JULY 13, 2000

Thank you for the opportunity to present the position of the Department of the Interior on S. 2331, a bill to direct the Secretary of the Interior to recalculate the franchise fee owed by Fort Sumter Tours, Inc., a concessioner providing service to Fort Sumter National Monument in South Carolina.

The Department of the Interior strongly opposes S. 2331 and the Secretary would recommend that the President veto this bill if passed by Congress.

S. 2331 would require the Secretary of the Interior to recalculate the fees owed by Fort Sumter Tours pursuant to its concessions contract with the National Park Service. If the recalculated fee is unacceptable to Fort Sumter Tours, it would have the right to go through a binding arbitration process with the Secretary to determine the appropriate fee. The arbitrators would be prohibited from taking into account any previous judicial decisions on this issue, and Fort Sumter Tours would be entitled to collect attorneys fees for the legal expenses it has incurred litigating against the government.

S. 2331 is essentially a private relief bill that would undermine the authority of the federal judiciary by nullifying the decisions of five courts over the past seven years that have ruled against Fort Sumter Tours. In addition, S. 2331 would demean a fundamental principle that underlies these decisions—the importance of living up to one's contractual responsibilities.

Fort Sumter Tours presently owes over $2,200,000 in fees, penalties and interest to the National Park Service under the contract that it entered into in 1986. This debt has been accumulating since 1991. When this contract was signed, it called for Fort Sumter Tours to pay a 4.25 percent franchise fee of gross annual receipts to the government in exchange for the exclusive right to transport visitors by boat to Fort Sumter National Monument. This fee was not set through an unfettered competitive process, as the law under which this contract was executed, the Concessions Policy Act of 1965 (repealed in 1998), contained provisions that discouraged outside businesses from applying for concessions contracts. The Concessions Policy Act balanced these anti-competitive provisions with a provision that required NPS to review the franchise fee under every contract every five years to determine whether it reflected the probable value of the contract. This fee reconsideration provision is reflected in section 9(e) of the standard concessions contract. Section 9(e) of the contract also provides for an arbitration process to resolve disputes over the adjusted fee.

Fort Sumter Tours agreed to these terms when it entered into its contract in 1986. A franchise fee analysis performed in 1991 showed that the probable value of the privileges under the Fort Sumter contract warranted a fee of 12 percent, and that with a 12 percent fee Fort Sumter Tours would have a reasonable opportunity for profit. This analysis, like the type of analysis NPS performs under every concessions contract, compared the financial records and the business opportunity of Fort Sumter Tours, to those of similarly situated businesses, using industry statistics. Analyses have been performed on other contracts that involve services similar to those provided by Fort Sumter Tours. NPS financial analyses have resulted in fees of 12 percent and 13 percent for operators in Golden Gate National Recreation Area and the Statue of Liberty that transport park visitors by boat to park sites. These concessioners operate profitably, and have not contested their fees.

In 1992, NPS notified Fort Sumter Tours that it was reconsidering its fee of 4.25 percent, and of its contractual right to seek advisory arbitration over the reconsidered fee. NPS also offered to discuss its financial analysis of the contract with Fort Sumter Tours with the intent that the parties could reach agreement over the fee. Fort Sumter Tours rejected these offers and opted instead to ignore the dispute resolution process it had agreed to in the contract and sued the National Park Service in Federal Court. Since Fort Sumter Tours first filed suit against the National Park Service in 1993, the four courts that have examined its claims, the United States District Court for the District of South Carolina, the United States Court of Appeals for the Fourth Circuit, the United States District Court for the District of Columbia, and the United States Court of Appeals for the District of Columbia, have found that the National Park Service acted appropriately in instituting a 12 percent fee under the Fort Sumter Tours contract. In addition, in 1996, the United States Supreme Court rejected Fort Sumter Tours attempt to seek Supreme Court review of the decision of the U.S. Court of Appeals for the Fourth Circuit. Despite these defeats, Fort Sumter Tours has continued to refuse to pay its contractually obligated franchise fee, and is seeking through S. 2331, to nullify these judicial decisions.

These decisions have been based on substantive, rather than procedural grounds. One of the primary issues before each court involved the principle that parties to a contract should be bound by the terms of their agreement. By signing its concessions contract, Fort Sumter Tours agreed to the dispute resolution process of Section 9(e), thereby committing itself to a process involving negotiation and, if necessary, advisory arbitration, to resolve any disputes relating to the fee. Fort Sumter Tours made a legal and business decision that it would not engage in this process. This is a matter of substance, rather than procedure, as the dispute resolution language was a substantive part of the Fort Sumter contract. As the Court of Appeals for the District of Columbia recently stated: "Fort Sumter Tours chose to ignore the contractual requirements and went directly to the courts. Like the District Court, we find the contract unambiguous and plaintiff's failure to abide by its terms fatal to its cause."

Fort Sumter Tours is the only concessioner out of more than 600 that has refused to abide by section 9(e) of the concessions contract. Of the concessioners that have contested franchise fee reconsideration, all but three came to agreement with NPS without employing the arbitration procedures of section 9(e). The three concessioners that could not reach agreement with NPS by negotiation, successfully utilized the section 9(e) advisory arbitration process to resolve the dispute. While this process did result in an increased fee in each of these instances, each of these concessioners continues to operate profitably.

The extraordinary degree of harmony between NPS and its concessioners that is reflected by a track record that shows very few fee disputes is understandable, given the benefits that businesses receive in operating under a NPS concessions contract. As is the case under the Fort Sumter Tours concessions contract, the overwhelming majority of these businesses are given the exclusive opportunity to serve a market that is often captive and must use the services of a given concessioner. The beneficial nature of the opportunities presented by these contracts has been commented on extensively in at least 5 studies conducted by the GAO and the Inspector General's office of the Department of the Interior over the past 10 years. These studies have concluded as a general rule that the NPS charges fees that are far lower than the market value of their corresponding contracts. It is therefore not surprising that there is no shortage of businesses that wish to apply for concessions contracts, and that the overwhelming majority of concessioners strive to abide by the terms of their contracts, including the advisory arbitration process in section 9(e).

The courts have looked closely at the substance of how NPS arrived at its fee. Both the district and appellate courts have found the Secretary's decision to be proper, and the subsequent court opinions have supported the finding of the first court that reviewed this matter, the United States District Court for the District of South Carolina, which stated, "the resulting franchise fee is not

excessive as to preclude a reasonable opportunity for profit." These courts have noted that the provision that allows NPS to review fees during the course of a contract is not unfair, since NPS's fee must, as a matter of law, allow a concessioner a reasonable opportunity for profit.

We understand that it has been reported to the committee that the National Park Service took into account non-concession revenue when calculating the profit that Fort Sumter Tours makes under this contract. We have stated that on page 2 of the 1992 NPS franchise fee analysis, non-concession income was included in the initial determination of the minimum and maximum franchise fee. However, as we have also stated, this inclusion was a harmless oversight that had no impact on the franchise fee determination. Again, the courts fully reviewed the reconsideration of the franchise fee and determined that we acted reasonably in setting this fee. Fort Sumter Tours has had countless opportunities to convince the courts that this information warranted the reversal of NPS's fee determination. They have been unsuccessful at every turn.

S. 2331 would also require the taxpayer to reimburse Fort Sumter Tours for the expenses it has incurred in litigation against the government. This is extremely unfair to the taxpayer, as current law grants prevailing parties against the United States the opportunity to be reimbursed for reasonable attorney fees. However, in this case, this legislation would grant attorneys fees to an individual who did not prevail in any of the five courts that reviewed this concessioner’s claims.

In addition, there is no guarantee that S. 2331would satisfy Fort Sumter Tours. If the Secretary prevailed in the binding arbitration under S. 2331 – that is, if the panel established a franchise fee of 12% - Fort Sumter Tours would still have the right to appeal this decision to a federal judge.

Moreover, subsection 1(d) of S. 2331 would prevent the National Park Service from awarding a new contract for the tour boat services at Fort Sumter National Monument until this matter was completely resolved and no longer subject to appeal. The present contract for these services expires on December 31, 2000. We expect to issue a prospectus for this contract prior to the end of this year. The language in subsection 1(d) would put this process on hold for an indefinite time period, as the appeal process could run for a considerable length of time—as long as 8 years if the present appeals process is an accurate indicator. This would prevent the National Park Service from advertising the contract to the business community, and seeking a fee that represents the true market value of the contract. In fact, as we fully expect that the market will determine a fee for this contract that is substantially equal to or greater than the fee that is in dispute under the present contract, any effort to freeze the fee during a pending arbitration and its subsequent appeal process could shortchange the taxpayer out of a just return under the contract. It would also prevent other businesses, several of which have already expressed interest in the new contract, from applying for this lucrative opportunity. As a government contract, this opportunity should be available through a fair competitive process to the tax-paying business community at large, rather than frozen for the benefit of one business until the appeals process runs its course.

There is no question that the dispute between Fort Sumter Tours and the United States Government involves an amount of money—approximately $2,200,000—that is considered significant by the concessioner and the NPS. But beyond the financial obligation, enactment of S. 2331 would send a message that no legal dispute with the United States Government is over, even if all judicial remedies have been exhausted. S. 2331 would also send a message that demeans the importance of requiring parties to live up to their obligations under commercial contracts, a principle that underlies each of the court decisions that has gone against Fort Sumter Tours. It is with these premises in mind that we would recommend that the President veto this bill if it is passed by Congress.

I would also like to note, in closing, that the NPS has attempted to settle this dispute with Fort Sumter Tours on several occasions, and, through the Department of Justice, remains open to any reasonable settlement offer from Fort Sumter Tours.

This concludes my testimony. I would be happy to answer any of your questions.