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# MEMORANDUM

Eastern Research Group, Inc.

110 Hartwell Avenue Lexington, MA 02421

Date: June 18, 2007

To: James Covington, EPA

From: Cal Franz, ERG Re: Industry Response to Draft Economic Impa ct Methodology for EPA Airport Deicing ELG

EPA held a meeting with industry representatives to discuss the draft economic impact methodology for the Airport Deicing Operations effluent limitati ons guidelines on May 31, 2007 in Washington, DC. Prior to the meeting EPA circulated a copy of th e draft methodology to industry trade organizations: Airports Council International – North America (ACI- NA), the Air Transport Association (ATA), and the American Association of Airport Executives (AAAE) for review and comment. In addition, at the meeting EPA extended an invitation to industry representatives to provide further comments or suggestions for analytic methodologies, especially c oncerning the setting of appropriate thresholds for determining impacts to industry since typical prof it maximization benchmarks are not applicable to airports. This memorandum summarizes industry’s comments on EPA’s draft methodology.

The most significant comments by industry centered on differences in airport access to capital and ability to fund capital expenditures for airports of different size. Industry representatives stated that EPA’s methodology used a “one size fits all” approach that does not adequately reflect the financial realities of the industry accurately.

Airport Size and Access to Capital

A major difference between large and small airports is their access to capital:

 The approximately 35 largest airports have significant ability to access capital markets by issuing general revenue bonds (GARBs).

 Smaller airport are not able to rely on issu ing GARBs to fund capital expenditures. These airports place much greater reliance on Airport Improvement Program (AIP) grants.

 The AIP program is over-subscribed; even if AIP gr ants can legally be used to fund expenditures associated with the deicing ELG, they are unlikel y to be available for such expenditures.

 Ownership approval to issue GARBs varies by airport and region

Industry recommends that EPA find a means of stratifying airports according to their financial structure that reflects these differences in access to capital mark ets and ability to fund capital expenditures. Each breakpoint identified in the stratification will requi re a different financial model. While Congress recognizes certain breakpoints by the way in which they have structured financia l support to industry (i.e., the AIP program and Subsidized Air Service program), these may not be the most appropriate breakpoints for EPA’s purposes. One industry representative suggested that airport gross revenues might be a suitable2 variable for airport stratification.

Airport Financial Structure and Fees to Pay for ELG Expenditures

A second way in which the proposed methodology does not reflect the financial reality of the industry is that it over simplifies the complexity of the internal financial structure of airports.

 Airports are operated on a cost center basis; wher e costs are incurred at the airport determines the cost center to which those costs will be assigned. Cost centers vary in the sources of the revenue streams used to support each cost center, how those different revenue streams are legally determined, and the airport’s ability to pass costs from that center through to customers.

For example, a cost incurred on the landside – or assi gned to the landside cost center – cannot be passed through to airlines in the form of higher landing fees; la nding fees are used to pay for airside costs. Thus, a treatment technology that affects only the airside w ould be assigned to the airside cost center, and can be figured into landing fees. However, a treatment technology that affects both landside and airside must be assigned to both landside and airside cost centers. Landside costs cannot be included in landing fees, and may be difficult to pass through to airport users in other forms.

Also, smaller airports have simpler cost centers and thus more flexibility on rate setting. It might be easier for a smaller airport to raise their landing fees than larger airports, where negotiations over rates and charges between the airport and airlines might be complex and difficult.

Potential Loss of Air Servic e

Industry representatives argued that EPA must look at the potential loss of air service at an airport as an impact of the ELG. At some airports the loss of a single flight might be significant. Loss of air service might also conflict with the will of Congress as reflected in its decision to provide subsidized air service to ensure access to air transportation in certain communities and regions. Industry representatives suggested EPA may be able to use the Bureau of Tr ansportation Statistics (BTS) Origin and Destination (O&D) Survey, a 10 percent sample of airline tickets, as a data source to estimate revenues by route to project route-specific impacts that might cause a loss of air service.

Incremental Costs to Airlines in A ddition to Costs to Airports

Airline industry representatives stated that the cost s of EPA’s ELG should include operational costs to airline, not just capital and O&M costs to airport. Thus, for example, if aircraft are required to use a deicing pad, aircraft will need to wait in line, thereby using additional fuel, as well as creating the potential for delay, which can impose significant costs on the airline.

Furthermore, waiting for deicing at a deicing pad creat es environmental impacts in the form of additional engine emissions from aircraft waiting with engines running. The incremental emissions might also be responsible for additional negative health impacts. These are all costs that should be included in EPA’s regulation.3 Price Elasticity of Demand for Air Transportation

Finally, EPA had suggested in its methodology that it mi ght use the percent of O&D traffic at an airport to reflect the price elasticity of demand for flights to that airport relative to the overall price elasticity of demand for air transportation in general. Industry representatives stated that there is no relationship between O&D traffic at an airport and the price elasticity of demand for flights from that airport.