitations of these
data are primarily reflected in the high level of common costs found by the
GRA study. Where costs could be directly tied to particular users, the data
limitations were less of a hindrance. It is likely that with better
cost-accounting information, the measured marginal costs of all users will
rise, while the pool of common costs to be allocated via Ramsey or some
other method will shrink.

44. The fact that DOD has a relatively large budget is not the reason that it
was assigned a large share of common costs under the Ramsey method



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Comments From the Department of Defense




used by GRA. The reason relates to how elasticities of demand for ATC
services (which reflect the expected price sensitivity of users) were
calculated in the model. Although all user groups (except general aviation
piston users) were assigned the same elasticity of demand for flights, the
operative elasticity was one that was imputed within the model to predict
the sensitivity of users to changes in the price of ATC services, a
component of total flight costs. As we discuss in our report, the elasticities
of demand for ATC services were imputed based on the share of total flight
costs that are related to ATC costs (see report, footnote 12, p. 7; footnote 5,
app. IV; and pp. 50-51). DOD flight costs, according to FAA’s data, are high
compared to many other groups; therefore, its imputed elasticity of
demand for ATC services was relatively low. Hence, this is the primary
reason that DOD is assigned a disproportionate share of FAA’s common
costs by the GRA study.

45. We disagree with DOD’s interpretation of the microeconomic literature
regarding the meaning of terms “willingness to pay” and “ability to pay.”
The phrase “willingness to pay” is generally used to refer to the nature of
demand for a product or a service by an individual or group of people. The
phrase “ability to pay” would refer to the income or budget constraint
faced by those people. Since a primary determinant of demand
(willingness to pay) is the income or budget constraint, the ability to pay is
a key factor that determines the willingness to pay.

46. This discussion of the cost of flying a flight relates to how elasticities
of demand for ATC services are derived within the Ramsey model (which is
used to allocate common costs) and has no relation to the issue of
marginal cost pricing. For more about the context of this discussion in our
report, see comment 44.

47. The category of overflights within the GRA model includes state aircraft.
This study was designed to be a tool for showing the costs associated with
various services and for analyzing how prices might be assigned to users
for the recovery of FAA’s total costs. Issues of law, regulation, and policy
would need to be taken into account as part of the ultimate fee-setting
process.




Page 76                                   GAO/RCED-97-106 National Airspace System
Appendix VII

Major Contributors to This Report


               Amy Abramowitz
               Dave Bryant
               Gerald Dillingham
               Matthew Hampton
               Robert Levin
               Belva Martin




               Page 77             GAO/RCED-97-106 National Airspace System
Glossary of Cost Terms


Common Costs                Common costs are costs that are incurred in producing more than one
                            product. These costs will be incurred even if any one of the products
                            ceased to be produced. Therefore, common costs can not be directly
                            attributed to the production of any one of the products. In the discussion
                            in this report, the term common costs is used to include both fixed costs
                            and common costs that cannot be traced to the production of ATC services
                            for any particular user group.


Directly Assignable Costs   Directly assignable costs are those that can be traced to the production of
                            a particular output. In this report we use this term to mean costs that were
                            attributable to the production of ATC services for a particular user group.


Fixed Costs                 Fixed costs are costs that do not vary in the short run as the production
                            volume of a good rises or falls. In this report, fixed costs of air traffic
                            facilities, which may be common over the many outputs for various
                            consumers that use services from that facility, are included under the
                            umbrella term “common costs.”


Marginal Cost               The economic concept of marginal cost is a measure of how the total cost
                            of producing a good will rise or fall as the level of production increases or
                            decreases. In this report we refer to the marginal cost of a certain user
                            group’s use of ATC services as being those costs that could be directly
                            attributed to the groups’ use. Thus, the term marginal cost is being used
                            somewhat differently than the strict economic meaning because some
                            fixed costs, in addition to marginal costs, may be attributable to a
                            particular user groups’ use of ATC services.


Stand-Alone Costs           Stand-alone costs are the costs that would be incurred to produce a
                            product for one type of user in the absence of any other users. In a general
                            sense, the stand-alone costs of one user would include common costs,
                            fixed costs, and marginal costs. However, because producing a product for
                            certain users might require a lesser total infrastructure than is the case for
                            other users, the fixed and common costs included in the stand-alone costs
                            for some user groups may be less than the observed pool of common and
                            fixed costs.




(341512)                    Page 78                                 GAO/RCED-97-106 National Airspace System
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