NPS bid for contractor competition spurs Grand Canyon clash

By Phil Taylor | 02/11/2015 01:13 PM EST

This story was updated at 4 p.m.

There’s $1 billion up for grabs at Grand Canyon National Park for running its historic lodges and mule rides. But the National Park Service can’t get a single bidder.

The problem in part stems from a 1998 law that requires the Park Service to seek competing bids to run lodges, restaurants, service stations, campgrounds and other amenities — but which includes provisions that have had the unintended result of limiting some bids.

Advertisement

The result is an ongoing battle between NPS and its largest hospitality provider that has major implications for visitors and park budgets. It’s part of a broader Park Service effort to boost competition for major concessions contracts and increase revenue.

The Concessions Management Improvement Act sought to provide "better service to visitors and a better return to the taxpayers," President Clinton said upon signing the bill. It required the Park Service to — with the exception of small contracts and outfitters — accept the best of competing proposals, a break from a 1965 law that allowed the agency to give preferential treatment to incumbent concessionaires.

Revenue is supposed to be a key factor in awarding new contracts, though it is subordinate to the protection, conservation and preservation of park resources and reasonable rates for park visitors.

Yet the Park Service has struggled to entice bidding on the Grand Canyon’s major South Rim contract — currently owned by Xanterra Parks & Resorts Inc. — as well as Alaska’s Glacier Bay Lodge, the only hotel accommodation in Glacier Bay National Park and Preserve. That threatens disruptions to visitor services as well as revenues at a cash-strapped agency that already faces an $11.5 billion maintenance backlog.

Competitive bids have failed to materialize in part because concessions companies own $600 million in improvements to park facilities — investments that the Park Service must pay back, or that competing firms must pay to assume, in order for contracts to change hands, the agency said.

Barriers to competition for the Grand Canyon’s South Rim amenities contract have been "particularly acute," the Park Service told a federal judge in December in response to a lawsuit filed by Xanterra, which was fighting Park Service efforts to level the playing field for its competitors.

Xanterra and its predecessor, the Fred Harvey Co., have operated concessions at the 1-mile-deep canyon since 1905, before it became a national park. Fred Harvey built more than 300 structures that today make up much of Grand Canyon Village.

Xanterra also runs facilities at Death Valley, Rocky Mountain, Zion, Yellowstone and Mount Rushmore national parks; a railway and cruise ships; and a handful of Ohio state parks.

Until recently, Xanterra owned roughly $200 million in improvements to Grand Canyon facilities — including lodging, trails and employee housing — accruing what’s known as leasehold surrender interest (LSI).

Under the 1998 law, LSI must be paid by either the Park Service or the next concessionaire if the contract changes hands.

Concessioners today own LSI at more than 50 parks, a potential barrier to would-be competitors that can force parks to settle for a smaller cut of the more than $1 billion in revenue its concessioners see each year.

"This is a symptomatic problem the Park Service has had for many years in not being able to maintain the infrastructure it operates," said Derrick Crandall, who leads the National Park Hospitality Association, which represents park concessioners that employ 25,000 people, including Xanterra.

Competition ‘significantly diminished’

Xanterra currently owns $57 million in LSI at the Grand Canyon. The next-highest are Grand Teton Lodge Co. with $44.7 million at Grand Teton National Park, Delaware North Cos. Inc. with $41 million at the Grand Canyon, Glacier Park Inc. with $22 million at Glacier National Park and Xanterra with $21 million at Yellowstone.

Key lawmakers in both chambers are concerned about the lack of competition for Park Service contracts.

"It has become increasingly clear that competition in the bidding process and the ability of the Park Service to attract new bidders have both significantly diminished," said a Dec. 19 letter from Senate Energy and Natural Resources Chairwoman Lisa Murkowski (R-Alaska) and Sen. Michael Bennet (D-Colo.) to Interior Secretary Sally Jewell obtained by Greenwire under the Freedom of Information Act. "Last year, at Glacier Bay in Alaska and most recently at the Grand Canyon in Arizona, the Park Service failed to attract a single new concessions bid, nearly resulting in a complete disruption in visitor services."

Xanterra’s $200 million in Grand Canyon LSI was for many years "the big elephant in the room," said David Nimkin, Southwest regional director for the National Parks Conservation Association.

"The value of their LSI has been growing practically exponentially," Nimkin said. "The Park Service is trying to find its way out from under this."

In a move that could further muscle out the competition, Xanterra last fall filed trademark applications for the names of iconic Grand Canyon sites including El Tovar, Phantom Ranch and Bright Angel Lodge, according to the U.S. Patent and Trademark Office.

Applications were also filed for Lookout Studio, Desert View Watchtower, Kachina Lodge, Yavapai Lodge and Hopi House, among others.

The Park Service is opposed to the trademarking of those names and will make official comments to the patent office, a spokeswoman said.

But should Xanterra win those rights, it would force competitors to buy the trademark or change the sites’ historical names, making them a less appealing business prospect. Xanterra declined to comment for this story.

At Yosemite, the nation’s third-most-visited national park, Delaware North, whose concessions contract is coming to a close, claims it owns as much as $51 million in intellectual property rights, including for trademarks it purchased in the 1990s for the historic Ahwahnee Hotel and Curry Village, but the Park Service insists those name rights are worth closer to $3.5 million, according to the Associated Press.

Bidding for the next Yosemite concessions contract ended in late January. Any successor would have to negotiate trademark values with Delaware North.

Grand Canyon shakeup

As Xanterra’s 10-year contract to operate the Grand Canyon’s South Rim amenities was coming to a close, the Park Service saw an opportunity to level the playing field.

In a major policy shift, it announced in 2013 it was splitting some of Xanterra’s South Rim services — including about $40 million in Xanterra’s LSI — to a smaller contract in hopes of lowering the buy-in for competing bidders. The new 15-year contract, which included grocery, food service, retail, lodging and a trailer village — was awarded last August to Delaware North. It is expected to generate $30 million in annual revenue.

But the remaining South Rim contract, the park’s largest, has been more problematic. It is to manage the historic El Tovar, a 1905 lodge built from local limestone and Oregon pine, on the canyon’s South Rim; the Phantom Ranch a mile below on the canyon floor; and many other facilities.

The agency in 2013 took $19 million from the park’s coffers to pay Xanterra, reducing the company’s remaining LSI to $138 million. When no companies bid, NPS last August spent $81 million more — including $50 million in franchise fees from 88 other national parks — to reduce Xanterra’s LSI to $57 million.

The park also slashed franchise fees on the South Rim contract and said it would allow concessioners to raise hotel rates faster than is generally allowed. But the contract still drew no bids.

Last October, Xanterra sued the Park Service, claiming the agency had "seriously mismanaged efforts" to award the two contracts and warning that visitors arriving after Dec. 31, 2014, when Xanterra’s existing contract was to end, "may find many of the park’s iconic facilities shuttered."

In its complaint to the U.S. District Court for the District of Colorado, Xanterra claimed NPS was subsidizing its competitors and imposing a "drastic hike" on franchise fees. The new contract, Xanterra claimed, provided no "reasonable opportunity for net profit," a key requirement under the 1998 law.

"To make matters worse, draining $100 million from the national park system to facilitate this ‘buy down,’ by NPS’s own admission, will result in layoffs and hiring freezes involving NPS’s own employees and drastic reductions in guest services at numerous parks across the nation," Xanterra said.

The Park Service told the court early in December that Xanterra "has enjoyed an almost exclusive entitlement to revenues from lodging and other concessions operations located at the South Rim," and that the simultaneous expiration of two South Rim contracts offered a key opportunity for the Park Service to enhance competition and "effectuate Congress’s intent in the 1998 Act."

That month, with no time left to offer a new solicitation, the park issued a one-year stopgap contract to Xanterra to ensure continued operation of El Tovar, Phantom Ranch and the canyon’s iconic mule rides. The lawsuit was also dropped.

Paying back the loan

Paying down Xanterra’s LSI was supposed to make the South Rim’s largest concessions contract more palatable to other companies, offering them an easier toehold into the market.

But using $50 million in franchise fees from other parks raised alarm among lawmakers.

"The practice of borrowing funds from parks maintenance accounts is not an adequate solution," Murkowski and Bennet wrote in their Dec. 19 letter to Jewell. "We believe this practice should not continue, and we urge you to intervene and stop this practice."

Last November, Rep. Doc Hastings (R-Wash.), who was then chairman of the Natural Resources Committee, and Reps. Rob Bishop (R-Utah) and Doug Lamborn (R-Colo.) warned Jewell in a letter that "these withdrawals will result in suspension or elimination of park improvements, services and staffing at multiple units throughout the National Park System."

Parks advocates have defended the agency’s move to pay down LSI, arguing it will spur more robust bidding that will benefit park visitors and the agency’s bottom line.

"The objective the Park Service is striving to fulfill through this is an important one" and could give the agency more leverage in setting franchise fees, said NPCA’s Nimkin.

The Park Service earns roughly $80 million annually from franchise fees on more than $1 billion in concessioner revenues. By law, 80 percent of the fees is used "at the unit for visitor services and for purposes of funding high-priority and urgently necessary resource management programs and operations," including to address the Park Service’s massive deferred maintenance backlog.

It’s one of many areas where park advocates are looking for nonappropriated funds to burnish the park system ahead of its 2016 centennial.

Grand Canyon’s major South Rim contract is expected to generate $1.27 billion over 15 years — a significant revenue source.

In 2014, the Park Service used franchise fees to rehabilitate historic buildings at Yosemite, enhance emergency response dispatch services at Denali National Park and increase accessibility to campgrounds at Grand Teton, the agency said.

The 88 parks that lent money to pay down Grand Canyon’s LSI "will operate without interruption or impact to projects funded by concession franchise fees in fiscal year 2015, and no long-term impacts are anticipated," Lena McDowall, NPS’s associate director for business services, wrote in a Jan. 26 letter to Bennet and Sen. Cory Gardner (R-Colo.).

"The lending parks had carry-over balances in their franchise fee accounts that, when combined with expected annual revenues, were larger than what the parks required to fund planned projects," McDowall wrote.

Moreover, the $50 million will be paid back — as required by law — over the course of the 15-year Grand Canyon contract, she said. A new solicitation for the South Rim contract, which will begin in January 2016, will be issued "soon," NPS said.

An overhyped barrier

But Crandall of the National Park Hospitality Association isn’t quite buying it.

"Explain that to the millions of visitors who won’t be getting the kind of experience they were expecting when they board the ferry on the way to the Statue of Liberty," he said.

Crandall said Congress is to blame for rising LSI, because it has failed to provide enough funding for NPS to maintain its infrastructure. Provisions in the 1998 concessions law haven’t helped, either, he said. Contracts are generally limited to 10 years, which isn’t enough time for companies to recoup their investments in park infrastructure, he said.

"It’s not like LSI is the wrong solution," he said. "It’s been used too much because the budget of the Park Service hasn’t allowed the kind of investment that really shouldn’t be borne by the concessioner."

Crandall said LSI is an overhyped barrier. When a new concessioner buys an old concessioner’s LSI, it doesn’t vanish. The new concessioner owns the investment. Moreover, most of the historic structures concessioners run were built with private capital, not appropriated funds, he said.

At a July 2013 hearing before the Senate Energy and Natural Resources Committee, Park Service Director Jon Jarvis said his agency would need at least $700 million annually just to keep the maintenance backlog level. The agency in the previous fiscal year had received only $444 million for that purpose.

More than half the backlog consists of roads and bridges, whose maintenance and upgrade is generally covered by the highway bill.

Crandall said the agency will need to look beyond traditional appropriations to properly maintain its assets. He touted a March 2013 white paper by NPHA and NPCA that listed 16 ideas for increasing nonappropriated funds.

For example, franchise fees could be increased 50 percent within three years through expanded concessioner services, including by lengthening operating hours at units like Alcatraz and the Statue of Liberty and allowing dynamic pricing of services, the paper said. Concessioner-operated facilities make up roughly $1 billion of the estimated $11 billion infrastructure backlog, it said.

"Concessioners report that the public wants expanded services — longer operating seasons at some units, removal of time-of-day limits at others, added educational seminars and special events [and] other services like Wi-Fi," the paper said.

Still, others argue parks are already overdeveloped and overcommercialized.

But concessionaires are hobbled by shorter contracts, a reluctance by NPS to award LSI and prospectuses creating a "negative cash flow" for more than half the concessions contract, the paper said. That has "exacerbated the challenges faced by NPS in maintaining aging infrastructure," the paper said.

Other proposals in the white paper included adding a "penny for parks" to the federal gasoline tax and creating a park legacy fund with money from oil and gas revenues and private donations.