Karnal bunt is a fungal disease of wheat ( Triticum aestivum ), durum wheat ( Triticum durum ), and triticale ( Triticum aestivum X Secale cereale ), a hybrid of wheat and rye. Karnal bunt is caused by the smut fungus Tilletia indica (Mitra) Mundkur and is spread primarily through the movement of infected seed. Some countries in the international wheat market regulate Karnal bunt as a fungal disease requiring quarantine. Therefore, in the absence of measures taken by the U.S. Department of Agriculture (USDA) to prevent its spread, the establishment of Karnal bunt in the United States could have significant consequences with regard to the export of wheat to international markets.

The domestic quarantine and other regulations regarding Karnal bunt are set forth in “Subpart—Karnal Bunt” (7 CFR 301.89-1 through 301.89-16, referred to below as the regulations). Among other things, the regulations describe articles and areas regulated for Karnal bunt; criteria for classifying areas or fields as regulated areas; requirements for planting wheat, durum wheat, and triticale in regulated areas; restrictions on movement of regulated articles from regulated areas; permitting, cleaning, disinfection, and treatment requirements; and requirements for growers, handlers, seed companies, and other entities seeking compensation from the USDA to mitigate losses or expenses incurred because of Karnal bunt. The regulations are designed to prevent the artificial spread of Karnal bunt.

We have conducted a review of our regulations. As a result of this review, we are proposing to incorporate changes aimed at improving the clarity, transparency, and effectiveness of the regulations. More specifically, the proposed changes would include the following: Clarifying our method for determining Karnal bunt infestation; adding or removing several definitions; adding or removing certain articles from the list of regulated articles; clarifying the circumstances under which a field or area would be classified as a regulated area, as well as adding provisions and criteria for the release of fields or areas from regulation; modifying the restrictions that apply to the planting of wheat, durum wheat, and triticale seed originating in regulated areas; and modifying cleaning and disinfection requirements for mechanized harvesting equipment, seed conditioning equipment, and storage facilities involved in the harvesting, planting, or storage of Karnal bunt-positive host crops or seed, as well as adding a requirement for the disposal of chemically treated, spore-positive seed.

In § 301.89-1, we are proposing to remove two of the existing definitions, amend three, and add six new ones. We would remove the definition of farm tools , as farm tools are no longer considered regulated articles and that term is no longer used in the regulations. We would also remove the definition of milling products and byproducts , as we are proposing in this document to remove milling products and byproducts from the list of regulated articles.

We would amend the definition of contaminated seed to specify that seed will be determined to be contaminated based on the presence of bunted kernels or teliospores. The regulations in § 301.89-4 currently provide that seed originating in a regulated area must be tested and found free of spores and bunted kernels before it may be planted in a regulated area; our proposed change to the definition of contaminated seed would reflect that standard. Similarly, we would amend the definition of infestation (infected) to specifically identify bunted kernels in grain and bunted kernels or teliospores in seed as identifiable stages of development of Tilletia indica , the presence of which will lead to a determination of infestation. The current definition of infestation (infested) would remain the same, but for identifying the stages of development of Tilletia indica. Again, including the bunted kernel standard for grain and the bunted kernel/teliospore standards for seed in the definition of infestation (infected) would make that definition consistent with the standards used elsewhere in the regulations. We would also amend the definition of mechanized cultivating equipment and mechanized harvesting equipment by adding grain buggies, trucks, and swathers as examples of equipment used for harvesting purposes and by removing cotton harvesters as one of those examples. Cotton harvesters are at low risk for becoming contaminated with the Karnal bunt pathogen, whereas grain buggies, trucks, and swathers used in connection with the harvest of wheat, durum wheat, or triticale are at greater risk of contamination.

We would add definitions for grain , hay , host crops , plant , seed , and straw . We are proposing to include all of these articles on the list of regulated articles in § 301.89-2, so including their definitions would aid users in understanding and complying with the regulations. We would define grain as wheat, durum wheat, and triticale used for consumption or processing, while seed would be defined as wheat, durum wheat, and triticale used for propagation. We propose to define host crops as consisting of plants or plant parts, including grain, seed, or hay, of wheat, durum wheat, and triticale. We propose to define plant as any plant (including any plant part) for or capable of propagation, including a tree, a tissue culture, a plantlet culture, pollen, a shrub, a vine, a cutting, a graft, a scion, a bud, a bulb, a root, and a seed. This is the definition provided in the Plant Protection Act (7 U.S.C. 7701 et seq. ). We would define hay as consisting of host crops cut and dried for feeding to livestock. The definition would also note that hay cut after reaching the dough stage may contain mature kernels of the host crop. Straw would be defined as the vegetative material left after the harvest of host crops. This proposed definition would also refer to the common uses of straw as animal feed, bedding, mulch, or for erosion control.

We are proposing several changes to the list of regulated articles in § 301.89-2 of the regulations. Currently, paragraph (a) of that section identifies conveyances such as trucks, railroad cars, and other containers used to move wheat, durum wheat, or triticale as regulated articles, and paragraph (b) identifies grain elevators, equipment, and structures used to store or handle those commodities as regulated articles. We would amend these paragraphs to specify that the conveyances listed in paragraph (a) and the equipment and structures listed in paragraph (b) would be regulated articles only if used to move or to store and handle the grain of host crops produced in a regulated area that test positive for Karnal bunt due to the presence of bunted kernels.

Current paragraph (c) of § 301.89-2 lists milling products or byproducts other than flour as regulated articles. We would remove this paragraph and would no longer regulate milling products or byproducts. Such products and byproducts are believed to present a low risk of spreading Karnal bunt because the milling process would have eliminated bunted kernels.

We are proposing to add hay cut after the dough stage to the list of regulated plants or plant parts in current paragraph (d). As noted in the proposed definition of hay discussed previously, hay cut after reaching the dough stage may contain mature kernels of the host crop and could, therefore, serve as a means of spreading Karnal bunt. We would also amend that paragraph to specify that the listed plants or plant parts would be considered regulated articles only if they were produced in a regulated area, and would provide exceptions for certain straw, stalks, and seed heads that have been processed or manufactured prior to movement and are intended to be used indoors for decorative purposes. We consider these items to present a low risk of transmitting Karnal bunt because of their end use as indoor decorative material and already exempt those articles from the certificate/limited permit requirements of § 301.89-5. Because we would specify that these articles are not regulated articles, it would no longer be necessary to provide an exemption for them in § 301.89-5.

Current paragraphs (f) through (h), which identify as regulated articles root crops with soil, soil from areas where field crops are produced, and manure from animals that have fed on untreated or raw wheat, durum wheat, or triticale, would be removed. Bunted kernels are not associated with these articles, and while they may contain spores of Tilletia indica, we regulate only seed for spores. In addition, the end uses of these articles make them unlikely to transmit Karnal bunt. Root crops, for example, would go to market after harvesting and would not be replanted.

Current paragraph (i) lists mechanized harvesting equipment, when used in the production of wheat, durum wheat, and triticale that tests positive for Karnal bunt, as a regulated article. To reflect the standards used elsewhere in the regulations, as described in the proposed definition of infestation (infected) in § 301.89-1, we would amend that paragraph to specify that a positive test result for Karnal bunt would be determined by the presence of bunted kernels. Similarly, we would amend current paragraph (j), which lists seed conditioning equipment used in the production of wheat, durum wheat, and triticale as a regulated article, to specify that the seed conditioning equipment would be considered a regulated article only if it had been used in the production of wheat, durum wheat, and triticale found to contain the spores of Tilletia indica. We would also amend this paragraph to include storage/handling equipment.

Current paragraph (k) provides that any product, article, or means of conveyance not covered in the previous paragraphs will be considered to be a regulated article when an inspector determines that the product, article, or means of conveyance presents a risk of spreading Karnal bunt due to its proximity to an infestation of Karnal bunt and the person in possession of the product, article, or means of conveyance has been notified that it is regulated under the regulations. We would amend that paragraph by removing the language pertaining to the proximity of the product, article, or means of conveyance to an infestation of Karnal bunt and would replace it with a statement specifying that the inspector's determination of risk would be based upon appropriate testing and the intended use of the product, article, or means of conveyance.

Because, as discussed previously, we are proposing to remove paragraph (c) and paragraphs (f) through (h), it would be necessary to redesignate paragraphs (d) and (e) as paragraphs (c) and (d), respectively, and paragraphs (i) through (k) as paragraphs (e) through (g), respectively.

In § 301.89-3, paragraphs (a) through (e) provide criteria for the designation of States or areas of States as regulated areas for Karnal bunt, and paragraph (f) describes the boundaries of regulated areas. Current paragraph (e)(3) indicates that a field or area will be classified as a regulated area if it contains at least one field that was found during survey to contain spores consistent with Karnal bunt and has been determined to be associated with grain at a handling facility containing a bunted kernel. We would remove the reference to spores so that the paragraph would be consistent with the other provisions in paragraph (e), which classify fields or areas as regulated areas based on the presence of bunted kernels. Grain would be tested for spores as well as bunted kernels only if intended for use as seed.

We are also proposing to add a new paragraph to § 301.89-3 that would provide conditions under which a field known to have been infected with Karnal bunt, as well as any non-infected acreage surrounding the field, could be released from regulation. Under these proposed conditions, such a field would be eligible for release from regulation if it is no longer being used for crop production or if it has been subjected to any one of the following management practices each year for 5 consecutive years (the practice used may vary from year to year): (1) Planted with a cultivated non-host crop, (2) tilled once annually, or (3) planted with a host crop that tests negative, through the absence of bunted kernels, for Karnal bunt. These criteria are consistent with emerging technical information about Karnal bunt. We would add these proposed conditions to § 301.89-3 as paragraph (f), while the current paragraph (f), which describes the boundaries of the currently regulated areas, would be redesignated as paragraph (g). A reference in paragraph (d) to the current paragraph (f) would be amended to reflect this redesignation.

We would amend the planting restrictions contained in § 301.89-4. Under paragraph (a) of that section, all wheat seed, durum wheat seed, and triticale seed originating within a regulated area must be tested and found free from bunted wheat kernels and spores before it may be planted within a regulated area. Current paragraph (b) prohibits the planting of wheat, durum wheat, and triticale outside a regulated area if they originated inside a regulated area. We are proposing to amend § 301.89-4 by removing current paragraph (b) and by allowing wheat, durum wheat, or triticale that originates in a regulated area and that has been tested and found free of bunted kernels and spores to be used as seed in fields outside the regulated area. We believe that wheat, durum wheat, or triticale that has been tested and found free of bunted kernels and spores would not pose a risk of disease transmission, so there would be no need to prohibit its planting outside a regulated area. (As indicated, planting inside a regulated area is currently, and would continue to be, allowed.)

Section 301.89-5 provides conditions under which regulated articles may be moved from regulated areas. Paragraph (a)(4) of that section provides that straw/stalks/seed heads for decorative purposes that have been processed or manufactured prior to movement and are intended for use indoors can be moved from a regulated area without a certificate or limited permit. Because, as noted earlier, we are proposing to amend § 301.89-2(d) to exclude these articles from the list of regulated articles, we are proposing to remove § 301.89-5(a)(4).

Section 301.89-6 provides criteria for the issuance of certificates or limited permits for the movement of regulated articles outside regulated areas. Current paragraph (b) states that to be eligible for movement under a certificate, grain from a field within a regulated area must be tested prior to its movement from the field or before it is commingled with other grains and found free from bunted kernels. If bunted kernels are found, the grain will be eligible for movement only under a limited permit issued in accordance with paragraph (c). Paragraph (b) goes on to provide that no wheat, durum wheat, or triticale moved out of a regulated area under a certificate may be used for planting outside the regulated area.

We are proposing to amend § 301.89-6(b) to add references to hay cut after reaching the dough stage in the first and second sentences, in keeping with our proposal to add such hay to the list of regulated articles in § 301.89-2. The second sentence of proposed paragraph (b) would indicate that if bunted kernels are found in grain or hay that comes from a field within a regulated area, the grain or hay could only be moved out of the regulated area under a limited permit issued in accordance with paragraph (c) of § 301.89-6, and the field of production will be considered positive for Karnal bunt. As noted earlier, the presence of bunted kernels indicates infestation. We would also remove the provision in paragraph (b) prohibiting the planting of regulated articles outside regulated areas because, as discussed earlier, our proposed § 301.89-4 would allow such planting under certain conditions.

We are also proposing to amend paragraph (c) of § 301.89-6. That paragraph currently describes the criteria for issuing limited permits for the movement of regulated articles within or outside regulated areas. Under our proposal, we would no longer require limited permits for movement of regulated articles within regulated areas. This restriction, while appropriate for an eradication program, generally is not needed for a control program like the current Karnal bunt program when a commodity is moving only within a regulated area.

We would revise § 301.89-12 to add or amend provisions relating to the cleaning and, when necessary, disinfection of certain regulated articles for which treatments are prescribed in § 301.89-13 and to provide for the disposal of certain seed. Current § 301.89-12 states that mechanized harvesting equipment that has been used to harvest host crops that test positive for Karnal bunt and seed conditioning equipment that has been used in the production of any host crops must be cleaned and disinfected in accordance with § 301.89-13(a) prior to movement from a regulated area. Our revised § 301.89-12 would be considerably broader in scope.

Proposed paragraph (a) states that mechanized harvesting equipment that has been used to harvest host crops that test positive for Karnal bunt based on the presence of bunted kernels must be cleaned and, if disinfection is determined to be necessary by an inspector, disinfected in accordance with § 301.89-13 prior to movement from a regulated area. Because cleaning alone may suffice to remove bunted kernels from such equipment, we would no longer require disinfection in all cases, but inspectors would retain the authority to require disinfection when necessary. Proposed paragraph (a) also accords with our proposed new definition of infestation (infected) in § 301.89-1 by indicating that the determination of host-crop infestation is based on the presence of bunted kernels.

Seed conditioning equipment would be provided for separately in proposed paragraph (b), which states that seed conditioning equipment that was used in the conditioning of seed containing spores of Tilletia indica must be cleaned and disinfected in accordance with § 301.89-13 prior to handling seed that has tested negative for spores or to being moved from a regulated area. We would retain the disinfection requirement for seed conditioning equipment because disinfection is thought to be necessary to deactivate spores.

A new paragraph (c) would state that all grain storage facilities, including on-farm storage, used to store seed that has tested bunted kernel or spore positive or grain that has tested bunted-kernel positive must be cleaned and, if disinfection is determined to be necessary by an inspector, disinfected in accordance with § 301.89-13 if the facilities will be used to store grain or seed in the future. As is the case with mechanized harvesting equipment, cleaning alone may sometimes suffice to decontaminate grain storage facilities. The decision to require disinfection as well would be left to the inspector.

A new paragraph (d) would provide exceptions to the cleaning and disinfection requirements for certain conveyances used to move bunted-kernel-positive host crops, including trucks, railroad cars, and other containers, if the conveyances are self-cleaning. In order to be considered self-cleaning, the conveyances would have to have sloping metal sides leading directly to a bottom door or slide chute.

Finally, a new paragraph (e) would state that spore-positive wheat, durum wheat, or triticale seed that has been treated with any chemical that renders it unfit for human or animal consumption would have to be disposed of by means of burial under a minimum of 24 inches of soil in a non-agricultural area that will not be cultivated or in an approved landfill. Spore-positive seed cannot be used for planting, and fungicide or other chemical treatments not approved for use in feed renders the seed unfit for use as feed. Thus, disposal by burial is necessary to prevent the seed from being used for any purpose.

Current paragraph (a) of § 301.89-13 describes approved cleaning and disinfection techniques for conveyances, mechanized harvesting equipment, seed conditioning equipment, grain elevators, and structures used for storing and handling wheat, durum wheat, or triticale for which cleaning and disinfection are required. We would amend the paragraph to coincide with the changes to the cleaning and disinfection requirements that we are proposing in § 301.89-12. The proposed paragraph would treat cleaning and disinfection separately, stating that all conveyances, mechanized harvesting equipment, seed conditioning equipment, grain elevators, and structures used for storing and handling wheat, durum wheat, or triticale required to be cleaned under the regulations must be cleaned by removing all soil and plant debris and that if disinfection is required in addition to cleaning, the articles must be disinfected by one of the methods specified in § 301.89-13, unless a particular treatment is designated by an inspector. This paragraph would become the introductory text of our proposed § 301.89-13.

The disinfection method specified in current paragraph (a)(1) involves wetting all surfaces of the regulated articles to the point of runoff with a solution of 1.5 percent sodium hypochlorite— e.g. , with a solution of sodium hypochlorite mixed with water applied at the rate of 1 gallon of household chlorine bleach (5.2 percent sodium hypochlorite) mixed with 2.5 gallons of water—and letting stand for 15 minutes. We would amend this paragraph to indicate that the bleach used must be Ultra Clorox brand regular bleach (6 percent sodium hypochlorite) or CPPC Ultra Bleach 2 (6.15 percent sodium hypochlorite). These are the only two bleach products that are approved for such use by the Environmental Protection Agency.

The minimum temperature for the hot water and detergent treatment, which is specified in current paragraph (a)(3) as 180 °F, would be changed to 170 °F, which has been determined to be the temperature needed to inactivate Karnal bunt. A temperature of 170 °F is also specified for the treatment described in current paragraph (a)(2), which would remain unchanged.

The Federal quarantine exemption permitting the use of methyl bromide for treatment of Karnal bunt has been withdrawn. Therefore, we are proposing to remove current paragraph (a)(4), which specifies fumigation with methyl bromide as a disinfection method for the conveyances, mechanized harvesting equipment, seed conditioning equipment, grain elevators, and structures covered under this section, and paragraph (b), which specifies fumigation with methyl bromide as a treatment for soil.

Current paragraph (c), which specifies a treatment for millfeed that has resulted from the milling of Karnal bunt-positive wheat, would be removed. Millfeed, like other milling products and byproducts, would no longer be considered a regulated article under this proposed rule.

Finally, we would remove the current paragraph (e), which contains treatment requirements for seed used for germ plasm or research purposes. Because we have eliminated the requirement for fungicide treatment of seed as of May 1, 2002, and are proposing, in § 301.89-4, to allow the movement of bunted kernel- and spore-negative seed from regulated areas, these treatment requirements would no longer apply.

For greater clarity, we would redesignate the bleach treatment in current paragraph (a)(1) as paragraph (a), the steam treatment in current paragraph (a)(2) as paragraph (b), and the hot water and detergent treatment in current paragraph (a)(3) as paragraph (c).

Section 301.89-14, which deals with compensation for the 1995-1996 crop season, is outdated and, therefore, would be removed and reserved.

In addition to the changes described above, we propose to make some nonsubstantive editorial changes to the regulations. These changes would include the updating of the addresses given in some footnotes.

The intent of this proposed rule is to improve the clarity, transparency, and effectiveness of our Karnal bunt regulations in order to help to prevent the spread of Karnal bunt within the United States.

This proposed rule has been reviewed under Executive Order 12866. The rule has been determined to be not significant for the purposes of Executive Order 12866 and, therefore, has not been reviewed by the Office of Management and Budget.

This proposed rule is intended to improve the clarity, transparency, and effectiveness of our Karnal bunt regulations. This proposal is the result of a review of the regulations.

Of the proposed substantive changes to the regulations, four stand out as having the potential to have the most economic impact: (1) Adding provisions for removing fields or areas from the list of regulated areas, (2) modifying seed planting restrictions, (3) removing animal manure from the list of regulated articles, and (4) modifying cleaning and disinfecting requirements for seed conditioning equipment. These four changes—all of which would have a favorable impact on any affected entities—are discussed individually in the paragraphs that follow.

The current regulations do not contain criteria for the removal of fields or areas from the list of regulated areas, although we have removed some fields or areas from regulation in the past on a case-by-case basis. This proposed rule would establish uniform criteria for the removal of fields or areas from regulation.

Under the current regulations, even wheat testing Karnal bunt-negative is not eligible for a phytosanitary certificate with an additional declaration if it was grown in fields that previously tested Karnal bunt-positive—a situation that adversely impacts the wheat's marketability and value. 1 By allowing wheat from those fields to become eligible for such a certificate (if certain conditions are met), the proposed rule would yield potential—and in some cases immediate—economic benefits for affected producers.

In San Saba and McCulloch Counties, TX, there are approximately 28 producers with fields that previously tested positive for Karnal bunt—including about 8 that would be immediately eligible for deregulation since they have already satisfied the proposed conditions for release. It is estimated that these 28 producers would have received, collectively, at least about $295,000 more for their wheat this past crop season if it had been eligible for export—an average of about $10,500 per producer. These dollar estimates are based on a price differential of at least $1.80 per bushel between uncertified wheat sold for animal feed and certified wheat in Texas sold for the export market. 2

This proposed rule also has the potential to enable the approximately 25 producers in 4 north Texas counties (Young, Throckmorton, Archer, and Baylor) with fields in a regulated area to recover lost revenues. Based on their estimated production capacity of about 81,000 bushels of wheat per crop season, the proposed rule, by allowing the 25 growers to obtain the phytosanitary certificate with the additional declaration needed to market their wheat for export, has the potential to enable them to recover $145,000 or more in annual revenues, based on current prices. 3

Growers in Arizona and California would also benefit. The proposed rule would enable the approximately 67 producers in Arizona with fields that previously tested Karnal bunt-positive, to recover, collectively, revenues estimated at about $1,433,000 per year. The four producers in California with fields that previously tested positive would stand to recover, collectively, about $210,000 per year in lost revenues. 4

Under the current regulations, wheat seed grown in regulated areas cannot be planted outside those areas. Under the proposed rule, such seed would be eligible for planting outside the regulated areas if it were tested and found free of both bunted kernels and spores.

Seed producers in regulated areas would benefit because they would be able to sell their seed outside those areas, recapturing markets that they had previously lost. Furthermore, by removing a disincentive for certified seed producers to operate in regulated areas, the proposed rule also has the potential to benefit owners of seed conditioning equipment who operate in those areas.

Even producers who do not sell seed outside the regulated area stand to benefit. In Texas, for example, it is not uncommon for producers to hold back a quantity of grain for use as seed in the next planting season. With the proposed changes in effect, producers in regulated areas would be able to use their grain as seed in fields that they operate outside the regulated area—instead of having to purchase higher-priced commercial seed for use in those fields. In San Saba and McCulloch Counties, TX, it is estimated that 14 producers would have saved a total of about $60,000 this past crop season if they had been able to use their grain as seed in fields that they operated outside the regulated area. 5 It is estimated that about half of the approximately 450 wheat producers in the regulated areas of northern Texas would benefit to at least some extent from this aspect of the proposed rule.

Currently, manure from animals that have fed on untreated or raw wheat is a regulated article under § 301.89-2. Although not set forth in the regulations, it has been our practice to require a 5-day “clean-out” period for livestock that have been fed untreated or raw wheat before the animals can be moved from the regulated area. During the clean-out period, livestock can be fed only Karnal bunt-negative wheat or a non-host crop. The proposal would remove animal manure from the list of regulated articles in § 301.89-2, effectively eliminating the clean-out requirement.

This aspect of the proposed rule would benefit livestock producers, since the clean-out requirement may compel them to switch their animals to an alternative, but less desirable, feed crop during the 5-day period. A change in feeding rations during the clean-out period can adversely impact weight gain, which, in turn, can adversely affect animal prices. In northern Texas, where this proposed rule has the potential to have the most impact, it has been estimated that cattle can lose up to 20 percent of their weight in the first week following a feed-crop change. For a single head of cattle weighing 700 lbs. before clean out, therefore, the clean-out requirement can translate into a loss of up to $109 (based on the current price of about $0.78/lb).

Livestock producers would further benefit because clean-out can also involve gathering the animals and transporting them to a new location, such as a new pasture, during the 5-day period. The time and expense associated with gathering and transporting cattle to a new location for clean-out would vary among individual livestock producers, depending on such factors as the distance to the new location, the cost for the use of the new location, and the equipment needed for transport to the new location.

To date in northern Texas, only a few cattle producers have had to clean out their animals, since most moved their animals before the wheat reached the soft dough stage. However, there are at least 500 cattle producers in northern Texas who would potentially benefit from this aspect of the proposed rule, including some who move up to about 25,000 head annually. 6

The Plant Protection Act (7 U.S.C. 7701-7772) and the Animal Health Protection Act (7 U.S.C. 8301-8317) assign to the Federal Government responsibility to prevent the introduction, spread, and establishment of plant pests, noxious weeds, and pests and diseases of livestock in the United States. 1 These Acts authorize the Secretary of Agriculture (Secretary) to regulate animals and plants, their products, and other articles in foreign and interstate commerce; to hold, treat, and destroy such articles; and to cooperate with various entities, including State and local governments and industry groups (cooperators), to carry out programs to detect, control, and eradicate pests and diseases. These Acts also provide the Secretary additional regulatory and funding authority, including the payment of compensation, in cases of pest and disease emergencies.

The occurrence of pests or diseases that are either foreign to or not widely prevalent in the United States poses a serious threat to the health and economic viability of U.S. animal and plant resources. These outbreaks are generally easier and less costly to control and eradicate if action is taken immediately following detection. The Animal and Plant Health Inspection Service (APHIS) of the U.S. Department of Agriculture (USDA) provides national leadership in implementing the Secretary's authorities, including emergency authorities, to detect, control, and eradicate invasive pests and diseases. APHIS frequently conducts these emergency programs in conjunction with affected States and other cooperators.

The cost of activities carried out under emergency program authorities to detect, control, and eradicate pests and diseases generally has been shared by APHIS and the State(s). These cost-sharing arrangements may also include industries, organizations, and groups that benefit from or are affected by these animal and plant protection activities. The allocation of emergency program costs among APHIS and other cooperators has varied depending upon the particular pest or disease, as well as other factors, such as the location of the outbreak or occurrence. For example, cooperative programs for eradicating fruit flies have historically operated on an equal cost-sharing basis with the affected States. In the recent outbreak of plum pox virus, a new pest in the United States, the State of Pennsylvania assumed a significant portion of the financial obligation for the operational program within the State, while APHIS contributed to the financing of activities to guard against the spread of the pest to other stone fruit producing States. However, in the case of Asian longhorned beetle (ALB), APHIS has assumed most of the cost of the operational program.

A close examination of these programs reveals that cost allocations have been implicitly based on at least three factors: The size of the outbreak area, the area at risk beyond the initial outbreak, and the nature of the pest. APHIS' actions to eradicate the plum pox virus and ALB outbreaks were based on the technical feasibility in carrying out each action (presented by the small size of the initial outbreak areas) and the risk of spread to nonaffected areas in the absence of early and rapid response by the Federal Government. The Federal share of costs for both pest outbreaks has been greater than the cooperators' share as the resources at risk in the nonaffected areas were much larger than those in the affected areas. The nature of the pest is an additional factor taken into consideration in determining the Federal cost share level in an emergency program. As a proportion of the total cost, the Federal share of the plum pox control program is smaller than the Federal share of the ALB emergency program. This reflects the greater responsibility of the Federal Government in safeguarding public resources as the pest in the ALB case largely affects non-commercial, urban trees and forests.

In recent years, the number of infestations, as well as the average and total cost of eradication programs to the Federal Government have increased significantly, as the following Table 1 illustrates:

We believe that a better defined, more consistent approach to cost sharing and the allocation of financial responsibility among the Federal Government, State(s), and other cooperators would improve planning and funding decisions in emergency programs. In response to this need, and as explained in greater detail below, we are proposing that predetermined cost-sharing percentages apply to certain emergency program activities.

There are a number of activities conducted as part of an emergency program, beginning with the detection of the pest or disease, that we believe should be subject to a predetermined cost-sharing arrangement. These would include such activities as:

• Delimiting surveys and diagnostics.

• Control or eradication operations ( e.g. , chemical, biological, and/or mechanical treatment regimens, including animal, plant, and product destruction and/or disposal).

• Research and methods development specific to outbreaks, if such activities are anticipated to rapidly contribute to the success of the control or eradication operations.

• Public information activities specific to outbreaks and designed to contribute to the success of the control or eradication operations.

• The payment of compensation.

Allocating the financial responsibility among the Federal government, State(s), and other cooperators would depend on the nature of the pest or disease, the extent of areas affected by the pest or disease versus currently nonaffected, but potentially threatened areas, the amount of time that has elapsed since the commencement of the emergency program, and the ability of States and local cooperators to conduct and/or fund the activities, as discussed later.

We believe that the costs for enforcement of regulations on interstate and intrastate movements in conjunction with specific emergency programs should be allocated directly to APHIS and the States as appropriate. We recognize that in practice, however, these activities may be indistinguishable from one another, and that these activities could be subject to a predetermined cost-sharing arrangement on a case-by-case basis. We also recognize that compensation payments are sometimes used in conjunction with other emergency program activities ( e.g. , to encourage expedited reporting of an infestation, thereby contributing to control or eradication of the pest or disease). As described in the following section, we invite comments on the inclusion of the cost of these payments in a predetermined cost-sharing arrangement.

In some emergency programs, compensation payments are made to producers and other persons for the destruction of animals and materials affected by pest or disease, or for related cleaning and disinfection costs. Since the Federal Government and States often share the payment of these costs, our proposal to establish predetermined cost-sharing arrangements for emergency programs would also apply to compensation payments to producers and other affected persons. If the emergency program includes the payment of compensation, then the cost-sharing percentage would be applied either to the emergency program costs in total (including payments of compensation) or to the compensation and non-compensation components separately, at the discretion of the Secretary.

By applying the proposed cost-sharing criteria to the payment of compensation, this proposed rule, if implemented, could affect other APHIS regulations that cover the payment of compensation and other emergency program costs for specific animal and plant pests and diseases. The rule portion of this document does not specify what those potential changes would be. However, the final rule, if implemented, would include any necessary changes to other APHIS regulations.

We have identified certain factors that we believe should influence the relative levels of Federal and cooperator support in emergency program activities covered by our proposal.

Of particular concern are highly contagious, virulent diseases, such as foot-and-mouth disease, and other pests or diseases that can spread rapidly, and quickly affect production, markets, and/or the environment over a large area. Also of concern are pests or diseases that, while not contagious (or as contagious), affect human health with resulting effects on the marketing of agricultural products. Full, immediate, and sustained application of Federal resources generally is required to eliminate these pests and diseases or minimize their effects. Our proposed rule, as discussed below, would refer to these pests and diseases as “priority pests and diseases.” We believe that the following pests and diseases would likely fall into this category:

• Foot-and-mouth disease

• Hog cholera (classical swine fever)

• Highly pathogenic avian influenza

• Exotic Newcastle disease

• Rinderpest

• African swine fever

• Contagious bovine pleuropneumonia

• Lumpy skin disease

• Bovine spongiform encephalopathy

• Downy mildew of corn

• Wheat rust

Pest and disease outbreaks usually (if inspection, monitoring, and surveillance programs are effective) begin at only one or a few loci. The Federal government has a statutory responsibility under the Plant Protection Act and the Animal Health Protection Act to protect susceptible animal, plant, and environmental resources that are free of the pest or disease by preventing its interstate spread and taking actions to eliminate the outbreak. When a pest or disease outbreak occurs, program specialists conduct assessments of its potential rate of spread and consequences. We believe that the Federal share of emergency program costs should be higher in situations where the areas or resources affected by the pest or disease occurrence are small, but the nonaffected areas or resources at risk are high. While there are innumerable such scenarios, we believe that the nonaffected areas or resources at risk in these situations should be at least 10 times greater than the affected areas or resources. Nonaffected areas or resources at risk would include those areas where the pest or disease could spread within 1 year in the absence of any action to control or eradicate the pest or disease. For larger outbreaks in which many States are affected (particularly States with commercial interests) and participating in the emergency program, the Federal share of program costs should be lower.

Long-standing relationships between APHIS and State and industry cooperators usually enable an effective programmatic response to serious outbreaks. However, cooperator contributions are frequently in-kind or intangible, especially in the early stages of a program. States or other cooperators may lack financial resources of the magnitude required, or they may lack the capability to quickly access those resources.

In situations where the success of detection, control, or eradication operations is especially time sensitive and program objectives may be achieved in a relatively short period of time, leading to lower total program costs, we believe that the Federal government should be prepared to provide more financial support early in the program to ensure a timely and cost-effective response to a pest or disease occurrence. We also believe that even in emergency programs of longer anticipated duration, for reasons stated above, our cooperators may not be able to provide their full share during the program's early stages. In these situations, we would expect that cooperator contributions would increase after the emergency program has been in operation for several years.

As we have said, we believe that the Federal government has a responsibility to take leadership in rapidly responding to a pest or disease occurrence. We are committed to carrying out that responsibility. We also believe that States and other cooperators have and should continue to share in that responsibility. In that regard, it is our desire that our cooperators continue to develop the capacity, including funding, to be full participants in emergency programs.

We intend to continue to work with our cooperators to develop emergency response capabilities, including commitment and capacity for cost sharing. In recent years, APHIS has worked with States to develop Standards for State Animal Health Emergency Management Systems. These standards include a standard addressing the adequacy of funding mechanisms and the sufficiency of funding to meet animal health emergency needs. APHIS and the States should work toward achieving performance goals for the development of the standards and tie financial support of State involvement in a given program activity to meeting these goals. We intend to carry out similar efforts to help strengthen Federal and State plant health emergency management systems.

We believe that, as a starting point, the Federal share of covered emergency program costs should be up to 50 percent. We believe that the following factors could cause an increase in this percentage:

• If higher Federal involvement in the early stages of an emergency program would lead to lower total program costs.

• If the areas or value of resources at risk ( e.g. , nonaffected areas) are very large compared to the affected area.

• If a State or other cooperator lacks financial resources.

• If the emergency involves a priority pest or disease.

We also believe that if the pest or disease directly affects one or more State commercial interests within the affected area, then the Federal share would be slightly lower.

We propose that Federal funding would continue for no more than 10 years for new emergency programs or 5 years for programs already underway, unless the Secretary determines that Federal payments for a longer period are necessary. We would also provide that if the same pest or disease occurs in a location that is geographically separate from the original outbreak, or reoccurs in the area of the original outbreak following a prescribed time period after eradication is completed, as determined by a USDA scientific assessment, then it could be considered a new outbreak and subject to new cost-sharing and program duration requirements.

Based on the general principles just discussed, we are proposing regulations that would establish criteria to determine the Federal share of emergency program costs relative to States and other cooperators. The regulations would be in two new parts in the Code of Federal Regulations (CFR), one part in the plant-related provisions of title 7, chapter III, and one part in the animal-related provisions of title 9, chapter I, subchapter B.

The two new parts, “Cost Sharing for Plant Health Emergency Programs” to appear at 7 CFR part 373, and “Cost Sharing for Animal Health Emergency Programs” to appear at 9 CFR part 60, would be constructed similarly: Each would contain a section that provides definitions for specific terms used in the part; a section that authorizes the Administrator of APHIS, USDA (Administrator) to assign “priority” status to certain pests and diseases; a section that provides criteria for determining the Federal share of emergency program costs; a section on funding shortfalls and other funding adjustments among cooperating parties; a section on activities not subject to cost-sharing; and a section that clarifies the authority of the Secretary to implement agreements with respect to funding responsibilities of APHIS and other cooperators in carrying out an emergency program. These two parts are almost identical in structure and content except that 7 CFR part 373 would cover emergency program activities carried out under the authority of the Plant Protection Act, and 9 CFR part 60 would cover emergency program activities carried out under the authority of the Animal Health Protection Act.

Both 7 CFR part 373 and 9 CFR part 60 would begin with a definition section, § 373.1 and § 60.1, respectively. The terms defined in each section would be the same: Administrator, commencement of the emergency program, cooperator(s), emergency program, emergency program costs , Federal base percentage , OMB , Secretary , and State .

Proposed §§ 373.1 and 60.1 would define Administrator as the Administrator of the Animal and Plant Health Inspection Service, United States Department of Agriculture, or any person authorized to act for the Administrator.

In proposed §§ 373.1 and 60.1, the term commencement of the emergency program would refer to the date that the Secretary determines an emergency exists or the date that emergency funding is approved, whichever comes first.

In proposed § 373.1, a cooperator(s) would refer to a State or political subdivision of a State, a domestic organization or association, or other person who participates in an emergency program with the Federal government. To parallel the statutory language found in the Animal Health Protection Act, proposed § 60.1 would vary slightly from § 373.1 by also referring to Indian tribes.

In proposed § 373.1, an emergency program would refer to those activities carried out under the authority of the Plant Protection Act in connection with an emergency, including delimiting surveys; testing and related diagnostic activities; regulatory enforcement; chemical, biological, mechanical, and other detection, control, and eradication activities, including destruction and disposal of plants, plant products, and other articles; the payment of compensation; and research, methods development, and public information activities carried out specifically in connection with an emergency. The proposed definition of emergency program in § 60.1 would parallel the proposed definition of emergency program in § 373.1 except that § 60.1 would refer to the authority of the Animal Health Protection Act instead of the Plant Protection Act.

Proposed §§ 373.1 and 60.1 would define emergency program costs as financial, personnel, and other resources necessary to carry out an emergency program, without regard to the entity or individual that provides the resources or the manner in which they are provided.

Proposed §§ 373.1 would define Federal base percentage as the initial percentage share of emergency program costs the Secretary is authorized to pay in connection with an emergency involving a plant pest or noxious weed, while proposed § 60.1 would define the same term as the initial percentage share of emergency program costs the Secretary is authorized to pay in connection with an emergency involving a pest or disease of livestock.

In proposed §§ 373.1 and 60.1, OMB would refer to the Office of Management and Budget of the United States Government.

Proposed §§ 373.1 and 60.1 would define State as each of the States of the United States, the District of Columbia, Puerto Rico, the Northern Mariana Islands, Guam, the Virgin Islands of the United States, or any other territory or possession of the United States.

Finally, proposed §§ 373.1 and 60.1 would define Secretary as the Secretary of Agriculture of the United States or any officer or employee of the United States Department of Agriculture authorized to act for the Secretary.

In proposed § 373.2, the Administrator would be authorized to designate certain plant pests and noxious weeds as priority plant pests and noxious weeds. In making such a determination, the Administrator would consider the degree of contagion and the human health and market effects of the plant pest or noxious weed and other relevant factors. The Administrator may notify the public from time to time, through publication of a list in the Federal Register , of the priority plant pests and noxious weeds. Proposed § 60.2 would contain a similar provision providing the Administrator with the authority to designate certain pests and diseases of livestock as priority pests and diseases of livestock. Assuming the final rule is implemented, we intend to publish a notice that would list those pests, noxious weeds, and diseases that we consider to be priority pests and diseases at the time of publication of the final rule.

Proposed §§ 373.3 and 60.3 would set forth criteria and cost-sharing percentages that would be used to determine the Federal share of emergency program costs. Both sections are almost identical in construction, other than referring to plant pests or noxious weeds (in the case of proposed § 373.3) or pests or diseases of livestock (in the case of proposed § 60.3).

Proposed § 373.3(a) would provide that, in connection with an emergency involving a plant pest or noxious weed and upon agreement of the States or political subdivisions of States, domestic organizations or associations, or other persons to participate in an emergency program, the Secretary would be authorized to pay, subject to the availability of funding, emergency program costs as provided under proposed § 373.3(b). Paragraph (a) of § 373.3 would also provide that such payments could be made for no more than 10 years (or, for emergency programs currently underway, for no more than 5 years after the effective date of the final rule), unless the Secretary determines that payments for a longer period are necessary. However, if the same pest or disease occurs in a location that is geographically separate from the original outbreak, or reoccurs in the area of the original outbreak following a prescribed time period after eradication is completed, as determined by a USDA scientific assessment, then it could be considered a new outbreak and subject to new cost-sharing and program duration requirements. Proposed § 60.3(a) would provide the same requirements. However, in order to parallel the statutory language found in the Animal Health Protection Act, § 60.3(a) would vary slightly from § 373.3(a) by also referring to Indian tribes among the list of cooperators.

Proposed §§ 373.3(b) and 60.3(b) set forth the basic criteria for determining the Federal share of costs in an emergency program. In connection with an emergency involving a plant pest or noxious weed (in the case of proposed 7 CFR part 373), or a pest or disease of livestock (in the case of proposed 9 CFR part 60), the Secretary could make payments of Federal funds of up to 50 percent of emergency program costs. We would refer to this percentage figure as the “Federal base percentage.” Further, the Secretary, in consultation with the Office of Management and Budget (OMB), could increase or decrease the Federal share of emergency program costs relative to the Federal base percentage as follows:

• Timing of program and its effect on total program costs. If the Secretary determines that a higher level of Federal involvement in the early stages of an emergency program would lead to lower total emergency program costs, then the Secretary, in consultation with OMB, could increase the Federal share of emergency program costs by up to 30 percent above the Federal base percentage during the first 8 months after commencement of the emergency program, and could increase the Federal share of emergency program costs by up to 15 percent above the Federal base percentage from the ninth month through the 24th month after commencement of the emergency program.

• The extent of affected versus nonaffected areas. If the Secretary determines that the area or value of resources at risk in the United States is at least 10 times greater than the area or value of resources covered by the emergency program, then the Secretary, in consultation with OMB, could increase the Federal share of emergency program costs by up to 20 percent above the Federal base percentage. The area or value of resources at risk in the United States would include those areas where the pest or disease could spread within 1 year in the absence of any action to control or eradicate the pest or disease. We invite comment on the criteria that would be used in making such a determination.

• Lack of financial resources. If the Secretary determines that a State or other cooperator lacks the financial resources required to cover its share of emergency program costs, or lacks the capability to quickly access those resources, then the Secretary, in consultation with OMB, could increase the Federal share of emergency program costs by up to 10 percent above the Federal base percentage during the first 24 months after commencement of the emergency program. In order to qualify for this additional Federal funding, the cooperator would have to demonstrate either that a funding body, such as the State legislature, was unable to meet in time to provide the necessary resources, or that the affected State or local area was experiencing a significant and unexpected reduction in resources. We invite comment on the proposed criteria for determining a cooperator's lack of financial resources, as well as the need for and effect of limiting this higher Federal share in the case of a priority pest or disease to the first 24 months of the emergency program.

• Commercial interest. If the Secretary determines that the pest or disease directly affects one or more State commercial interests within the area covered by the emergency program, then the Secretary, in consultation with OMB, could reduce the Federal share of emergency program costs by up to 3 percent under the Federal base percentage.

• Priority pests and diseases. If the emergency involves a priority plant pest or noxious weed (in the case of proposed 7 CFR part 373) or a priority pest or disease of livestock (in the case of proposed 9 CFR part 60), then the Secretary, in consultation with OMB, could pay up to 100 percent of the total emergency program costs authorized under proposed part 373 or proposed part 60 during the first 24 months after commencement of the emergency program. We invite comment on the need for and effect of limiting this higher Federal share in the case of a priority pest or disease to the first 24 months of the emergency program.

• Certain emergency program activities. We believe that particular emergency situations may necessitate deviation from the cost-sharing percentages just discussed, either for an entire emergency program or for particular activities of an emergency program. Therefore, we are proposing that the Secretary may determine, in consultation with OMB and the cooperating entities, that an emergency program or certain activities within that emergency program be excluded from the percentage calculations provided under proposed §§ 373.3(b) and 60.3(b) or, alternatively, be subject to a different Federal share of emergency program costs. We expect that such authority would be exercised infrequently.

• Percentages are cumulative. Any applicable percentage changes to the Federal share of emergency program costs, as just discussed, would be cumulative, but could not exceed 100 percent of total emergency program costs authorized under proposed 7 CFR part 373 or proposed 9 CFR part 60.

• Payment of compensation. If the emergency program includes the payment of compensation, then the cost-sharing percentage would be applied either to the emergency program costs in total (including payments of compensation) or to the compensation and non-compensation components separately, at the discretion of the Secretary.

The funding percentages provided in proposed §§ 373.3 and 60.3 would serve as guidelines for the Federal government, States, and other cooperator participants to facilitate long-term cooperator resource planning and funding decisions, and may vary slightly in actual application. The Federal share percentages would not be dependent on the source of funds ( e.g. , transfers from the Commodity Credit Corporation, annual appropriations, user fees). Traditionally, however, the source of Federal funds in the event of an emergency is the Commodity Credit Corporation.

Proposed §§ 373.3(c) and 60.3(c) would provide that the Federal share of emergency program costs, as determined under proposed §§ 373.3(b) and 60.3(b), would be subject to periodic review by the Secretary, in consultation with OMB, as conditions warrant.

We recognize the uncertainties inherent in formulating the specific percentages and thresholds in our proposed cost-sharing arrangements, and we invite comment and suggestions on alternatives to those proposed here. We also recognize that implementing predetermined cost-sharing arrangements such as we are proposing is a complex undertaking, involving many entities and a variety of legal authorities and organizational capabilities. We solicit your comments on the length of time necessary to implement these arrangements. We anticipate that a minimum of 60 days would be necessary to implement these arrangements once the applicable requirements are published as a final rule.

Proposed §§ 373.4 and 60.4 would provide that the cost allocation assigned to the Federal government and each cooperator would be based on cumulative funding over the duration of the emergency program. Should the Federal government or any cooperator fail to provide adequate program funding to meet their funding obligation for a given year, then such funding shortfall would have to be made up prior to the end of the emergency program. Similarly, should the shortfall in funding by the Federal government or any cooperator require other parties to provide funding that exceeds their obligation in any given year, then those parties making excess payments in one year would have the latitude to reduce their payments in subsequent years in an amount that equals the amount of excess payment.

Proposed §§ 373.4 and 60.4 would also provide that, to the extent that actual funding levels change, the difference (plus or minus) would be applied to the calculation of cumulative funding as soon as practicable. In addition, if approved by APHIS in consultation with cooperators, any in-kind payment ( i.e. , in the form of services, equipment, etc.) provided by a cooperator could be counted towards their funding obligation if the in-kind payment represents an expense that is not a normal program cost to the cooperator and directly affects emergency program objectives.

Under proposed §§ 373.5 and 60.5, certain activities conducted by APHIS and other Federal entities that relate to the control and eradication of pests and diseases would not be subject to the cost-sharing requirements in this proposal. Specifically, the Federal government would provide full funding and cost-sharing criteria would not apply to control and eradication activities that do not directly affect the targeted area, pest, or disease that is the focus of the emergency program. For example, this would include national surveys and diagnostics; research not specific to the outbreak; public awareness not related to the outbreak; control and eradication programs in other countries; preclearance of passengers, cargo and means of conveyance; and port-of-entry inspection of passengers, cargo and means of conveyance.

As discussed previously under proposed §§ 373.3(a) and 60.3(a), the payment of Federal funds by the Secretary for emergency program costs would depend, in part, upon the “agreement” of the States or other cooperators to participate in the emergency program.

Proposed §§ 373.6 and 60.6 would provide that the Secretary may, as a condition of providing the Federal funding pursuant to proposed § 373.3 (in the case of emergencies involving plant pests and noxious weeds) or § 60.3 (in the case of emergencies involving pests and diseases of livestock), enter into agreements with cooperating entities. Such agreements would cover the particular responsibilities of the cooperating parties, including funding obligations, in conducting the emergency program.

This proposed rule has been reviewed under Executive Order 12866. The rule has been determined to be significant for purposes of Executive Order 12866 and, therefore, has been reviewed by OMB.

Below is an economic analysis for the proposed rule that would establish criteria for determining the share of financial responsibility of the Federal government, States, and other cooperators should an outbreak of an animal or plant pest or disease occur in the United States. The economic analysis provides a cost-benefit analysis as required by Executive Order 12866, as well as an analysis of the potential economic effects of this proposed rule on small entities, as required by the Regulatory Flexibility Act.

Under the Plant Protection Act (7 U.S.C. 7701-7772) and the Animal Health Protection Act (7 U.S.C. 8301-8317), the Secretary of Agriculture is authorized to regulate plants and animals, their products, and other articles in foreign and interstate commerce; to hold, treat, and destroy such articles; and to cooperate with various entities, including State and local governments and industry groups (cooperators), to carry out programs to detect, control, and eradicate plant pests, noxious weeds, and pests and diseases of livestock. These Acts also provide the Secretary additional regulatory and funding authority, including the payment of compensation, in cases of pest and disease emergencies.

The Federal Government, primarily through APHIS, has the statutory responsibility to prevent the introduction, spread and establishment of pests or diseases of plants and animals in the United States. APHIS frequently conducts prevention, detection, control and eradication programs in conjunction with State counterparts. In a cooperative arrangement, the program funding is generally shared by APHIS and the State, where each party is financially responsible for a portion of the program costs. The funding allocations in these arrangements have varied depending upon the specific pest or disease and its location. There appears to be a lack of consistent basis for determining how the financial responsibility between the Federal Government and its cooperator is allocated. This has raised questions regarding the appropriate Federal role in light of the large increase in emergency funding transfers by APHIS over the past few years.

This proposed rule sets forth specific cost-sharing percentages to apply to certain emergency program activities, including the payment of compensation. Greater certainty about cost-sharing would facilitate improved planning and funding decisions by the Federal government and its cooperators regarding future plant and animal pest and disease emergency programs.

The public good aspect of pest and disease management suggests that prevention, detection, control, and eradication programs are most effectively delivered under governmental guidance. These governmental actions confer direct benefits to affected entities and the public at large. Without such actions by the Federal Government, States, and other cooperators, it is unlikely that affected individuals could or would take sufficient actions to prevent the establishment and spread of exotic pests and diseases of plants and livestock.

Some animal pests and diseases threaten not only livestock but also wildlife populations that inhabit public land. Certain animal pests and diseases may also be transmitted to humans. Because of the interstate movement of livestock and poultry through marketing and distribution channels, animal pests and diseases are further able to spread rapidly beyond a localized area. Rapid response by the Federal Government, States, and other cooperators at the first sign of a pest or disease outbreak is critical to prevent widespread losses. Greater funding certainty would be one way to enhance the timeliness and effectiveness of responses to pest or disease outbreaks.

APHIS, from its inception over 30 years ago, has participated in a variety of emergency programs with cooperators to detect, control, and eradicate pests and diseases of plants and animals. In the early 1990s, emergency programs involving new pest and disease outbreaks were largely associated with fruit fly incursions. When a pest was introduced into the United States on several occasions in the same geographical locations, such as Mediterranean fruit fly (Medfly) in Florida and California, Federal and State roles became more defined with each reintroduction. Memoranda-of-understanding as well as work plans and cost-sharing formulas were agreed upon on an annual basis. However, since the mid-1990's, there has been a dramatic increase in the number of new pest and disease occurrences beginning with the discovery of Karnal bunt in 1995. The cost to the Federal government has correspondingly risen as it responds to these emergency outbreaks. Given today's highly mobile environment and global agricultural economy, the threat to U.S. agricultural and nonagricultural resources from new pest and disease incursions is ever present. The need for a more consistent and predictable cost allocation approach among program participants is warranted in a world of constrained resources.

Recent occurrences of the highly contagious foot-and-mouth (FMD) disease in the United Kingdom and other countries demonstrate the need for advanced planning to minimize delays in eradicating an outbreak of serious livestock diseases such as FMD. The specific cost-sharing percentages between the Federal government and its cooperators as set forth in this proposed rule would eliminate uncertainty in program funding allocations, which could delay eradication activities. The fixed-formula approach to cost-sharing as set forth in this proposed rule would make resource planning decisions simpler for all parties and lessen the chances for delays in eradication.

The intent of the proposed rule is to lessen funding uncertainties in conducting emergency programs. An examination of the funding of past emergency programs reveals that cost allocations have often been based implicitly on three factors: The size of the outbreak, the area at risk beyond the initial outbreak, and the commercial interest at stake. The specific percentages for cost sharing as provided for in this proposed rule incorporate these implicit elements. Particular pest or disease outbreaks may necessitate deviations from these percentages. As compared to the current flexible cost arrangement, some redistribution of costs among cooperators may occur due to the greater specificity in cost-sharing percentages. The most significant change in this proposed rule would be the provision that stipulates that the amount of Federal contribution should be based on a specified duration of an infestation or disease occurrence. The Federal government would be less obligated financially for emergency programs that are extended in time.

This proposed rule specifies a base Federal share of up to 50 percent ( i.e. , Federal base percentage). If the funding is for an emergency situation which has occurred within the previous 8 months, an additional allotment of up to 30 percent could be added to the Federal base percentage. For emergency programs that are 9 months to 2 years in duration, the Federal contribution could be increased by up to 15 percent above the Federal base percentage. A deduction of up to 3 percent could be applied in situations where the pest or disease affects one or more commercial interests within an area covered by the emergency program.

Pest and disease outbreaks may occur in States that lack the resources or the incentive to make large expenditures. Further consideration may be given to States that are financially unable to contribute. In such cases, the Federal share may increase by up to 10 percent. Up to 20 percent could also be allotted by the Federal government in situations where the pest or disease threat outside the outbreak area may be significant. Such was the case with the recent outbreak of the Asian longhorned beetle, which affected urban trees in New York and Illinois. Should this pest spread to forest trees in the affected States and beyond, the impact could be economically and environmentally devastating.

The application of the cost-sharing percentages as specified in this proposed rule is anticipated to increase the costs to the Federal government in the first 2 years of a pest or disease outbreak because of the Federal additional share ( i.e. , up to 30 percent and 15 percent) paid, but may lower costs in subsequent years. Table 2 shows that in FY 1999, APHIS spent about $46 million in emergency funds for three pest outbreaks that would have been subject to the cost-sharing provisions as proposed in this rule. The actual Federal share comprised 55 percent of total program costs. Cooperators contributed the remaining 45 percent of overall program costs ($37 million). Due to the detection of citrus canker in the previous year, under the proposed rule, the Federal cost share in FY 1999 would have been slightly higher by 2 percent. For FY 2000, the overall Federal contribution to emergency programs, if allocated according to the criteria specified in this proposed rule, would have been lower by nearly $12 million, and the Federal cost-share would have fallen by about 5 percent. In FY 2001, the cost savings would have been larger. Applying the Federal cost-share rate according to the criteria specified in the proposed rule would have saved about $64 million in FY 2001, lowering the overall Federal share from 78 percent (the actual cost share percentage in that year) to 58 percent.

The adoption of the proposed rule is anticipated to yield savings to the Federal Government in future years largely due to the limits placed on Federal financial contributions to long-term emergency programs, especially those involving commodities with commercial interests. As an emergency situation dissipates, a greater share of the funding of these extended programs should appropriately be assumed by the affected States and other cooperators who, with time, would be in a better position to obtain the necessary resources to address a long-term pest or disease situation.

Additionally, the increased program effectiveness that is expected to result from more reliable State participation and funding certainty would yield economic and environmental benefits over the long run. These gains are expected to balance the costs to State cooperators from redistribution.

The Regulatory Flexibility Act requires that agencies specifically consider the economic effect of their rules on small entities. The Small Business Administration (SBA) has established guidelines for determining when establishments are to be considered small under the Act. This proposed rule is not expected to directly affect commercial entities as defined by the SBA.

Under these circumstances, the Administrator of the Animal and Plant Health Inspection Service has determined that this action would not have a significant impact on a substantial number of small entities.

This program/activity is listed in the Catalog of Federal Domestic Assistance under No. 10.025 and is subject to Executive Order 12372, which requires intergovernmental consultation with State and local officials. ( See 7 CFR part 3015, subpart V.)

This proposed rule has been reviewed under Executive Order 12988, Civil Justice Reform. If this proposed rule is adopted: (1) All State and local laws and regulations that are inconsistent with this rule will be preempted; (2) no retroactive effect will be given to this rule; and (3) administrative proceedings will not be required before parties may file suit in court challenging this rule.

We have reviewed this proposed rule under Executive Order 13132 and determined that it does not have sufficient federalism implications to warrant the preparation of a federalism assessment. The provisions contained in this proposed rule would not have a substantial direct effect on States or their political subdivisions, or on the distribution of power and responsibilities among the various levels of government.

The Administrator has examined the federalism implications of the requirements in this proposal, i.e. , criteria for determining the Federal share of emergency program costs relative to States and other cooperators in the event of animal or plant pest or disease outbreak in the United States. The Administrator believes that this action adheres to Constitutional principles for the exercise of Federal power and is clearly authorized by statutory authorities delegated to APHIS.

This proposed action focuses primarily on the criteria and cost-sharing percentages that would be used to determine the Federal share of emergency program costs. The proposed rule does not absolutely impose any new compliance costs on States or local governments or require that States or local governments incur new costs in support of emergency programs to prevent, detect, control, or eradicate disease.

APHIS already conducts cooperative control and eradication programs in conjunction with State counterparts and other cooperators. In a cooperative arrangement, program funding is generally shared by APHIS and the State, with each party being financially responsible for a portion of the program costs. The cost-sharing arrangements generally have been the result of case-by-case negotiations between APHIS and cooperators. The funding allocations in these arrangements have varied depending on the specific pest or disease and its location. We believe that establishing criteria, including predetermined percentages of the Federal share of program costs, will foster greater certainty about emergency program cost sharing and facilitate improved planning and funding decisions by the Federal government and its cooperators.

State and local governments have the opportunity to comment on this proposed rule, and we encourage them to submit comments on federalism concerns or any other issues.

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub. L. 104-4, establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, tribal governments, and the private sector. Under section 202 of the UMRA, APHIS generally must prepare a written statement, including a cost-benefit analysis, for proposed and final rules with “Federal mandates” that may result in expenditures by State, local, or tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year. When such a statement is needed for a rule, section 205 of the UMRA generally requires APHIS to identify and consider a reasonable number of regulatory alternatives and adopt the least costly, more cost-effective, or least burdensome alternative that achieves the objectives of the rule.

We do not expect, based on historical data, that this proposed rule would contain Federal mandates (under the regulatory provisions of Title II of the UMRA) that may result in new expenditures by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year. Thus, this proposed rule is not subject to the requirements of sections 202 and 205 of the UMRA.

In accordance with section 3507(d) of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ), the information collection or recordkeeping requirements included in this proposed rule have been submitted for approval to the Office of Management and Budget (OMB). Please send written comments to the Office of Information and Regulatory Affairs, OMB, Attention: Desk Officer for APHIS, Washington, DC 20503. Please state that your comments refer to Docket No. 02-062-1. Please send a copy of your comments to: (1) Docket No. 02-062-1, Regulatory Analysis and Development, PPD, APHIS, Station 3C71, 4700 River Road Unit 118, Riverdale, MD 20737-1238, and (2) Clearance Officer, OCIO, USDA, room 404-W, 14th Street and Independence Avenue SW., Washington, DC 20250. A comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication of this proposed rule.

The Secretary of Agriculture may, as a condition of providing Federal funding under proposed 7 CFR part 373 and proposed 9 CFR part 60, enter into agreements with States and other cooperating entities. Such agreements would specify the particular responsibilities, including funding obligations, of the Federal Government and cooperators in conducting the emergency program. Such agreements also could impose other information collection and recordkeeping requirements on affected States or other cooperating entities. We are therefore asking OMB to approve, for 3 years, our use of this information collection.

We are soliciting comments from the public (as well as affected agencies) concerning our proposed information collection and recordkeeping requirements. These comments will help us:

(1) Evaluate whether the proposed information collection is necessary for the proper performance of our agency's functions, including whether the information will have practical utility;

(2) Evaluate the accuracy of our estimate of the burden of the proposed information collection, including the validity of the methodology and assumptions used;

(3) Enhance the quality, utility, and clarity of the information to be collected; and

(4) Minimize the burden of the information collection on those who are to respond (such as through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology; e.g. , permitting electronic submission of responses).

Estimate of burden: Public reporting burden for this collection of information is estimated to average 1.0 hour per response.

Respondents: States and other cooperating entities who enter into agreements with the Secretary of Agriculture in connection with an emergency program involving a plant pest or noxious weed or a pest or disease of livestock.

Estimated annual number of respondents: 1.

Estimated annual number of responses per respondent: 1.

Estimated annual number of responses: 1.

Estimated total annual burden on respondents: 1 hour.

Copies of this information collection can be obtained from Mrs. Celeste Sickles, APHIS' Information Collection Coordinator, at (301) 734-7477.

The Animal and Plant Health Inspection Service is committed to compliance with the Government Paperwork Elimination Act (GPEA), which requires Government agencies in general to provide the public the option of submitting information or transacting business electronically to the maximum extent possible. For information pertinent to GPEA compliance related to this proposed rule, please contact Mrs. Celeste Sickles, APHIS' Information Collection Coordinator, at (301) 734-7477.

Accordingly, we propose to amend 7 CFR chapter III by adding a new part 373, and to amend 9 CFR chapter I, subchapter B, by adding a new part 60 to read as follows:

In the fall of 2002, DOE designated the Energy Efficiency Standards for Residential Furnaces, Boilers, and Mobile Home Furnaces as high priority in The FY2003 Priority Setting Summary Report and Actions Proposed , which the Office of Building Technologies Program, U.S. Department of Energy, published on August 22, 2002.

In the Department of Energy's most recent Semiannual Regulatory Agenda notice, 68 FR 30195 (May 27, 2003), the Department inadvertently noted in its discussion of the Energy Efficiency Standards for Residential Furnaces, Boilers, and Mobile Home Furnaces that “the Department is reclassifying this action as low priority, pending further review.”

The Department of Energy has not reclassified this action as a low priority and remains committed to getting public input before making decisions on the priorities for its rulemakings. As the Office of Building Technologies Program described in its 1996 Procedures for Consideration of New or Revised Energy Conservation Standards for Consumer Products (Process Rule), 61 FR 36974, 36976, 36982 (July 15, 1996), the program will prepare an analysis of pending or prospective rulemakings at least once a year. The program will invite the public to review and comment on the program's priority analysis prior to making any changes to its priority designation. As noted in the Semiannual Regulatory Agenda published May 27, 2003, the program will be seeking comments from stakeholders regarding the priority status of Residential Furnaces, Boilers, and Mobile Home Furnaces. In addition, the program will be seeking comments on its prioritization of all current rulemakings this summer. The program fully intends to follow the Process Rule and provide stakeholders with an opportunity to comment.

The 504 Program, Title V of the Small Business Investment Act (“Act”), 15 U.S.C. 695, was established by Public Law 85-699 on August 21, 1958. A “development company” was defined as an enterprise formed for the purpose of furthering economic development of its community and environs, and with authority to promote and assist the growth and development of small business concerns in the areas covered by their operations. The law further stated that a local development company is a corporation chartered under any applicable State corporation law to operate in a specified area within a State and be composed of and controlled by persons residing or doing business in the locality. The program was amended in 1980 due to changing business conditions for small businesses. During the late 1970s and early 1980s, the prime interest rate and unemployment rate reached historically high levels. It was generally believed that long-term, fixed-rate money was not available at a reasonable cost to small businesses because of these high prevailing rates and that this was hindering job creation. Congress enacted section 503 of the Act in 1980. The 503 and 504 Programs were intended to provide long-term, fixed-rate financing to small businesses at favorable terms that were unavailable in the commercial marketplace. Congress specified in the Act that this program “foster economic development and create or preserve job opportunities in both urban and rural areas by providing long-term financing for small business concerns * * *” The statute authorizes SBA to guarantee debentures backing long-term, fixed-asset loans (“504 Loans”) made by CDCs. It also authorizes SBA to pool the guarantees and sell interests in the pools to investors.

On December 6, 2002, SBA published the ANPRM to solicit comments on the 504 Program. SBA posed specific questions requesting comments on a wide range of topics including the overall 504 Program's effectiveness; CDC organizational structure; ways to increase the 504 Program's geographic coverage to ensure that all small businesses have access to long-term fixed-rate financing; 504 loan and debenture structure; CDC performance requirements; operational and logistical issues; economic development; and CDC participation in other SBA programs. SBA received more than 1,900 responses from lenders, borrowers, government and community organizations, and CDCs.

In response to the questions in the ANPRM as to whether the need for the 504 Program still exists, the overwhelming majority of commenters supported the continued need for the program. The comments included approximately 600 letters from banks and other lenders and 590 letters from 504 Program borrowers. A national lender explained as follows:

Addressing the question of compatibility of the 504 Program with the loan programs authorized by section 7(a) of the Small Business Act, 15 U.S.C. 632 et seq. (“7(a) Program”), a lender stated:

Regarding the 504 program's contribution to the economic development of communities, a typical comment follows:

Other economic development benefits to the local communities from the CDC Program in addition to the long-term, fixed-rate financing are mentioned by many writers. One writer stated that:

There also was overwhelmingly negative response from banks, 504 borrowers, and CDCs to the questions about permitting a CDC to establish a 7(a) lender or permitting a 7(a) lender to establish a CDC. One writer explained that:

In summary, the comments supported the continuation of the 504 Program. The comments also suggested some policy changes to the 504 Program to permit increased access to capital for small businesses. The most frequently suggested changes dealt with the structure of CDCs, including their designated areas of operations. These suggestions included liberalizing the rules governing a CDC's membership requirements, changing the definition of a CDC's area of operations, and changing the definition of when a county is adequately served by existing CDCs. The comments also supported the distinct economic development aspect of the 504 Program by overwhelmingly opposing a CDC's investing in or being affiliated with a 7(a) lender.

SBA believes the proposed regulatory changes will improve 504 Program delivery to small business customers by increasing customer choice of service; increase third party lender choice of CDCs; facilitate the formation of new CDCs; facilitate the expansion of existing CDCs; and increase the number of CDCs able to take advantage of special initiatives for rural areas. By allowing market-driven forces to determine availability of 504 Program service, small businesses will have greater opportunity to negotiate the best total financing package including fees, as well as receive increased service by CDCs. In addition, the 504 Program will be more responsive to changes in market conditions.

To allow for greater delegation of authority to CDCs, this proposed rule includes expanded sections on the ALP and the PCLP. This proposed rule also simplifies and clarifies the enforcement provisions for CDCs. In addition, SBA proposes to amend the “job opportunity average,” which will permit CDCs to approve more projects that do not meet the job creation criteria but do meet other statutory goals such as increasing manufacturers' productivity and competitiveness through re-tooling, robotics or modernization. Proposed amendments also clarify the regulations governing fees that a small business may and may not be charged. The regulations covered by the proposed rule are 13 CFR, subpart A, § 120.102 and § 120.140, and subpart H, §§ 120.800 through 120.984.

The 504 Program from 1986 to 2002 has created or retained more than 1.5 million jobs, averaging approximately $13,600 of debenture per job. However, the 504 Program has not used all of its available budgetary authority for many years. The 504 Program's authorization level for fiscal year 2002, for example, was $4.5 billion compared to the total approval level of $2.5 billion.

SBA has decided to take steps to increase the availability of the long-term, fixed-rate financing offered by the 504 Program that is vital for our nation's small business community. This proposed rule begins this process by establishing the State in which a CDC is incorporated as the CDC's minimum area of operations. Currently, each CDC is assigned a specific, local area, typically several counties. Only one CDC per State is permitted to be a statewide CDC. In some cases, there are geographic areas that do not have CDC coverage. Although CDCs' areas of operations often overlap, SBA believes that establishing statewide areas of operations for all CDCs will increase the availability of 504 Program assistance to small businesses. SBA also believes that it is empowering the CDCs' boards to determine what is the optimal area of operations within the State for the CDC to market and service effectively.

Next, SBA is proposing to eliminate the “adequately served” standard. Currently, a county meets the standard of “adequately served” when the CDC that includes the county in its area of operations averages at least one 504 loan approval in that county per 100,000 population per year averaged over two years. In such cases, the county is unavailable both to an existing CDC applying to expand its operations to include that county, and to a new CDC applying to include that county in its proposed area of operations. In addition, the regulations currently do not permit a new CDC, or a CDC applying to expand its area of operations, to apply for a particular county if that county has become part of another CDC's area of operations within the previous 24 months. Eliminating this standard will encourage new CDC applications and expansion applications from existing CDCs. SBA is proposing to allow the marketplace to determine the maximum number of CDCs that can co-exist within a State. With these changes SBA anticipates that small businesses, as well as lenders, will have greater choice in and access to capital.

To facilitate these changes, SBA is proposing to streamline a CDC's organizational structure by modifying the CDCs' general membership requirements. Currently, a CDC is required to have a general membership that covers the CDC's entire area of operations. In the proposed rule, SBA would no longer require that a CDC's membership cover the entire area of operations, but rather would require that the CDC's members each actively support economic development within all or some portion of the CDC's area of operations. The CDC's board of directors would make the decision on how widely disbursed the CDC's general membership needs to be to meet the objective of local economic development. SBA also is proposing to modify the regulations governing contracting for staff to facilitate a CDC's contracting for “back office” work with a contractor located outside of the CDC's area of operations. SBA believes that this will permit certain economies of scale by providing additional sources of expertise in 504 packaging, processing, servicing and liquidation.

For CDCs that apply to cross State lines as a multi-state CDC, the CDC also will be able to determine the maximum geographic coverage its general membership in the new State needs to be. Also for multi-state CDCs, SBA is proposing to relax the requirements for board representation from the new State by eliminating the current requirement that at least three of the CDC's board members must come from the new State. In addition, SBA is proposing to allow a CDC that currently has ALP or PCLP authority in its State of incorporation to use that authority in its expanded area. To ensure that only those CDCs with demonstrated strong underwriting are permitted to expand beyond their State of incorporation, SBA is clarifying the requirement that the expanding CDC must meet SBA's portfolio performance benchmarks. Taken together, SBA believes that these changes in a CDC's area of operations, elimination of the concept of “adequately served,” elimination of the requirement that a CDC's membership cover the entire area of operations, the clarification regarding contracting, and the changes in the expansion requirements for CDCs will result in the 504 Program becoming more relevant in today's dynamic financial services marketplace.

SBA agrees with the opinion of the majority of writers that the 504 Program should remain separate from the 7(a) Program. The proposed rule introduces a new regulation that prohibits a CDC from investing in or being affiliated with a 7(a) lender.

The concept of permitting a CDC to invest in a Small Business Investment Company (“SBIC”) generally was supported by the commenters. Many writers viewed such an investment as economic development as long as the SBIC and the CDC were not affiliates. However, SBA's current regulations prohibit a CDC from owning an equity interest in a business that has received or is applying to receive SBA financing (§ 120.140). Since SBICs typically have an ownership interest in the businesses that they assist, a CDC that has invested in an SBIC also would have an ownership interest in the small business receiving financing from the SBIC and could potentially violate this regulation by providing financing directly to that small business. In addition, SBA's regulations state that a CDC must operate in its Area of Operations. SBA interprets this requirement to apply to all CDC activities that use funds generated from the 504 Program. In light of these concerns, at this time SBA proposes to prohibit a CDC from investing in an SBIC. The proposed rule would not require a CDC with an existing investment in an SBIC to liquidate such investment.

SBA proposes to add a definition of “SOP” to § 120.102, the definitions section applicable to the entire part 120.

SBA proposes to amend § 120.140 to delete references to Associate Development Companies (“ADC”) (see discussion of § 120.850).

SBA proposed to change the headings for § 120.800 and § 120.801 to make their format consistent with the other section headings in subpart H.

SBA proposed some changes to the definitions in § 120.802. The definition of “Area of Operations” would be modified to add that the minimum area of operations for a CDC is the State in which the CDC is incorporated. This change would permit more access to capital as well as choices for small businesses. In response to the ANPRM, several commentors suggested that a CDC's area of operations be SBA district-wide. However, SBA agrees with the reasoning of one commentor regarding the district-wide proposal:

In § 120.810, application for certification as a CDC, SBA is proposing changes to the policies governing new CDC applications to reflect the change in the definition of a CDC's “Area of Operations” to a minimum of statewide. Additionally, it deletes the current restrictions that permit existing CDCs to exclude geographic areas from being considered for a new CDC. SBA is permitting the marketplace to determine the optimum number of CDCs that may be supported.

Because of these changes and in order to streamline the application process, SBA would delete § 120.811, public notice of CDC certification application, which requires public notice as well as direct notice to existing CDCs. SBA believes the application process, SBA oversight, and the marketplace will be enough to ensure that the process will lead to improved economic development. This proposed rule would add a clarification that an applicant CDC must demonstrate financial capability to meet the upfront costs of the program until the CDC's operations meet the breakeven point. This is to ensure that the CDC will be staffed sufficiently to meet the requirements of marketing, processing, closing, and servicing 504 Loans.

Section 120.812, probationary period for newly certified CDCs, proposes revisions that would clarify how SBA will process a CDC's petition for permanent CDC status, and that the probationary period commences on the date of certification. Also SBA proposes to delete all references to ADCs in connection with the proposed elimination of the ADC program (see discussion of § 120.850).

In § 120.820, CDC non-profit status, SBA proposes to describe what SBA means by the term “good standing.” While this is a term SBA has used over the years in administering the 504 Program, SBA has not fully defined it previously. Following discussions between SBA program officials and the CDC industry, SBA proposes several criteria that constitute good standing for the 504 Program. SBA intends to apply the term generally to all CDCs.

Section 120.821, CDC Area of Operations, would be revised to delete the limitation of one statewide CDC since all CDCs' areas of operations will be at least statewide (see discussion of definition of “Area of Operations” in § 120.802).

Section 120.822, CDC membership, would be revised to streamline CDC membership qualifications by deleting the requirement that a CDC's membership must be representative of its entire area of operations. Currently, a CDC must have representation from each of the four groups ( i.e. , government organizations, financial institutions, community organizations, and businesses) for its entire area of operations. With this change, SBA still would require that each of the four groups be represented in the membership, but would no longer require that such members represent the entire area of operations. It will be up to the CDC's board to determine how broadly-based geographically the membership needs to be to meet the CDC's economic development objectives. The CDC's board may choose to have a membership that represents only a county, or some counties, while another CDC's board may choose to have a membership that represents the entire State.

In addition, SBA would clarify the intent of the regulation by adding that a CDC must not use its employees and staff to meet the membership requirements. The membership requirement is designed to be filled by local community leaders volunteering to assist in providing economic development in their communities through the formation of a CDC. The membership elects the CDC's board from among its members. The board, in turn, hires paid professional staff to operate the CDC on a daily basis. SBA also proposes to eliminate the requirement that SBA pre-approve the CDC's members representing government organizations, and to add small business development companies (“SBDCs”) and another type of community organization that may be a source of members for a CDC.

Section 120.824, professional management and staff, would be revised to delete the provision that describes the circumstances under which a rural CDC with insufficient loan volume may be managed by another CDC located in the same area of operations. This provision has not been used and appears to be unnecessary. In addition, the proposed change would clarify the requirements regarding CDC staff provided under contract including deleting the requirement that a contractor must live or do business in the CDC's area of operations. SBA believes that a CDC may wish to contract for certain services, such as “back office” staff support, with individuals or organizations that are outside of the CDC's area of operations.

Section 120.826, basic requirements for operating a CDC, would be slightly reworded for clarity. The responsibilities currently described in § 120.827(a) would be moved to this section because SBA considers them to be basic requirements for operating a CDC. In addition, SBA proposes to clarify that all CDCs must comply with all of the 504 Program requirements imposed by statute, regulation, SOP, policy and procedural notice, loan authorization, debenture, or any agreement between SBA and the CDC, some of which is currently in § 120.827(a).

Section 120.827, other services a CDC may provide to small businesses, would be revised to focus this section only on, and clarify what is meant by, “other services” that a CDC may provide to a small business, as well as describe the regulations to which the CDC will be subject if it does provide such other services.

Section 120.828, minimum level of 504 loan activity and restrictions on portfolio concentrations, would be reworded to clarify the minimum level of 504 loan activity a CDC must maintain. In addition, this section would cover the requirement concerning portfolio concentrations currently contained in § 120.827(a) and the heading to the section would be revised accordingly.

Section 120.829, job opportunity average a CDC must maintain, would modify the job opportunity average a CDC must maintain by changing it to an amount specified by SBA by means of a notice published in the Federal Register . Currently, the average is preventing many CDCs from accepting 504 loan applications from small businesses for loans that would not create jobs but would meet other statutory 504 Program objectives, such as loans to increase business efficiency through technology. In addition, the present ratio has been in effect since 1990 and does not take into account the inflationary factors in the cost of land, real estate acquisition, construction, and machinery and equipment since that time. Finally, SBA is proposing to clarify that a new CDC is permitted two years from the date it is certified to meet the job portfolio requirement.

Section 120.830, reports a CDC must submit, would be revised to change the submission requirement for CDC annual reports from 90 days to 120 days after the end of the CDC's fiscal year to permit CDCs more time to provide financial statements with the required level of review. This proposed rule also clarifies the requirement by adding that the annual report must include financial statements of any affiliate or subsidiary of the CDC. In addition, it would add some clarifying language regarding the submission requirements for changes to directors or staff.

Section 120.835, application to expand an area of operations, would be revised. Most of the applications SBA receives are for expansions of a CDC's area of operations within its State of incorporation. The expansion request usually is for several counties in which there currently are one or more CDCs that include those counties in their areas of operations. Since the proposed rule gives all CDCs a minimum area of operations of the State in which they are incorporated, and since SBA is allowing the marketplace to determine the optimum number of CDCs, much of the current regulatory language is no longer required (refer to § 120.802 and § 120.810 for further discussion). SBA proposes that the only applications for expansion that it would consider would be when the CDC requests to expand beyond its State of incorporation. In this section, SBA also proposes to add the requirement that such applicants must be ALP-qualified. There are two reasons for this. The first is to limit expansions beyond State lines to only those CDCs who have met certain volume, closing, and portfolio quality standards. The second is to reflect the proposed change in the regulations governing multi-state expansions that would permit a CDC to use in the expanded area any unilateral authority it has already received in its State of incorporation ( see discussion of proposed changes to § 120.837). To further streamline the application process, SBA is proposing to delete the requirement that a multi-state CDC have at least three members from each State on its board. SBA believes that the general membership requirements ( see § 120.822) and loan committee requirements ( see § 120.823) for the State into which it is expanding are sufficient to demonstrate the CDC's commitment to local economic development in that State. Additionally, SBA is proposing to delete the requirement for public notice and for direct notice to all other CDCs in the proposed area of operations since SBA is permitting the marketplace to determine the optimum number of CDCs that can be supported.

Section 120.836, public notice, and opportunity for response, would be deleted. SBA believes that the requirement would not be needed for the same reasons discussed in § 120.811.

Section 120.837, SBA decision on application for a new CDC or for an existing CDC to expand an area of operations, proposes to streamline the process by changing the paragraph on a multi-state CDC to permit any unilateral authority that a CDC has in its State of incorporation to be carried over into the additional State in which it is approved to operate as a multi-state CDC and clarifying SBA's decision process.

Section 120.838, expiration of existing, temporary expansions, was a short-term regulation to manage the conversion of existing temporary expansions into permanent expansions by March 1, 1996. Because of the changes proposed to the rules covering areas of operation, SBA believes this section is no longer required and proposes its removal.

Section 120.839, case-by-case extensions, proposes to give a district office the authority to make a decision concerning whether SBA will allow a CDC to make a 504 Loan outside of its area of operations, and by adding as a new basis for such decision the situation in which a State may not have a CDC. (For example, currently Alaska has no CDC.) In addition, SBA is proposing to delete the exception that would require the Associate Administrator for Financial Assistance (“AA/FA”) to approve because the exception has never been used and SBA's experience indicates that it is unnecessary.

In section 120.840, accredited lenders program, SBA proposes to substantially revise this section to describe the ALP, the benefits a CDC will receive through the ALP, how to apply for the ALP, and how SBA will process the application.

In new § 120.841, SBA proposes to establish more detailed qualifications for the ALP. The standards will be consistent with section 507 of the Act and coordinate with eligibility requirements for CDC participation in the PCLP ( see § 120.845 discussion below). These changes will make it easier for SBA to provide consistent and objective evaluation of a CDC application to participate in the ALP.

Section 120.845, premier certified lenders program, would be revised. The PCLP is now a permanent program pursuant to section 508 of the Act. SBA proposes to add considerably more detail to § 120.845 and move some of its revised and expanded provisions to new §§ 120.846-120.848. Since CDCs participating in the PCLP must be approved to participate under the ALP or be “ALP qualified,” SBA proposes to add some of the PCLP requirements to § 120.841.

The PCLP is designed to take advantage of the proven loan processing and servicing skills of SBA's most proficient and most active CDCs. It is a relatively new program (started in 1994 as a pilot program) with a somewhat limited operating history. Because SBA transfers substantial additional authority to CDCs, the PCLP carries potentially significant risk to SBA and the 504 Program. Therefore, SBA intends to closely monitor and control its implementation and expansion. As a result, SBA will continue to work with the CDC industry to develop and publish enhanced operating policies and procedures as experience with the PCLP develops. While SBA intends to transfer as much authority and responsibility to PCLP CDCs as reasonably prudent, the extent of that delegation will continue to be refined over time. These refinements likely will address such issues as the type of 504 Loans eligible for the PCLP, the amount of prior SBA review applicable to each loan, program participation criteria, and other factors.

For example, while SBA believes that the PCLP may be most appropriately applied to routine 504 Loans and that particularly complex or problematic loans may need to be processed through standard 504 Program procedures, SBA will continue to study and analyze this issue and develop further guidance as appropriate. With respect to SBA's prior review of a 504 Loan at the loan approval stage, SBA is interested in limiting/minimizing its involvement in reviewing 504 Loans. While initially SBA expects to continue to review loan eligibility while delegating virtually all credit decisions to PCLP CDCs, SBA will consider expanding or reducing that authority as warranted by the results of the program.

Participation in the PCLP, pursuant to section 508(b) of the Act, is limited to those CDCs that are active in the 504 Program; are in good standing with SBA; have demonstrated the ability to properly analyze, close and service 504 Loans; and have been active as ALP CDCs. Section 508(b)(2)(A) of the Act allows SBA to waive the requirement for those non-ALP CDCs that meet the ALP participation criteria. However, rather than developing a waiver process, SBA proposes incorporating the ALP participation criteria into the PCLP participation criteria ( see § 120.845(c)(1)).

Based on the guidance in the statute, and following extensive discussion with the CDC industry, SBA developed more specific factors to be used in evaluating a CDC's level of activity; ability to properly analyze, close, service and liquidate 504 Loans; and good standing. Each factor represents a major and essential CDC function, and each carries significant risk to SBA and the 504 Program. Because SBA delegates substantial authority and autonomy to PCLP CDCs, it considers each factor important, and a substantive deficiency in any one may preclude participation in the PCLP. SBA will use information from onsite compliance reviews, operational reviews and other program management and oversight activities, including the review of 504 loan applications to SBA, to make the determination regarding eligibility for PCLP status.

Congress, SBA and the CDC industry recognize that the success of the PCLP is highly dependent on the extent to which PCLP CDCs are familiar with SBA's credit and eligibility standards and its loan processing, closing, servicing and liquidation policies and procedures. These policies and procedures are highly complex and require processing a substantial volume of 504 Loans over an extended period of time to remain proficient. Also, SBA needs access to a significant number of a CDC's loans to evaluate its proficiency. SBA notes that the ALP requires that its participants must have processed at least 20 504 Loans in the most recent three years ( see proposed § 120.841(b). When considering the minimum 504 Loan volume requirement for participation in the PCLP, SBA considered the concern of smaller and rural CDCs that a high minimum 504 Loan volume requirement could exclude them from being a PCLP CDC. SBA discussed those concerns with the CDC industry and concluded that proficiency in 504 Loan policies and procedures can only be developed and maintained from regularly processing a significant number of 504 Loans. In addition, one of the main purposes of the PCLP was to improve the efficiency and expedite the loan processing of higher volume CDCs, which were being disproportionately impacted by the longer turn-around time in SBA's district offices. Also, for low volume CDCs, any potential efficiency benefits from participating in the PCLP would more than likely be offset by the cost and effort required to develop and maintain the high level of 504 Loan proficiency required in a staff that rarely processes an SBA 504 Loan. (About half of all CDCs process less than six 504 Loan applications per year.) After considering these issues, SBA proposes to require that ALP and PCLP applicants must have received approval for at least twenty 504 Loans in the most recent three years and have a portfolio of at least 30 active 504 Loans. (SBA proposes to define an “active” 504 Loan as a loan that was approved and closed by the CDC and has a status of either current, delinquent, or in liquidation.)

To assist in determining the proficiency of a PCLP applicant to effectively process and administer 504 Loans, SBA proposes that SBA conducted oversight reviews of a PCLP applicant must have found the applicant to be at least generally in compliance with SBA's regulations, policies and procedures. In addition, SBA will need to assess the applicant's current proficiency, so these reviews must be relatively recent (within the past 12 months). While SBA has policy and procedural guidance in place generally requiring annual SBA oversight review, CDCs may occasionally request a postponement of those reviews. Applicants to the PCLP must recognize the need for current SBA review data and coordinate with their Lead SBA Office to ensure that the CDC is available and prepared for any required oversight reviews.

SBA has developed comprehensive management information systems to timely track and analyze the performance of a CDC's 504 Loan portfolio. As a result of an extensive examination and analysis of these performance data, SBA has determined that portfolio currency, delinquency, default, liquidation and loss rates are important measures of the quality of a CDC's portfolio and the effectiveness and diligence of its loan analysis, closing and servicing. Therefore, SBA has established benchmarks for each of these measures, which the large majority of CDCs regularly achieve. SBA proposes that PCLP applicants must meet SBA's established portfolio benchmarks.

SBA and the CDC industry recognize that the training and experience of the PCLP applicant's staff are critical determinants of the quality and effectiveness of its 504 Loan program administration as well as its diligence in applying SBA's 504 Loan credit and eligibility standards. As a result, the CDC industry has developed appropriate credit, packaging, loan closing and loan servicing training programs, which the staff of many CDCs attend. As a result, SBA proposes that the principal staff of PCLP applicants possess adequate 504 Loan training and experience.

Under the PCLP, SBA delegates authority and a certain level of autonomy to PCLP CDCs to process, close and service 504 Loans with only limited prior SBA review. As a result, SBA proposes that applicants to the PCLP must demonstrate a particularly thorough understanding of and an applied diligence to SBA's 504 Loan credit and eligibility standards and its 504 Loan processing, closing and servicing policies and procedures. A failure to consistently apply appropriate credit analyses and standards and loan processing, closing and servicing policies or procedures exposes SBA and the taxpayer to excessive risk of loss and negatively impacts the availability of SBA financing to the small business community. A CDC's failure to adequately apply SBA's 504 Loan eligibility standards could result in 504 Loan approvals to small businesses that are expressly prohibited by statute or regulation from receiving SBA loans.

Section 508(b)(2)(A) requires that PCLP CDCs be in good standing with SBA. SBA interprets that requirement to mean both in good standing with the State in which the CDC is incorporated (as discussed in § 120.820), and in compliance with the 504 Program requirements imposed by statute, regulation, SOP, policy and procedural notice, loan authorization, debenture, or any agreement between SBA and the CDC. Under the PCLP, due to the higher level of authority delegated to the PCLP CDCs and the potential risk to the Agency, SBA expects a significantly higher level of compliance with both of these requirements by PCLP CDCs, with only very rare deviation. SBA sees a similar distinction between non-PCLP CDCs generally meeting SBA's five established portfolio benchmarks versus virtually absolute compliance by PCLP CDCs with those benchmarks.

The Lead SBA Office would consider the CDC's initial application to the PCLP, and will forward the application package, including a recommendation regarding the applicant's qualifications, to SBA's PCLP Processing Center, which then will forward the package with its recommendation to the AA/FA for final action. PCLP applicants are expected to coordinate with their Lead SBA Office early in their consideration of the PCLP to realistically assess its requirements and their prospects for admission. When officially applying for the PCLP, an applicant will need to provide certain essential information and documentation to assist SBA in ascertaining its qualifications, including a resolution from its Boards of Directors; resumes on key staff for 504 Loan processing, servicing, liquidation, and litigation; documentation of any required insurance; and information about the qualifications of its closing attorney. While SBA will generally confer PCLP status for a period of two years, under some conditions (such as borderline performance benchmarks, certain compliance review deficiencies, etc.) SBA may determine that a lesser period is appropriate.

Section 120.846, requirements for maintaining and renewing PCLP status, would be added. Pursuant to section 508(b)(3) of the Act, in order to retain its PCLP status, a PCLP CDC must continue to meet the eligibility requirements of the PCLP, as proposed in § 120.845. While level of activity is one of those criteria, section 508(i) of the Act requires that PCLP CDCs establish a goal of processing a minimum of 50 percent of their 504 Loan applications using PCLP procedures. SBA considered establishing a requirement that PCLP CDCs process at least 30 percent of their 504 Loans using PCLP procedures immediately after becoming a PCLP CDC and gradually increasing that requirement as the PCLP CDCs matures. However, following discussions with the CDC industry, SBA determined that immediately establishing such an absolute minimum could discourage participation in what is a developing program with a variety of relatively new concepts and procedures. Nevertheless, SBA recognizes that the legislation authorizing PCLP mandates that PCLP CDCs be active CDC lenders and establish a goal of processing a minimum of 50 percent of their 504 Loans using PCLP procedures. As a result, while SBA still expects PCLP CDCs to process a substantial proportion of their 504 Loans using PCLP procedures and strive to reach their 50 percent goal as mandated by statute, SBA will not immediately require an absolute minimum. Thus, as the PCLP matures, SBA intends to publish procedural guidance gradually incorporating and increasing the minimum number and percent of 504 Loans that PCLP CDCs must process using PCLP procedures.

Due to the delegation of authority under the PCLP, and the associated risk of loss, SBA expects PCLP CDCs to develop, implement and actively monitor effective internal control systems and processes that will ensure continued conformance with the requirements of the PCLP. These systems should provide PCLP CDCs with early information on their performance. SBA also has developed management control systems to monitor individual PCLP CDCs, specifically the portfolio benchmark data and the management oversight reviews, and SBA provides this information to PCLP CDCs. With these internal and external control systems, SBA expects PCLP CDCs to constantly monitor their performance as a CDC and as a PCLP CDC and to be in a position to take appropriate and timely corrective action when necessary. Due to the risk inherent in the delegation of authority under the PCLP, SBA will move to timely suspend, terminate or decline to renew the PCLP status of PCLP CDCs that do not comply with the requirements of the PCLP. Significant problems with respect to liquidation and litigation activities by either a PCLP CDC or its contractor may, at SBA's option, also lead to suspension, termination, or the non-renewal of PCLP status. In egregious cases of a PCLP CDC's failure to comply with PCLP requirements, SBA also can issue an immediate suspension, under the proposed rule. In recommending a suspension or termination from the PCLP, SBA proposes to provide timely written notice to the PCLP CDC of its intention and the basis for the recommendation. The proposed regulations also delineate a PCLP CDC's appeal rights and reapplication time frames.

Section 120.847, requirements for the loan loss reserve fund, would be added. To mitigate some of the potential risk of delegating additional authority to PCLP CDCs, pursuant to section 508(c)(1) of the Act, PCLP CDCs must establish and make deposits to a Loan Loss Reserve Fund (“LLRF”). The LLRF is a restricted account established for the purpose of accumulating deposits and limiting withdrawals to those SBA specifically authorizes. The PCLP CDC may use the deposits to reimburse SBA for 10 percent of any loss sustained by SBA as a result of a default in the payment of principal or interest on a debenture issued by the PCLP CDC using PCLP procedures (“PCLP debenture”). Pursuant to section 508(c)(3) of the Act, the LLRF must be composed of: (1) Segregated deposit accounts at one or more federally insured depository institutions subject to a collateral assignment to SBA; (2) irrevocable letters of credit in favor of SBA; or (3) some combination of the above. Due to the characteristics and cost of letters of credit, and in consultation with the CDC industry, SBA has determined that letters of credit do not currently represent a feasible option for PCLP CDCs. Consequently, SBA is not addressing letters of credit in this proposed rule. However, SBA will continue to explore this option with the CDC industry, and will promulgate regulations addressing letters of credit to the extent this becomes a feasible option.

Pursuant to section 508(b)(2)(c) of the Act, PCLP CDCs must reimburse SBA for 10 percent of any loss SBA incurs in connection with a default on a PCLP debenture and the regulation proposes what is to be included in SBA's loss. The statute and proposed rule also require that the LLRF maintain a deposit equal to one percent of the original principal amount of each PCLP debenture.

The LLRF must be a deposit account with a federally insured depository institution selected by the PCLP CDC. Following discussions with the CDC industry, SBA is aware that alternative accounts and financial instruments may offer greater returns on the LLRF. However, the Act restricts LLRFs to federally insured depository institutions and that language as well as other applicable law greatly limit the investment alternatives. This proposed regulation elaborates on what constitutes a deposit account acceptable to SBA. Also, to simplify the administration of the LLRF, this proposed regulation would allow PCLP CDCs to pool loss reserves in a single segregated account. SBA generally does not anticipate that PCLP CDCs will incur significant fees in connection with their LLRFs, although PCLP CDCs will need to be mindful of breakage fees, should they place funds into certificates of deposit (“CDs”). This proposed regulation goes on to make clear that the PCLP CDC will be responsible for any fees, costs and expenses incurred in connection with the LLRF.

Pursuant to section 508(c)(3) of the Act, any LLRF established by a PCLP CDC must be subject to a collateral assignment in favor of, and in a format acceptable to, SBA. Accordingly, a PCLP CDC must give SBA a first priority perfected security interest in each LLRF. The PCLP CDC must grant the security interest pursuant to a security agreement between the PCLP CDC and SBA, and the security interest must be subject to a control agreement between SBA, the PCLP CDC, and the applicable depository institution. The control agreement will include provisions requiring a depository institution to follow instructions from SBA regarding withdrawals without further consent from the PCLP CDC. The laws governing security interests in deposit accounts are complex, vary by jurisdiction and are undergoing change. Therefore, when establishing a LLRF, a PCLP CDC must coordinate with the Lead SBA Office to develop, execute and deliver the required documentation. SBA field counsel will have a model control agreement, which they may need to modify to meet local legal requirements. This proposed rule provides that the CDC must provide to the Lead SBA office a fully executed original copy of the security and control agreements which the Lead SBA Office will retain in its files. All associated documents must meet SBA requirements and occasional changes may be necessary. If a depository institution will not enter into or modify a control agreement or violates the terms of any such agreement, the PCLP CDC cannot maintain a LLRF with that institution.

Pursuant to section 508(c)(4) of the Act, PCLP CDCs are allowed to make required deposits to the LLRF associated with each loan in as many as three deposits, but specifies the minimum amount and timing of those deposits. This proposed rule sets forth the amount and timing of those deposits.

Due to its management control and oversight responsibilities, SBA must ensure that LLRFs (1) are properly established, (2) contain the required reserve amounts and (3) are appropriately administered and controlled. Periodic reporting by PCLP CDCs to SBA on the amount of funds maintained in LLRFs is critical to ensuring that LLRFs are properly established and maintained. However, while LLRFs must contain deposits equal to one percent of each PCLP debenture, the deposits associated with each PCLP debenture may be made in as many as three installments. Also, during the normal course of a PCLP CDC's operations, LLRFs will be subject to a variety of other deposits and withdrawals ( e.g. , withdrawals associated with loans paid in full and defaults). As a result, reporting and reconciling LLRFs might become quite complex. SBA is concerned with the potential burden such reporting could represent to PCLP CDCs. SBA continues to work with the CDC industry to develop and test efficient and effective reporting procedures, and will publish appropriate procedural guidance as those procedures are finalized.

SBA proposes to allow PCLP CDCs to withdraw any funds from the LLRFs that exceed required minimums, at SBA's discretion. The proposed § 120.847(g) provides that requests for withdrawals must be forwarded to the Lead SBA Office, which will check the balances to ensure the required minimums are maintained and authorize withdrawals as appropriate.

Proposed § 120.847(h) would provide that when a PCLP CDC has submitted a liquidation wrap-up report to SBA, or SBA otherwise has determined that all reasonable collection efforts have been exhausted, the Lead SBA Office will calculate the SBA's loss and notify the PCLP CDC of the amount of any reimbursement obligation and provide appropriate supporting documentation. The proposed role sets forth procedures so that PCLP CDCs may appeal any problems or disagreements regarding the calculation of SBA's loss.

Proposed § 120.847(i) would require PCLP CDCs to reimburse SBA for 10 percent of any loss and states that the reimbursement may come from the LLRF or from other funds provided by the PCLP CDC. There could also be instances where a PCLP CDC would not have sufficient funds in its LLRF to reimburse SBA for 10 percent of SBA's loss, and the regulation proposes to provide the PCLP CDC a reasonable period of time after SBA demand to reimburse the Agency.

Pursuant to section 508(c)(5), the proposed regulations would also require that should a PCLP CDC's LLRF drop below the required minimum, the PCLP CDC must replenish the LLRF within 30 days of the time that it realizes this deficiency or of a notice from SBA that the LLRF is deficient. Thus, if a depository institution offsets from any LLRFs maintained with the institution any amounts owing by the PCLP CDC to it, the PCLP CDC must replenish the LLRF to the full amount then required within 30 days.

Section 120.848, requirements of PCLP loan processing, closing, servicing, liquidating and litigating, would be added. SBA believes that the PCLP can be most prudently implemented and expanded if SBA focuses, at least initially, on expediting the processing of routine CDC loan applications under the PCLP and handling complex or problematic eligibility issues using standard 504 Loan procedures. However, SBA will continue to study and analyze this issue and develop further guidance as the PCLP progresses.

Pursuant to § 508(e) of the Act, PCLP CDCs are permitted to approve, authorize, and close 504 Loans, subject to standards established by SBA. Proposed § 120.848 provides additional guidance and notes that all 504 Program requirements apply to 504 Loans processed by PCLP CDCs. PCLP CDCs are specifically authorized to determine a 504 Loan applicant's credit-worthiness and are permitted to establish the terms and conditions under which the loan will be made. The PCLP CDC also will be authorized to take other processing actions as may be delegated by SBA to PCLP CDCs. However, because SBA's management control and oversight responsibilities require a systematic review of a PCLP CDC's 504 loan processing proficiency, SBA must periodically review the processing actions of PCLP CDCs to ensure the PCLP CDC is using appropriate and reasonable procedures. PCLP CDCs are thus expected to retain in their loan files copies of all documents associated with their processing actions. SBA may occasionally review these documents on site or request that they be forwarded to SBA for review. If SBA identifies significant problems or deviations from SBA's 504 Program requirements, SBA will take appropriate corrective action, including possible removal from the PCLP.

The proposed rule also would require the authorized PCLP CDC official to sign all required documents and forward them to SBA's designated loan processing center for assignment of a loan number, subject to the availability of funds.

The PCLP CDC then would be expected to take appropriate action to close the loan and to prepare the closing documents for the corresponding debenture its closing counsel must issue an opinion stating the legal sufficiency of all closing documents, that all documentation has been obtained to comply with the loan terms and conditions established by the PCLP CDC and that the loan closing complies with all legal requirements and all 504 Program requirements for the PCLP. These actions are complex and will require the opinion of a qualified loan closing counsel. SBA counsel will close the PCLP debenture.

Pursuant to section 508(e) of the Act, SBA may delegate to PCLP CDCs responsibility for servicing 504 Loans, subject to terms and conditions as established by SBA. To enhance the efficiency of the PCLP, SBA intends to delegate most routine servicing actions to PCLP CDCs. However, SBA retains management oversight responsibility for the effectiveness of the PCLP. Therefore, SBA will continue to monitor the quality and effectiveness of PCLP CDC servicing activities through onsite reviews and other evaluation activities. As a result, should significant problems develop, or when it substantially benefits SBA or the PCLP CDC, SBA may elect to handle some or all servicing actions associated with a particular 504 Loan or a particular PCLP CDC portfolio. However, SBA anticipates such actions to be rare and unusual. In delegating servicing authority to PCLP CDCs, SBA proposes that PCLP CDCs must use prudent and commercially reasonable standards and practices, as well as comply with all 504 Program requirements.

SBA is proposing to delete §§ 120.850-120.852, concerning ADCs, and to eliminate the ADC designation. First, SBA is seeking to eliminate redundancy in the regulations. One aspect of the ADC program was that it established requirements for organizations to qualify to contract with CDCs for 504-related services. However, § 120.824 permits CDCs to contract for 504-related services and governs such contracts. Second, these regulations established one of the grounds (not meeting the minimum required level of 504 Loan approval activity) for removing a CDC from the 504 Program. In the proposed rule, all grounds for taking enforcement action against a CDC would be combined under one regulation, § 120.854.

Section 120.855, CDC ethical requirements, would be redesignated as § 120.851, and reworded to clarify its meaning and to remove the reference to ADCs ( see § 120.850 discussion).

Proposed new § 120.852 would prohibit a CDC from investing in or being affiliated with a 7(a) lender or an SBIC, which SBA believes will help to avoid apparent conflicts of interest and serve the economic development mission of the CDC. The proposed rule would not require a CDC with an existing investment in an SBIC to liquidate such investment. As part of the ANPRM, SBA asked the question whether SBA should permit a CDC to establish a 7(a) lender or permit a 7(a) lender to establish a CDC. The overwhelming response was that two programs should remain separate.

Proposed new § 120.853 is identical to existing § 120.973 except that it would eliminate references to ADCs.

Proposed new § 120.854, grounds for taking enforcement action against a CDC, § 120.855, types of enforcement actions, and § 120.856, enforcement procedures, would consolidate existing § 120.852 and §§ 120.982-120.984 and would clarify the grounds required for SBA enforcement actions against CDCs as well as SBA's and CDCs' rights and responsibilities in such actions. Section 120.981, voluntary transfer and surrender of CDC certification, would be redesignated as § 120.857 to move it under the new heading.

Section 120.861, job creation or retention, is revised (see discussion of proposed revisions to § 120.829 for a description of the changes to the job requirement criteria). The change in the criteria will be published in a Federal Register notice from time to time.

Section 120.862, other economic development objective, includes two technical changes. The first is the Agency-wide replacement of “SIC” codes with “NAICS” codes when identifying the types of small businesses eligible to receive SBA assistance. The second is to correct the cross-reference to the regulation that describes a minority for purposes of the public policy goal of assisting minority-owned businesses. The proposed changes also reflect the statutory changes to section 501(d) of the Act, which added women-owned and veteran-owned businesses to the public policy goals.

Section 120.870, leasing project property, would eliminate references to 504 project property being leased by the CDC to the borrower.

Section 120.880, basic eligibility requirements, proposes simplifying changes by replacing the actual size standards with a cross-reference to the size standard regulation. As the size standard regulations change, so will this regulation without requiring it to be re-written.

Section 120.882, eligible project costs for 504 loans, proposes clarifying eligible costs that may be included in 504 project costs.

Section 120.883, eligible administrative costs for 504 loans, proposes changes clarifying eligible administrative costs that may be paid from the proceeds of the 504 Loan and debenture.

Section 120.892 would be revised to require a 504 loan borrower to provide to the CDC current financial statements within 120 days of 504 loan closing, instead of within 90 days.

SBA proposes to change the headings of §§ 120.900 and 120.910 to make their form consistent with the other section headings in subpart H.

Section 120.911, land contributions, proposes to make a technical correction to the regulation by deleting the reference to CDCs. CDCs do not contribute land for a 504 loan.

Section 120.913, limitations on any SBIC contributions, proposes changes to clarify the heading, and to add a cross-reference and clarify the section.

Section 120.923, policies on subordination, proposes changing the section heading and consolidating existing §§ 120.923 and 120.924.

Section 120.925, preferences, proposes adding a cross-reference to another SBA regulation governing preferences.

Section 120.926, referral fee, proposes modifying the language by adding “reasonable” in describing the referral fee that a CDC may charge a third party lender. The proposed changes also emphasize that neither the lender nor the CDC can charge this fee to the borrower.

Section 120.930, amount, proposes eliminating the requirement that SBA must approve 504 loans between $25,000 and $50,000 on an exception basis. SBA does not believe that it ever has declined such a request.

Section 120.931, 504 lending limits, proposes increasing the dollar amounts to reflect the changes to section 502(2) of the Act that became effective December 21, 2000.

Section 120.933, maturity, proposes creating flexibility in debenture maturities. This will permit SBA to consider other maturities besides 10 and 20 years at some future date.

Section 120.934, collateral, proposes clarifying the paragraph by rearranging and re-wording the sentences.

Section 120.935, deposit, proposes changing the heading.

SBA proposes to delete section 120.936, subordination to CDC. SBA believes that this regulation is a holdover from the former 501 and 502 programs. SBA knows of no instance when a CDC has requested a subordination on its 504 Loans.

Section 120.960, responsibility for closing, proposes clarifying language that describes the circumstances under which SBA can decline to close a debenture or cancel its guarantee of the debenture prior to sale.

Section 120.970, servicing of 504 loans and debentures, proposes clarifying language regarding a CDC's responsibility in servicing a 504 loan.

Section 120.971, allowable fees paid by borrower, proposes clarifying language regarding the loan closing fees that a CDC may charge.

Section 120.972, third party lender participation fee and CDC fee, proposes revising the heading, deleting the language “from the Third Party Lender” from paragraph (a), and slightly clarifying paragraph (b). SBA accepts the third party lender participation fee from the third party lender, the 504 borrower, or the CDC.

SBA proposes to remove §§ 120.980-120.984.

SBA is considering reordering the entire subpart H, and SBA invites comments specifically responding to this proposal. SBA is considering whether renumbering the regulations within subpart H would better highlight the purposes of the 504 Program and the requirements pertaining to 504 Loans. SBA is considering reordering the sections into the following topic areas in the following new order:

SBA also generally invites comment on all aspects of this proposed rule, including the underlying policies. SBA may rely on its own expertise in promulgating the final rule. Submitted comments will be available to any person or entity upon request.

Executive Order 13132: For the purposes of Executive Order 13132, SBA determined that this proposed rule has no federalism implications warranting preparation of a federalism assessment.

Executive Order 12866: The Office of Management and Budget (OMB) has determined that this proposed rule constitutes a significant regulatory action under Executive Order 12866. SBA believes there is a need for this regulatory action for the reasons stated in the preamble to this proposed rule. SBA believes the proposed regulatory changes will improve 504 Program delivery to small business customers by increasing customer choice of service; increase third party lender choice of CDCs; facilitate the formation of new CDCs; facilitate the expansion of existing CDCs; and increase the number of CDCs able to take advantage of special initiatives for rural areas. By allowing market-driven forces to determine availability of 504 Program service, small business will have greater opportunity to negotiate the best total financing package, including fees, as well as receive increased service by CDCs. In addition, the 504 Program will be more responsive to changes in market conditions. SBA believes that there are no viable alternatives to these changes that would produce similar positive results without imposing an additional burden on SBA or the public. However, SBA requests comment from members of the public who believe there are viable alternatives that would achieve the same objectives with no greater burden.

In FY2002, OMB developed the Program Assessment Rating Tool (PART) to establish a systematic, consistent process for rating the performance of programs across the federal government. The 504 Program was evaluated under the PART criteria in FY2002. The PART review revealed that SBA needs to increase the availability of CDCs within the 504 Program to improve customer access to loans. Additionally, increasing the availability of CDCs will enable borrowers to determine which of SBA's loan programs best meet their needs. SBA expects that this proposed rule will address this recommendation of OMB.

SBA does not have sufficient data to establish a baseline in order to measure the costs and benefits of this proposed rule on the affected public. However, SBA has data on the cost to SBA of the 504 Program. In FY2002, the cost of the 504 Program to SBA was approximately $15 million. The majority of the cost of the Program, 82% or $12.6 million, was for the cost of the field office staff support that reviewed and approved loan applications and conducted marketing and outreach to generate new loans. The cost of the 504 Program to SBA also includes the cost of reviewing and analyzing CDC requests to expand their areas of operations by SBA's field office and Headquarters staff. SBA would expect this cost to decline substantially as a result of this proposed rule because it permits all CDCs to operate at least throughout their State of incorporation. Other data on the program can be found at www.sba.gov. SBA requests data from the public that would enable SBA to determine existing regulatory costs of the program to the public and changed costs and benefits as a result of the proposed rule.

Regulatory Flexibility Act: This proposed rule directly affects all CDCs, of which there are approximately 270. SBA has determined that CDCs fall under the size standard for NAICS 522298, All Other Nondepository Credit Intermediation. The size standard is $6 million in average annual receipts. SBA estimates that at least 95 percent of the CDCs do not exceed this size standard and are therefore considered small entities by this definition. Thus, SBA has determined that this proposed rule will have an impact on a substantial number of small entities. However, SBA has determined that such impact will not be significant.

The effect of the proposed rule will be to “level the playing field” by allowing CDCs more flexibility to choose the optimal area of operations within their State of incorporation. Currently, each CDC has a specific area of operations that is approved by SBA. The typical area of operations is several counties within the CDC's State of incorporation. If a CDC wishes to apply to expand into neighboring counties, it can only do so if those counties are available. Currently, a county is available to a new CDC or a CDC requesting to expand its area of operations if the CDC(s) that include that county in its area of operations is not meeting a threshold of one 504 approval per year per 100,000 population averaged over two years. If the existing CDC is meeting this threshold of activity, both an applicant wishing to become a CDC and a CDC wishing to expand its area of operations is barred from including that county in their request. The proposed rule levels the playing field by eliminating this threshold and by permitting all CDCs to operate anywhere in their State of incorporation. SBA believes that some CDCs will choose to continue to operate in those counties they presently operate in while others will choose to expand their market area into neighboring counties or throughout the State. It has been SBA's experience with CDCs that are permitted to compete with other CDCs in the same market area, that the market of eligible 504 Loan projects itself expands, resulting in a benefit for the affected CDCs as well as a benefit to small business borrowers.

This proposed rule will also permit new CDCs the opportunity to market in areas that may produce more 504 loans sooner. This in turn will permit the new CDC to reach a breakeven point sooner in its operations and continue to meet the required 504 activity of two 504 approvals per year. Currently it is estimated that it takes a CDC at least two years at a cost of $200,000 or more to reach the 504 activity level where the 504 fee income covers the CDC's expenses. SBA believes that smaller, rural CDCs will derive a similar benefit by having a greater opportunity to meet the required 504 loan activity level. Since 1993, SBA has had to revoke certifications from more than 100 CDCs and transfer their 504 loan portfolios and fees to other, active CDCs due to their failure to meet the required 504 activity level of two 504 loan approvals per year averaged over two years. Most of these CDCs have been located in rural areas where there are a limited number of potential 504 Loan projects. This proposed rule will enable those small, rural CDCs the opportunity to expand their market area by doing projects in more populous areas, resulting in their more easily meeting the 504 loan activity level. At the same time those CDCs that currently have exclusive areas that include populous urban areas resulting in substantial 504 loan activity may seek to expand their market areas into the less lucrative rural areas. The expected result is that future 504 borrowers will benefit from an increase in choice among CDCs.

In addition, SBA expects the impact of the proposed rule will be a reduction in the overall paperwork burden for CDCs since CDCs will no longer have to apply to SBA to expand their area of operations within their State of incorporation. SBA received and approved approximately 11 expansion requests during 2002. All were for CDCs requesting expansions into neighboring counties within the CDC's State of incorporation. The burden hours for a new CDC or a CDC wishing to expand to complete an application is estimated to be 10 hours. None of the applications for an expansion would have been necessary under the proposed rule. In addition, applicants requesting to become CDCs also will be permitted to establish their optimal area of operations within their State of incorporation without being excluded from areas that currently have one or more CDCs. SBA receives one or two applications to become a CDC per year. The burden hours for an application will be reduced by approximately one hour due to the changes in the general membership requirements that will allow an applicant more flexibility in meeting this requirement. SBA asserts that the economic impact of the reduction in paperwork, if any, will be minimal to small entities.

Finally, it has been SBA's experience that the more CDCs that market the 504 program in a particular area, the higher the 504 Loan volume in that area. SBA believes that this is due to the additional marketing initiatives by the CDCs which creates an increased awareness of the 504 Program among the local lending community and improves their willingness to participate because they have a choice. SBA also believes having multiple CDCs in the area improves the service provided by the CDCs, which also makes the 504 Program more useful to the commercial banking community. As more and more bankers successfully use the program, they discuss it and provide information about it to other bankers which increases the impact of the marketing efforts of the CDCs. A similar phenomenon occurred in the banking industry. Over the years, bankers participating in SBA's 7(a) program have always been willing to come to bankers' meetings to describe their activity with other bankers. They do this because they recognize that as more people are aware of the program, the size of the market will increase. They may not have as high a percentage of the market but will have a smaller percentage of a bigger market resulting in more overall loan activity for the lender.

Accordingly, SBA hereby determines that this rule will not have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601-612. SBA invites comment from members of the public who believe there will be a significant economic impact on a substantial number of small entities.

Paperwork Reduction Act: SBA has determined that this proposed rule imposes additional reporting or recordkeeping requirements under the Paperwork Reduction Act, 44 U.S.C. chapter 35. This collection of information relates to two different reporting requirements: (1) The PCLP application and (2) the PCLP Loan Loss Reserve Fund reporting requirements. We include below an estimate of the time necessary to review the instructions, search data, fill in the forms, and gather, maintain and report the required data.

SBA invites comments on: (1) Whether the proposed collection of information is necessary for the proper performance of SBA's functions, including whether the information will have a practical utility; (2) the accuracy of SBA's estimate of the burden of the proposed collections of information, including the validity of the methodology and assumptions used; (3) ways to enhance the quality, utility, and clarity of the information to be collected; and (4) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques, when appropriate, and other forms of information technology.

Please send comments by the closing date for comment for this proposed rule to David Rostker, Office of Management and Budget, Office of Information and Regulatory Affairs, 725 17th Street, NW., Washington, DC 20503 and to LeAnn Oliver, Deputy Associate Administrator for Financial Assistance, Office of Financial Assistance, Small Business Administration, 409 Third Street, SW., Washington, DC 20416.

Title: CDC Checklist for Submitting PCLP Guarantee Requests (Part A); Supplemental Information for PCLP Processing (Part B); Eligibility Information Required for PCLP Submissions (Part C); How to Apply for a PCLP Number from SBA (instructions); and Instructions for “Supplemental Information for PCLP Processing” (No SBA form no. yet) (An application for OMB clearance is being submitted under separate cover.)

Summary: The PCLP application form is designed for PCLP CDCs. Under PCLP, the CDC is delegated the authority to (1) determine whether the proposed borrower poses an acceptable credit risk and (2) limiting SBA's determination of eligibility to a checklist filled in by the CDC. The other forms that make a complete PCLP application package are data collection forms to enable SBA to enter descriptive information about the borrower into SBA's database, and two pages of “Application for Section 504 Loan,” SBA Form 1244 (OMB Approval No. 3245-0071) that include information about the borrower as well as the signature page regarding CDC Agreements and Certifications.

Need and Purpose: Under standard SBA 504 Loan processing, SBA extensively analyzes the financing proposal and supporting documentation such as personal and business financial statements, cash flow projections and documentation to support an eligibility determination. These activities are designed to control and limit the risk associated with the 504 Program and SBA's guaranty, but they do require significant SBA resources. The time between submission of the 504 application to SBA and SBA making a decision to approve or deny the application can be several days to several weeks. If the loan defaults, SBA assumes 100 percent of the cost associated with the purchase of the debenture as well as costs associated with collection and liquidation activities. Under the PCLP, the CDC makes the credit decision regarding the application and submits an abbreviated eligibility checklist for SBA's review to determine eligibility. The time between submission of an application by the PCLP CDC and SBA making a decision is generally an hour or less. In exchange for this quick turn-around time by SBA, the PCLP CDC assumes 10 percent of any loss to SBA on any loan processed under the PCLP.

Description of Respondents: CDCs that qualify as PCLP CDCs. There are approximately 270 CDCs. Of those, 26 CDCs are PCLP CDCs. The number of PCLP CDCs has remained relatively static for several years. In FY 2002, 14 percent of the number of loans and 15 percent of the approved dollars were processed PCLP. For fiscal year 2003, year-to-date (through May 9, 2003), the percentage has dropped to 12 percent in the number of loans and 12 percent of the approved dollars.

SBA estimates the burden of this collection of information as follows: A PCLP CDC will complete these forms for each PCLP loan it processes. SBA estimates that the time needed to complete this collection is 45 minutes. SBA estimates that the cost to complete this collection will be approximately $20 per hour due to the clerical nature of most of the completion. Total estimated aggregated burden per annum is estimated to be approximately 700 hours per annum costing an aggregated $14,000 per year.

Title: LLRF Compliance Information (No SBA Form Number)

Summary: The LLRF compliance information will document the PCLP CDC's meeting of the LLRF deposit requirements.

Need and Purpose: Proposed § 120.847(f) of SBA regulations states that each PCLP CDC must periodically report to SBA the amounts in its LLRF in a form that will readily facilitate reconciliation of the amounts maintained in its LLRF with the amounts required. This will require the PCLP CDC to keep track of the face amount of each PCLP debenture and then determine and record the amount that must be contributed into its LLRF. Pursuant to the proposed regulations (§ 120.847(e)) the PCLP CDC has several deadlines related to when those contributions relating to each PCLP debenture must be made. There are three relevant deadlines for each PCLP debenture. The PCLP CDC must also keep track of its contributions to the LLRF.

Description of Respondents: There are approximately 270 CDCs. Of those, there are approximately 26 PCLP CDCs, or less than 10 percent of all CDCs.

SBA estimates the burden of this collection of information as follows: one hour per PCLP debenture. PCLP debenture volume will vary significantly among participants. We expect that few PCLP CDCs will issue more than 50 PCLP debentures annually. That would mean an aggregate burden of no more than 50 hours per year. SBA estimates that the added cost would be minimal, because existing PCLP CDC support staff and ordinary bank records will cover the labor costs. At an estimate of $10 per hour, the reporting requirements would not likely exceed $500 per year for any PCLP CDC.

Executive Order 12988: For purposes of Executive Order 12988, SBA determines that this proposed rule is drafted, to the extent practicable, to accord with the standards set forth in paragraph 3 of that Order.

For the reasons set forth in the preamble, SBA proposes to amend 13 CFR part 120 as follows:

Interested persons are invited to participate in the making of the proposed rule by submitting such written data, views, or arguments as they may desire. Communications should identify the Rules Docket number and be submitted in triplicate to the address specified above. All communications received on or before the closing date for comments, specified above, will be considered before taking action on the proposed rule. The proposals contained in this action may be changed in light of the comments received.

Comments are specifically invited on the overall regulatory, economic, environmental, and energy aspects of the proposed rule. All comments submitted will be available, both before and after the closing date for comments, in the Rules Docket for examination by interested persons. A report summarizing each FAA-public contact concerned with the substance of this proposal will be filed in the Rules Docket.

Commenters wishing the FAA to acknowledge receipt of their comments submitted in response to this action must submit a self-addressed, stamped postcard on which the following statement is made: “Comments to Docket Number 2001-NE-21-AD.” The postcard will be date stamped and returned to the commenter.

Any person may obtain a copy of this NPRM by submitting a request to the FAA, New England Region, Office of the Regional Counsel, Attention: Rules Docket No. 2001-NE-21-AD, 12 New England Executive Park, Burlington, MA 01803-5299.

On March 6, 2003, the FAA issued AD 2003-05-10, Amendment 39-13086 (68 FR 12806, March 18, 2003), to require initial and repetitive visual inspections and cleaning of the B-sump scavenge screens until a screenless fitting is installed. That action was prompted by six reports of B-sump oil scavenge system failure causing engine in-flight shutdowns. That condition, if not corrected, could result in ignition of B-sump oil in the secondary air system, fan drive shaft separation, and uncontained engine failure.

Since AD 2003-05-10 was issued, the FAA has recognized that a typographical error needs to be corrected in the Differences Between This AD and the Manufacturer's Service Information paragraph, and that a less restrictive terminating action schedule needs to be established.

The FAA has reviewed and approved the technical contents of GE Aircraft Engines (GE) Alert Service Bulletin (ASB) CF34-AL S/B 79-A0014, Revision 3, dated January 31, 2003; and ASB CF34-BJ S/B 79-A0015, Revision 3, dated January 31, 2003; that describe procedures for initial and repetitive visual inspections and cleaning of the B-sump scavenge screens. The FAA has also reviewed and approved GE ASB CF34-AL S/B 79-A0016 and ASB CF34-BJ S/B 79-A0017, both dated June 17, 2002. These ASBs describe the procedures for introducing the screenless B-sump scavenge fittings and for reworking to eliminate the screens from the existing scavenge screen fittings located at the forward and aft end of the lube and scavenge pump assembly, thereby terminating the repetitive inspections.

GE ASB CF34-AL S/B 79-A0014, Revision 3, dated January 31, 2003, recommends for engines with more than 4,000 hours time-since-new (TSN) or more than 1,000 hours time-since-last-shop-visit (TSLSV), initial visual inspections and cleaning of the B-sump scavenge screens “by the next A-check”. GE ASB CF34-BJ S/B 79-A0015, Revision 3, dated January 31, 2003, recommends for engines with more than 4,000 hours TSN or more than 1,000 hours TSLSV, initial visual inspections and cleaning of the B-sump scavenge screens within 300 hours for the CF34-3A1 engine model or within 400 hours for the CF34-3B engine model. However, this proposed AD would require initial visual inspections and cleaning of the B-sump scavenge screens within 500 hours after the effective date of this proposed AD. The time intervals have been changed from those cited in the ASBs to provide consistency for all engine models and to eliminate the use of aircraft maintenance terminology. The times are approximately equivalent to the A-check intervals.

GE ASBs CF34-AL S/B 79-A0016, dated June 17, 2002; and CF34-BJ S/B 79-A0017, dated June 17, 2002; recommend for engines with more than 4,000 hours TSN or more than 1,000 hours TSLSV, replacement of existing scavenge screens P/Ns 4047T95P01 and 5054T86G02, installed in the B-sump oil scavenge system, with screenless fittings “by the next A-check”. However, this proposed AD would require installation of screenless fittings, or fittings that have been reworked to remove the screens, in the B-sump oil scavenge system within 500 hours after the effective date of this proposed AD. The installation requirement has been changed from that cited in the ASBs to eliminate the use of aircraft maintenance terminology. The time is approximately equivalent to the A-check interval.

Since an unsafe condition has been identified that is likely to exist or develop on other GE CF34-3A1, -3B, and -3B1 turbofan engines of the same type design, this proposed AD is being issued to prevent B-sump scavenge screen blockage due to coking, which could result in ignition of B-sump oil in the secondary air system, fan drive shaft separation, and uncontained engine failure. This proposed AD would require:

• Initial visual inspection and cleaning of the scavenge screens, P/Ns 4047T95P01 and 5054T86G02, installed in the B-sump oil scavenge system.

• Repetitive visual inspection and cleaning of the scavenge screens, P/Ns 4047T95P01 and 5054T86G02, installed in the B-sump oil scavenge system, within 200 hours time-since-last inspection (TSLI) if no coking is found.

• Repetitive visual inspection and cleaning of the scavenge screens, P/Ns 4047T95P01 and 5054T86G02, installed in the B-sump scavenge system, within 100 hours TSLI if any coking is found.

• Replacement of existing scavenge screens, P/Ns 4047T95P01 and 5054T86G02, installed in the B-sump oil scavenge system, with screenless fittings.

The actions must be done in accordance with the service bulletins described previously.

There are approximately 940 engines of the affected design in the worldwide fleet. The FAA estimates that 576 engines installed on aircraft of U.S. registry would be affected by this proposed AD. The FAA also estimates that it would take approximately 10.0 work hours per engine to perform the proposed actions, and that the average labor rate is $65 per work hour. Required parts would cost approximately $1,050 per engine. Based on these figures, the total cost of the proposed AD to U.S. operators is estimated to be $979,200.

This proposed rule does not have federalism implications, as defined in Executive Order 13132, because it would not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. Accordingly, the FAA has not consulted with state authorities prior to publication of this proposed rule.

For the reasons discussed above, I certify that this proposed regulation (1) is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and (3) if promulgated, will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act. A copy of the draft regulatory evaluation prepared for this action is contained in the Rules Docket. A copy of it may be obtained by contacting the Rules Docket at the location provided under the caption ADDRESSES.

Accordingly, pursuant to the authority delegated to me by the Administrator, the Federal Aviation Administration proposes to amend part 39 of the Federal Aviation Regulations (14 CFR part 39) as follows:

DEA is publishing this Notice of Proposed Rulemaking (NPRM) to propose the clarification of its policies and procedures regarding the reporting by registrants of the theft or significant loss of controlled substances.

Title 21, Code of Federal Regulations, § 1301.74(c) “Other security controls for non-practitioners; narcotic treatment programs and compounders for narcotic treatment programs.” requires that: “The registrant shall notify the Field Division Office of the Administration in his area of any theft or significant loss of any controlled substances upon discovery of such theft or loss. The supplier shall be responsible for reporting in-transit losses of controlled substances by the common or contract carrier selected pursuant to § 1301.74(e), upon discovery of such theft or loss. The registrant shall also complete DEA Form 106 regarding such theft or loss. Thefts must be reported whether or not the controlled substances are subsequently recovered and/or the responsible parties are identified and action taken against them.”

Title 21, Code of Federal Regulations, § 1301.76(b) “Other security controls for practitioners.” further requires that: “The registrant shall notify the Field Division Office of the Administration in his area of the theft or significant loss of any controlled substances upon discovery of such loss or theft. The registrant shall also complete DEA (or BND) Form 106 regarding such loss or theft.”

A number of questions have arisen regarding the meaning of certain terms in these paragraphs. Specifically, there seems to be confusion within the regulated industry as to the exact meaning of the phrase “upon discovery”. Therefore, as further discussed below, DEA is proposing the amendment of the regulations to insert the word “immediately” before the phrase “upon discovery” to clarify this point. Further, DEA is proposing the amendment of its regulations to list certain factors which registrants should consider when determining whether a loss of controlled substances is significant. Finally, this document provides guidance to registrants on the reporting of breakage, spillage or other explained losses of controlled substances. No regulatory amendments are being proposed regarding this guidance.

Every DEA registrant is required to notify the DEA field office in their area of any theft or significant loss of controlled substances upon its discovery. DEA has always viewed “upon discovery” to mean that notification should occur immediately and without delay. Every DEA registrant (practitioner, pharmacy, hospital/clinic, manufacturer, distributor, etc.) must comply with this requirement, and such compliance cannot be overridden by an internal corporate policy that is contrary to the notification requirement. For example, a DEA-registered pharmacy must provide notice to the local DEA field office when a theft or significant loss is discovered. This requirement is not satisfied by the reporting of the theft or significant loss internally to individuals in corporate management. DEA must be notified directly and immediately of the theft or significant loss of the controlled substances. A corporation that owns/operates multiple registered sites and wishes to channel all notifications through a central point such as corporate loss prevention, corporate security, or other corporate entity may do so but must still fulfill the requirement to provide notice to DEA immediately upon discovery by the actual registrant. However, this immediate notification does not always occur. Therefore, DEA is proposing the amendment of its regulations to insert the word “immediately” before the phrase “upon discovery” to clarify this point.

The purpose of immediate notification is to provide an opportunity for DEA, state, or local participation in the investigative process when warranted, and to create a record that the theft or significant loss was properly reported. It also alerts law enforcement to more broadly based circumstances and patterns of which the individual registrant may be unaware. This notification is considered part of a good-faith effort on the part of the regulated industries to maintain effective controls against the diversion of controlled substances, as required by 21 CFR 1301.71(a). Lack of prompt notification could prevent effective investigation and prosecution of individuals involved in the diversion of controlled substances. Withholding or failing to provide information is a violation of the law and regulations (21 U.S.C. 821, 21 U.S.C. 842(a)(5), 21 CFR 1301.74(c), 1301.76(b)).

The regulations require that notice of a theft or significant loss must be reported to DEA upon its discovery. As noted above, DEA has always viewed “upon discovery” to mean that notification should occur immediately and without delay. Where circumstances of the theft or significant loss are immediately known, a DEA Form 106, Report of Theft or Loss of Controlled Substances, should be used to detail the circumstances of that theft or significant loss. When details concerning the specific circumstances surrounding the theft or loss are unknown at the time of discovery, DEA recommends initial notice be provided by faxing a short statement to DEA advising of the theft or significant loss. While such initial notice may alternatively be mailed, delays occuring due to the mailing process may hinder investigative efforts by DEA. A DEA Form 106, Report of Theft or Loss of Controlled Substances, is not immediately necessary. The registrant may then make efforts to determine the facts involved by conducting inventories, internal audits, and/or investigations using internal or law enforcement resources, as appropriate. The DEA Form 106 should be submitted once the circumstances surrounding the theft or significant loss are clear. The DEA Form 106 must document the circumstances of the theft or significant loss and the quantities of controlled substances involved. DEA recognizes that some time may elapse between the time initial notice of a theft or loss is provided and the conclusion of the investigation. DEA suggests that if an investigation takes more than two months to complete, registrants provide updates regarding the investigation to DEA. The conduct of an investigation does not obviate the need for immediate notification of the theft or significant loss by the registrant to the local DEA field office. If, after an investigation of the circumstances surrounding the disappearance of the material, it is determined that no theft or significant loss occurred, no DEA Form 106 need be filed. However, DEA recommends the registrant advise DEA that a DEA Form 106 is not needed or will not be filed regarding the incident.

The theft of controlled substances from a registrant is a criminal act, and a source of controlled substances diversion requiring notification of DEA. Although not specifically required by DEA law or regulations, the registrant should also notify local law enforcement and state regulatory agencies. Prompt notification of law enforcement agencies will allow them to investigate the incident and prosecute those responsible for the diversion.

Complete accountability by a registrant for all controlled substances handled is a fundamental requirement of the closed distribution system mandated by the Controlled Substances Act (CSA). The CSA requires: “* * * every registrant under this title manufacturing, distributing, or dispensing a controlled substance or substances shall maintain, on a current basis, a complete and accurate record of each such substance manufactured, received, sold, delivered, or otherwise disposed of by him,* * *.” (21 U.S.C. 827(a)(3)). No registrant should disregard any unexplained shortage of controlled substances. Registrants should treat an individual theft or significant loss seriously and should monitor occurrences so that patterns do not remain undetected. Record keeping must be accurate and complete so as to serve as a reliable reporting and recording device.

DEA has become aware of instances in which registrants have used a DEA Form 106 to document or explain minor inventory discrepancies, thereby “balancing the books.” DEA wishes to stress that the DEA Form 106 should be used only to document thefts or significant losses of controlled substances. Minor inventory discrepancies, not attributable to theft, should not be reported to DEA or recorded on a DEA Form 106. Rather, registrants should make appropriate notations of minor inventory discrepancies in their records, indicating the amount of variance between the physical count and the amount accounted for through records. Such discrepancies need not be reported to DEA if they are not significant or actual losses. If a registrant is unsure of the significance of a loss after considering the factors described below, the registrant should file the report. Any continuing pattern of loss of seemingly insignificant quantities should always be considered significant.

Specifically, this rulemaking proposes the amendment of 21 CFR 1301.74(c) and 1301.76(b) to insert the word “immediately” before the phrase “upon discovery” to clarify the points raised in the previous discussion. Although not specifically mentioned in the previous discussion, such reports include the report by a supplier of in-transit thefts or losses of controlled substances by the common or contract carrier selected by the supplier pursuant to 21 CFR 1301.74(e). Further, this rulemaking proposes a minor technical correction to § 1301.76(b) to remove the reference to BND Form 106, as this form is no longer used.

Questions have arisen as to exactly what constitutes a “significant loss.” There is no single objective standard which can be established and applied to all registrants to determine whether a loss is significant. Any unexplained loss or discrepancy should be reviewed within the context of a registrant's business activity and environment. What constitutes a significant loss for one registrant may be construed as comparatively insignificant for another. For example, the loss by a pharmacy of a 100-count bottle of controlled substance tablets would be viewed as significant, whereas the same loss by a full line distributor may be viewed differently, particularly if the loss is an unexplained inventory discrepancy that may have resulted from a picking error. A manufacturer may experience continuous losses in the manufacturing process due to atmospheric changes, mixing procedures, etc. Such losses may not be deemed by the registrant to be significant, and may be recorded in batch records. Conversely, for registrants other than manufacturers, the repeated loss of small quantities of controlled substances over a period of time may indicate a significant aggregate problem which must be reported to DEA, even though the individual quantity of each occurrence is not significant.

When determining whether a loss is significant, a registrant should consider, among others, the following factors:

(1) The actual quantity of controlled substances lost in relation to the type of business;

(2) A pattern of such losses, and the results of efforts taken to resolve them; and, if known,

(3) Local trends and other indicators of the diversion potential of the missing material.

Specific questions which a registrant should ask to identify whether a loss is significant include, but are not limited to:

(1) Has a pattern of loss been identified? Would this pattern result in a substantial loss of controlled substances over that period of time?

(2) Are specific controlled substances being lost, and do the losses appear to be random?

(3) Are the specific controlled substances likely candidates for diversion?

(4) Can losses of controlled substances be associated with access to those controlled substances by specific individuals? Can losses be attributed to unique activities which may take place involving the controlled substances?

Individual registrants should examine both their business activities and the external environment in which those business activities are conducted to determine whether unexplained losses of controlled substances are significant. When in doubt, registrants should err on the side of caution in alerting the appropriate law enforcement authorities, including DEA, of thefts and losses of controlled substances.

Specifically, this rulemaking proposes the amendment of 21 CFR 1301.74(c) and 1301.76(b) to include the factors listed above as factors which a registrant should consider when determining whether a loss is significant and, thus, must be reported to DEA. DEA encourages registrants to use other criteria, as well as those factors listed above, which they have found to be useful in the evaluation of losses of controlled substances when determining whether such losses are significant, but is proposing the provision of these factors as the minimum which registrants should consider.

DEA has encountered instances in which registrants have attempted to report spillages or explained losses of controlled substances on a DEA Form 106. The breakage, spillage or other witnessed controlled substance losses do not require the immediate notification of DEA. If controlled substance containers are broken or damaged, or controlled substances spilled, the substances are not considered “lost” because they can be accounted for. When breakage, spillage or damage of controlled substances occurs, the affected controlled substances must be disposed of according to DEA requirements.

If there is breakage, spillage or other damage to controlled substances, but the controlled substances are still recoverable, then the registrant has two options for disposing of the controlled substances. The registrant may dispose of the controlled substances by either (1) Contacting their local DEA field office and receiving permission from that office to dispose of the controlled substances pursuant to 21 CFR 1307.21, or (2) the registrant may send those controlled substances to a firm registered with DEA to handle returns/disposals.

If the registrant receives permission from DEA to dispose of the controlled substances pursuant to 21 CFR 1307.21, then that registrant must complete a DEA Form 41, Registrants Inventory of Drugs Surrendered, explaining the circumstances of the breakage. Two individuals who witnessed the breakage, spillage or damage must sign the DEA Form 41, indicating what they witnessed. Registrants must submit three copies of the DEA Form 41 to their local DEA field office (21 CFR 1307.21(a)(1)). Registrants are also required to maintain a copy of the DEA Form 41 in their records.

If the registrant sends the controlled substances to a DEA registered disposer, then the registrant must complete the necessary paperwork showing the distribution of the damaged controlled substances to the registered disposer.

If the breakage or spillage is clearly observed but the controlled substances are not recoverable, then the registrant must document the circumstances of the breakage in their inventory records. Two individuals who witnessed the breakage must sign the inventory records, indicating what they witnessed. These records must be maintained in the registrant's files.

The Deputy Assistant Administrator hereby certifies that this rulemaking has been drafted in accordance with the Regulatory Flexibility Act (5 U.S.C. 605(b)), has reviewed this regulation, and by approving it certifies that this regulation will not have a significant economic impact on a substantial number of small entities. This regulation seeks to clarify existing DEA regulations regarding the reporting of thefts and losses of controlled substances. No new recordkeeping or reporting requirements are proposed in this rulemaking.

The Deputy Assistant Administrator further certifies that this rulemaking has been drafted in accordance with the principles in Executive Order 12866 Section 1(b). DEA has determined that this is not a significant rulemaking action. Therefore, this action has not been reviewed by the Office of Management and Budget. This rulemaking merely seeks to clarify existing DEA regulations, policies and procedures.

This regulation meets the applicable standards set forth in sections 3(a) and 3(b)(2) of Executive Order 12988 Civil Justice Reform.

This rulemaking does not preempt or modify any provision of state law; nor does it impose enforcement responsibilities on any state; nor does it diminish the power of any state to enforce its own laws. Accordingly, this rulemaking does not have federalism implications warranting the application of Executive Order 13132.

This rule will not result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100,000,000 or more in any one year, and will not significantly or uniquely affect small governments. Therefore, no actions were deemed necessary under the provisions of the Unfunded Mandates Reform Act of 1995.

This rule is not a major rule as defined by section 804 of the Small Business Regulatory Enforcement Fairness Act of 1996. This rule will not result in an annual effect on the economy of $100,000,000 or more; a major increase in costs or prices; or significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based companies to compete with foreign-based companies in domestic and export markets.

For the reasons set out above, 21 CFR part 1301 is proposed to be amended as follows:

Section 1.1502-31 applies if one corporation (P) succeeds another corporation (T) under the principles of § 1.1502-75(d)(2) or (3) as the common parent of a consolidated group in a group structure change. If a corporation acquires stock of the former common parent in a group structure change, the basis of the members in the former common parent's stock immediately after the group structure change is generally redetermined to reflect the former common parent's net asset basis. In general, the group structure change regulations were designed to prevent disparate basis consequences resulting from different forms of transactions that effect a restructuring of a consolidated group that continues to exist following the restructuring.

The IRS and Treasury are concerned that the application of the net asset basis rule may produce inappropriate results on the disposition of stock acquired in a transaction in which, under generally applicable rules, the basis of the acquired stock would otherwise be determined by reference to the acquiror's cost for the stock. Accordingly, this document proposes to modify the application of the provisions of § 1.1502-31 to permit the basis of stock acquired in a recognition transaction to reflect the cost of the acquired stock.

In particular, this document excepts from the application of the net asset basis rule stock acquired in a transaction in which gain or loss was recognized in whole. These regulations are proposed to apply to group structure changes that occur after the date these regulations are published as temporary or final regulations in the Federal Register . With respect to group structure changes that occur on or before the date these regulations are published as temporary or final regulations in the Federal Register and during consolidated return years beginning on or after January 1, 1995, these regulations are proposed to apply at the election of the group.

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It is hereby certified that these regulations do not have a significant impact on a substantial number of small entities. This certification is based on the fact that these regulations primarily will affect affiliated groups of corporations, which tend to be larger businesses. Moreover, the number of taxpayers affected is minimal and the regulations will simplify basis determinations. Pursuant to section 7805(f) of the Internal Revenue Code, these proposed regulations will be submitted to the Chief Counsel of Advocacy of the Small Business Administration for comment on their impact.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the proposed regulations. All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register .

The principal authors of these regulations are Marlene Oppenheim and Ross Poulsen, Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in their development.

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

This document contains proposed amendments to 26 CFR part 1 under section 411(d)(6) of the Internal Revenue Code of 1986 (Code) as amended by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (115 Stat. 117). Section 411(d)(6)(A) of the Code generally provides that a plan will not be treated as satisfying the requirements of section 411 if the accrued benefit of a participant is decreased by a plan amendment. Section 411(d)(6)(B) prior to amendment by EGTRRA provided that an amendment is treated as reducing an accrued benefit if, with respect to benefits accrued before the amendment is adopted, the amendment has the effect of either eliminating or reducing an early retirement benefit or a retirement-type subsidy, or, except as provided by regulations, eliminating an optional form of benefit.

The IRS published TD 8900 in the Federal Register on September 6, 2000 (65 FR 53901). TD 8900, which amended § 1.411(d)-4 of the Income Tax Regulations, added paragraph (e) of Q&A-2 to provide for additional circumstances under which a defined contribution plan can be amended to eliminate or restrict a participant's right to receive payment of accrued benefits under certain optional forms of benefit.

Section 1.411(d)-4, Q&A-2(e)(1) provides that a defined contribution plan may be amended to eliminate or restrict a participant's right to receive payment of accrued benefits under a particular optional form of benefit without violating the section 411(d)(6) anti-cutback rules if, once the plan amendment takes effect for a participant, the alternative forms of payment that remain available to the participant include payment in a single-sum distribution form that is “otherwise identical” to the eliminated or restricted optional form of benefit. The amendment cannot apply to a participant for any distribution with an annuity starting date before the earlier of the 90th day after the participant receives a summary that reflects the plan amendment and that satisfies Department of Labor's requirements for a summary of material modifications under 29 CFR 2520.104b-3, or the first day of the second plan year following the plan year in which the amendment is adopted. Section § 1.411(d)-4, Q&A-2(e)(2) provides that a single-sum distribution form is “otherwise identical” to the optional form of benefit that is being eliminated or restricted only if it is identical in all respects (or would be identical except that it provides greater rights to the participant), except for the timing of payments after commencement. A single-sum distribution form is not “otherwise identical” to a specified installment form of benefit if the single-sum form:

• Is not available for distribution on any date on which the installment form could have commenced;

• is not available in the same medium as the installment form; or

• imposes any additional condition of eligibility.

Section 645(a)(1) of EGTRRA revised section 411(d)(6) in a manner that is similar to § 1.411(d)-4, Q&A-2(e), but without the advance notice condition. Section 411(d)(6)(E) of the Code provides that, except to the extent provided in regulations, a defined contribution plan is not treated as reducing a participant's accrued benefit where a plan amendment eliminates a form of distribution previously available under the plan if a single-sum distribution is available to the participant at the same time as the form of distribution eliminated by the amendment, and the single-sum distribution is based on the same or greater portion of the participant's account as the form of distribution eliminated by the amendment.

To reflect the addition of section 411(d)(6)(E) by EGTRRA, these proposed regulations would amend § 1.411(d)-4, Q&A-2(e). Under these amendments, the regulations would retain the rules under which a defined contribution plan may be amended to eliminate or restrict a participant's right to receive payment of accrued benefits under a particular optional form of benefit without violating the section 411(d)(6) anti-cutback rules if, once the plan amendment takes effect for a participant, the alternative forms of payment that remain available to the participant include payment in a single-sum distribution. However, these proposed regulations would remove the 90-day notice condition previously applicable to these plan amendments. 1

Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713), the Secretary of the Treasury has interpretive jurisdiction over the subject matter addressed in these regulations for purposes of the Employee Retirement Income Security Act of 1974 (ERISA), as well as the Code. Section 204(g)(2) of ERISA, as amended by EGTRRA, provides a parallel rule to section 411(d)(6)(E) of the Code that applies under Title I of ERISA, and authorizes the Secretary of the Treasury to provide exception to this parallel ERISA requirement. Therefore, these regulations apply for purposes of the parallel requirements of sections 204(g)(2) of ERISA, as well as for section 411(d)(6)(E) of the Code.

The proposed regulations are proposed to apply on the date of publication of final regulations in the Federal Register .

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulation does not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

The principal author of these regulations is Vernon S. Carter of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury participated in their development.

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

Paragraph 1. The authority citation for part 1 is amended to read in part as follows:

Section 1.411(d)-4, Q&A-2(e) also issued under 26 U.S.C. 411(d)(6)(E). * * *

Par. 2. Section 1.411(d)-4, Q&A-2(e) is revised to read as follows:

This document proposes amendments to 26 CFR part 1 to provide additional rules under section 465 of the Internal Revenue Code of 1986 (Code), as amended. Section 465 was added to the Code by section 204 of the Tax Reform Act of 1976 (Public Law 94-455, 90 Stat. 1531). Section 465 limits the deductibility of losses to a taxpayer's economic investment (the amount at risk) in the activity at the close of a taxable year. A taxpayer is generally considered at risk in an activity to the extent of cash and the adjusted basis of property contributed by the taxpayer to the activity. In general, a taxpayer's amount at risk also includes any amounts borrowed for use in the activity if the taxpayer is personally liable for repayment or if property other than property used in the activity is pledged as security.

As originally enacted, section 465 applied to certain enumerated activities described in section 465(c)(1) (old activities). Subsequent amendments made by section 201 of the Revenue Act of 1978 (Public Law 95-600, 92 Stat. 2814) extended the at-risk rules to other activities described in section 465(c)(3)(A) (new activities).

On June 5, 1979, the IRS published in the Federal Register (44 FR 32235) proposed regulations (LR-166-76) relating to the treatment of investments in old activities under section 465 of the Code (the previously proposed regulations). Section 1.465-8 of the previously proposed regulations provides that amounts borrowed by a taxpayer for use in an old activity do not increase the taxpayer's amount at risk if the lender has an interest in the activity other than that of a creditor. Section 1.465-20 of the previously proposed regulations provides rules for the treatment of amounts borrowed from certain persons and amounts protected against loss. This document proposes to amend §§ 1.465-8 and 1.465-20 of the previously proposed regulations.

Under section 465(b)(3), amounts borrowed for use in an activity will not increase the borrower's amount at risk in the activity if the lender has an interest other than that of a creditor in the activity (a disqualifying interest) or if the lender is related to a person (other than the borrower) who has a disqualifying interest in the activity. The rule applies even if the borrower is personally liable for the repayment of the loan or the loan is secured by property not used in the activity.

Section 465(c)(3)(D) provides that section 465(b)(3) will apply to new activities only to the extent provided in regulations prescribed by the Secretary. The Tax Court in Alexander v. Commissioner, 95 T.C. 467 (1990), held that, until regulations are issued, section 465(b)(3) cannot be applied to a new activity. These proposed regulations will apply section 465(b)(3) to the new activities described in section 465(c)(3)(A).

As originally enacted, section 465(b)(3) also applied to any borrowing from persons related to the taxpayer under section 267(b). Section 432(c) of the Deficit Reduction Act of 1984 (Public Law 98-369, 98 Stat. 814) eliminated this rule but provided, instead, that a taxpayer's amount at risk is not increased by amounts borrowed from a person related to a person (other than the taxpayer) who has a disqualifying interest in the activity. These proposed regulations change § 1.465-20 of the previously proposed regulations to reflect the amendment made by the Deficit Reduction Act of 1984.

These proposed regulations modify the previously proposed regulations to reflect section 465(b)(3)(B)(ii), which provides that, for purposes of determining a corporation's amount at risk, an interest as a shareholder is not a disqualifying interest. Thus, amounts borrowed by a corporation from its shareholders may increase the corporation's amount at risk.

These proposed regulations also modify the previously proposed regulations to reflect section 465(b)(6)(A), which provides that “qualified nonrecourse financing,” if borrowed for use in an activity of holding real property and secured by real property used in the activity, is not subject to the limitations of section 465(b)(3). In addition, these proposed regulations expand the exception to include financing that, if it were nonrecourse, would be financing described in section 465(b)(6)(B). This expansion of the exception ensures that recourse financing is treated no worse than qualified nonrecourse financing.

The new rules in these regulations are proposed to be applicable to amounts borrowed after the rules are published as final regulations in the Federal Register .

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and, because these regulations do not impose on small entities a collection of information requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and 8 copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register .

The principal authors of these proposed regulations are Tara P. Volungis and Christopher L. Trump of the Office of Associate Chief Counsel (Passthroughs and Special Industries). Other personnel from Treasury and the IRS participated in their development.

Accordingly, 26 CFR part 1, which was proposed at 44 FR 32235 (June 5, 1979), is proposed to be amended as follows:

Current MMS incident reporting requirements at 30 CFR 250.191 do not include detailed reporting thresholds and definitions. This allows a range of interpretations by the lessees/operators as to what should be reported. It is difficult to conduct meaningful incident analyses on data that are not consistently reported. Additionally, MMS does not currently require the submission of written incident reports. This also makes it more difficult to gather consistent information about each incident. The OCS lessees/operators have the best and most immediate access to information about incidents that are associated with their operations.

MMS's top priority is that OCS operations be conducted in a safe and environmentally sound manner. We must continue to identify unsafe equipment and procedures, as well as the human and organizational factors that cause incidents. To do this effectively, we need to upgrade our incident data analysis, investigation, and information publication functions. MMS uses incident data analyses and investigations to identify incident causes and trends. We also use it to evaluate both industry and individual operator performance. With this knowledge, we can develop strategies for promoting safety on the OCS. Strategies may include: developing regulatory initiatives, performing needed research, working with industry to develop new standards, conducting risk-based inspections, holding joint MMS/industry workshops to address specific safety issues, working with individual lessees/operators to address particular safety concerns, or other appropriate actions. Publishing information on incident causes and trends also allows industry to identify potentially unsafe equipment, conditions, or procedures so that lessees and operators can take appropriate steps to improve the safety of their operations.

Current MMS incident reporting requirements are not consistent with the USCG reporting requirements for OCS activities. This creates confusion for OCS lessees/operators in determining what incidents to report to each agency and makes it more difficult for MMS and the USCG to coordinate their respective responsibilities on the OCS as agreed to in a Memorandum of Understanding (MOU) signed December 16, 1998. The purpose of the MOU is to minimize duplication and promote consistent regulation of OCS facilities. This proposed rule will help achieve that goal in the area of incident investigation, data collection, and analysis.

This proposed rule revises and clarifies MMS requirements for reporting incidents associated with OCS oil and gas and other mineral operations:

a. Several definitions are added, including the term “incident” which replaces the term “accident” currently used in the regulations;

b. More specific incident reporting thresholds for various incident types are established;

c. Written reports are required and must be submitted electronically; and

d. Two new MMS forms are proposed so that consistent information will be reported to MMS for all incidents.

MMS is working with the USCG to develop a single point electronic reporting system that would allow reports submitted through a single point to fulfill the requirements of both MMS and the USCG.

On December 7, 1999, the USCG published a Notice of Proposed Rulemaking (NPR) (64 FR 68416) amending its regulations at 33 CFR parts 140-147, Outer Continental Shelf Activities. Among many other things, the USCG NPR revises requirements for reporting incidents related to OCS facilities and vessels engaged in OCS activities. After several extensions, the comment period closed on November 30, 2000. MMS has worked with the USCG to ensure that the MMS proposed reporting requirements are as consistent as possible with the USCG's proposed rule.

This MMS proposed rule revises reporting requirements for all incidents that must be reported to MMS. The proposed rule also lists USCG reporting requirements for incidents where the two agencies have mutual interest and responsibility. We listed the USCG requirements so that both agencies' reporting requirements for these incidents can be found in one location. Our goal is for OCS lessees/operators to be able to submit reports to both agencies through one electronic system for those incidents where the two agencies have mutual interest and responsibility. Since this is an MMS rule, we can require that incidents be reported to MMS, but cannot require that the incidents be reported to the USCG. The USCG's regulations impose that requirement. The USCG will need to take some action that will allow the appropriate segments of its regulated community to report incidents electronically according to the MMS regulation. We have discussed this with the USCG, and we will continue to work closely with the USCG as we review the comments to the proposed rule and finalize the MMS incident reporting regulation.

During the comment period for this rule, MMS will hold a workshop to discuss the rule and the development of an electronic reporting system. We will publish information on the workshop in the Federal Register . MMS and USCG encourage your comments on any aspect of this proposed rule and your participation in the workshop.

On January 5, 1998, (63 FR 256), MMS and the USCG published proposed revisions to the MMS/USCG MOU in the Federal Register .

On February 13, 1998 (63 FR 7335), MMS published a proposed rule to revise MMS regulations for Postlease Operations Safety. The revisions were, among other things, intended to upgrade our incident investigation, data collection, and analysis functions. Some of the comments expressed concerns that were similar to those raised at an April 22, 1998, USCG-sponsored National Offshore Safety Advisory Committee (NOSAC) meeting. At that NOSAC meeting, industry expressed concerns about the duplicative and inconsistent incident reporting requirements of MMS and the USCG and the lack of specific reporting definitions and thresholds contained in the MMS February 1998 proposed rule. Because of these concerns, NOSAC formed an Incident Reporting Subcommittee to develop recommendations for a consistent approach to incident reporting between the two agencies. MMS, USCG, and industry representatives served on this subcommittee.

On May 29, 1998 (63 FR 29478), MMS published a final rule that redesignated sections of 30 CFR part 250 to provide additional section numbers for future revisions. This redesignation did not change any requirements. Former § 250.19, dealing with incident reporting, was redesignated as § 250.119.

At a November 5, 1998, NOSAC meeting, the Incident Reporting Subcommittee presented a framework and recommendations for MMS and the USCG to use in developing incident reporting regulations. Recommendations included:

• Delay the portion of the final rule for Postlease Operations Safety dealing with incident reporting regulations (to allow MMS and USCG time to address inconsistencies between the two agencies' requirements);

• Improve the cycle time to provide better feedback of incident data (incident analysis, faster safety alerts, trend analysis);

• Establish a USCG/MMS team to focus on the incident reporting process;

• Include stakeholders in the process;

• Use, wherever possible, common definitions for like terms;

• Strive for a process that requires single agency reporting;

• Explore the value of a single form with multiple data needs;

• Investigate alternate reporting methods and timing for reports; and

• Clarify and identify who is responsible for initiating the reports.

MMS and the USCG concurred with the NOSAC Subcommittee's recommendations, and in December 1998 met to begin developing mutually agreeable reporting requirements and an electronic reporting system. The two agencies developed a draft set of requirements and, in June 1999, invited industry representatives from the NOSAC Subcommittee to meet and discuss the draft requirements.

On December 16, 1998, MMS and the USCG signed a new MOU, which was published in the Federal Register on January 15, 1999 (64 FR 2660). The purpose of the MOU is to minimize duplication and promote consistent regulation of OCS facilities. In the Federal Register notice, we also described several actions that the two agencies would consider in implementing the MOU. Several were related to incident investigation, data collection, and analysis, and they included:

• Work on safety management, including accident investigations to promote safe practices;

• Continue to work on single point reporting;

• Communicate electronically;

• Improve the process of reporting and collecting incident data; and

• Share incident data to prevent accidents, particularly fatalities.

On December 28, 1999 (64 FR 72756), MMS published the final rule for Postlease Operations Safety (30 CFR 250, subpart A). In the final rule, the section relating to incident reporting, 30 CFR 250.119, was renumbered as 30 CFR 250.191. We addressed a few of the comments on the proposed incident reporting requirements in that final rule. However, we did not make changes to incident reporting requirements (except for rewriting them in plain English) and deferred the issue to a separate rulemaking process, i.e. , this MMS proposed rule.

We propose to renumber 30 CFR 250.190 as 250.186.

We propose to revise 30 CFR 250.191 into several sections as follows:

Section 250.187—What is the scope of the incident reporting requirements?

Section 250.188—What incidents must I immediately report to MMS, USCG, National Response Center (NRC), or the Responsible Party?

Section 250.189—What other incidents must I report to MMS?

Section 250.190—What reporting procedures must I follow?

Section 250.191—How does MMS conduct incident investigations?

Twelve new definitions are proposed. Five definitions are proposed to clarify specific MMS incident reporting requirements. Seven are proposed to clarify both MMS and USCG requirements.

Definitions that clarify specific MMS reporting requirements:

• Collision—We developed this definition to clarify the types of collisions that should be reported. The USCG does not have a definition for collision.

• Gas release—Reporting these incidents is a new proposed requirement, so a definition was added.

• Loss of well control—Loss of well control incidents have the potential to result in very serious consequences from both a safety and environmental standpoint. Because of the potential consequences, MMS needs to investigate and understand the causes of all of these incidents so that appropriate measures to prevent them can be identified. Currently, MMS regulations require reporting of all “blowouts,” and the term “blowout” is undefined. Because of the seriousness of loss of well control incidents, we believe most of these incidents are already being reported under current MMS regulations. However, a small number of lessees/operators may not be reporting all types of loss of well control incidents. In particular, some lessees/operators may not be reporting incidents where the well is put on a diverter and subsequently controlled. MMS proposes to replace the term “blowout” with “loss of well control” and has defined “loss of well control” as broadly as possible, including diverter incidents.

• Reportable releases of H 2 S— § 250.490(l) currently requires lessees/operators to notify MMS of these incidents. We are retaining that requirement and are providing a definition for “Reportable Releases of H2S” that uses the same wording found in § 250.490(l).

• Fire—Industry comments on the MMS proposed rule for Postlease Operations Safety (February 13, 1998, 63 FR 7335) requested that MMS provide a definition for fires and identify what types of fires are to be reported. In response to these comments, we are proposing a definition of fire. We started with the definition from the American Petroleum Institute's (API) Recommended Practice 14G, Third Edition, December 1, 1993. It is likely the one used by most OCS lessees/operators. To this definition, MMS has specifically added incidents involving smoke with no visible flame. This addition is in response to industry questions about whether “smoke only” incidents must be reported.

Definitions needed to clarify both MMS and USCG requirements:

• Incident—We propose to replace the term “accident” with the term “incident” and have proposed a definition. Current MMS regulations refer to “accidents.” Many people think of an accident as an event that results in serious personal injury or involves significant damage to property, while the term “incident” connotes a broader range of events. This proposed rule, like the current rule, includes reporting of events that result in serious injury or damage to property and events that result in minor or no injuries and little or no property damage. Thus, we believe the term “incident” is more appropriate. We do not intend to require reporting of illnesses and injuries arising from causes other than operational incidents, such as communicable diseases, food poisoning, etc. The definition of “incident” is designed to exclude these types of events.

The current USCG regulations and the USCG proposed rule use the term “casualty” or “marine casualty” to refer to events that must be reported. The definition of incident in this MMS proposed rule includes these terms.

• Mobile Offshore Drilling Unit (MODU)—Current MMS regulations do not include a definition for MODU. The definition proposed in this NPR is taken from the USCG NPR (33 CFR 140.25) with one change. We have eliminated the exclusion of MIDUs (Mobile Inland Drilling Units) that appears in the USCG NPR. The USCG proposed rule specifies the limited locations where MIDUs may operate on the OCS (33 CFR 145.505) and also proposes some requirements for MIDUs that are different than those for MODUs (33 CFR, part 145, Subpart F). Therefore, the USCG proposed rule includes separate definitions for MODUs and MIDUs. However, for the purpose of incident reporting, this distinction is not needed. Therefore, in this MMS NPR we have eliminated the exclusion of MIDUs from the USCG NPR defintion of MODUs, so that the reporting requirements apply to both MODUs and MIDUs when they operate on the OCS.

• OCS Activity—A definition of “OCS activity” is added to help define other terms. This proposed definition is taken directly from the MMS/USCG MOU with a minor editorial change.

• OCS Facility—A definition of “OCS facility” is added to clarify reporting requirements for vessels in relation to these facilities. Current MMS regulations include three definitions for facility. However, their applications are limited to specific sections of the 30 CFR part 250 regulations. The USCG proposed rule definition of “facility” (33 CFR 140.25) does not include pipelines, which MMS needs to include in this rulemaking. In this MMS proposed rule, we added a definition for OCS facility that is taken from the MMS/USCG MOU, which does include pipelines. To this definition, we added a phrase that specifies when MODUs are considered to be an OCS facility. We are also correcting a typographical error in the MMS/USCG MOU definition by replacing the word “and” with the word “or” to indicate that the purpose of an OCS facility is “exploring for, developing, producing, or transporting resources from the OCS.”

• Property Damage—Since some of the proposed incident reporting thresholds are based on the dollar amount of property damage, a definition is needed. At 33 CFR 143.110(a)(6), the USCG NPR incorporates a description of what “property damage” includes. We have used the USCG wording for our proposed definition with minor editorial changes and one additional change. We have replaced the term “facility” with the term “OCS facility.” The USCG NPR includes a definition for “facility,” which is not the same as our proposed definition of “OCS facility.” The definition of “OCS facility” is broader in scope than the USCG proposed rule definition of “facility,” particularly because it includes pipelines and MODUs. For incident reporting purposes, the use of the broader term, “OCS facility,” in relation to property damage is more appropriate and should satisfy the needs of both agencies.

• Vessel—We are proposing reporting of certain incidents involving vessels (boats, barges, etc.) and need to define the term “vessel.” The USCG NPR definition for vessel (33 CFR 140.25) does not specifically exclude atmospheric or pressurized vessels used for containing liquids and gases. We propose to use the definition from the MMS/USCG MOU, which does specifically exclude atmospheric and pressure vessels. We have made minor editorial changes to this definition.

• Vessels engaged in OCS activities—This definition is needed to help identify the scope of the proposed reporting requirements (§ 250.187). There is no definition for these vessels in current MMS or USCG regulations, proposed USCG regulations, or the MMS/USCG MOU. The definition in this proposed rule is based on a vessel's distance from an OCS facility.

We propose to expand the scope of the current regulations and provide additional guidance. Current regulations do not specify when incidents involving vessels are related to operations on a lease, easement, right-of-way, or other permit. As a result, it is unclear when these incidents must be reported to MMS. Numerous crew, supply, and other vessels transit the OCS daily. They visit OCS facilities to load/unload crew and supplies and to provide fuel and other services to those facilities. The USCG has jurisdiction over vessel operations on the OCS. However, to coordinate response and investigation responsibilities, both MMS and the USCG need to know about incidents where vessels may be involved with or pose a threat to an OCS facility. We have identified these situations as incidents involving “vessels engaged in OCS activities,” and have added a reporting requirement. A definition of “vessels engaged in OCS activities” is also proposed and is based on the distance of the vessel from an OCS facility.

As noted earlier in the preamble, we list the USCG's reporting requirements in this MMS proposed rule so that reports for both agencies can be made through one electronic system. Since MMS cannot require that incidents be reported to the USCG, the USCG will need to take some action to allow its regulated community to report incidents according to MMS regulations. This issue is also addressed in the scope of this MMS proposed rule.

The following table compares the scope of current MMS regulations and this MMS proposed rule.

Three reporting categories are proposed based on the seriousness of the outcome of the incident. Those categories are “Immediate,” “12-Hour,” and “15-Day” and are named for the time when the first notification or report is due. Within each of these categories, reporting thresholds are proposed for various incident types (fires, explosions, injuries, gas releases, etc.).

We are proposing three reporting categories to ensure that MMS and the USCG receive timely notification of incidents so that we may respond appropriately. For incidents in the “Immediate” category, one or both agencies need to be notified right away because they may need to take one or more of the following actions: (1) Be involved in or monitor the ongoing response to the incident; (2) determine if the incident jeopardizes ongoing operational safety and take appropriate action; or (3) initiate an incident investigation. Although incidents in the “12-Hour” category are less serious in terms of outcome, MMS still needs to be notified to determine if any of the actions previously listed are needed. Incidents in the “15-Day” category are not likely to require immediate action from MMS. However, the agency still needs to know about them because they involve unsafe conditions or actions related to offshore operations that we may need to address.

The following discussion summarizes the thresholds we are proposing for each incident type. A table comparing these proposed thresholds with those in the current regulation is found at the end of this discussion.

For some incident types, the proposed overall reporting threshold is the same as in MMS current regulations. For other incident types, reporting thresholds have been modified through proposed definitions or more specific reporting thresholds. Other incident types included in this proposed rule are not specifically addressed in the current regulations. One incident type in the current regulation is not specifically addressed in this proposed rule.

Incidents—No change to the current reporting thresholds. Although the language may be different for the following four incident types, the reporting thresholds remain the same.

• Death—Current regulations and the proposed rule both require reporting any death. In the proposed rule, all deaths other than deaths due to natural causes would have to be reported to MMS and would be reported in the “Immediate” category. Although current regulations do not specifically exclude deaths due to natural causes, they do indicate that reportable incidents are those that are connected with any activities or operations on the lease or operations that are related to the exercise of rights under an easement, right-of-way, or other permit. We therefore believe that the reporting threshold in this proposed rule is essentially the same as that in the current regulation.

• Explosions—Current regulations and the proposed rule require reporting all explosions. In the proposed rule, explosions are reported in either the “Immediate” or “12 Hour” category, depending on the amount of property damage resulting from the explosion.

• H 2 S Releases—The current regulations at § 250.490(l) and the proposed rule require reporting of H 2 S releases. The reporting threshold of both the current and proposed rule is also the same. In the proposed rule, all H 2 S releases are reported in the “Immediate” category.

• Oil spills—The reporting threshold in the current regulation and the proposed rule is the same. In the proposed rule, all oil spills are reported in the “Immediate” category.

Incidents where current reporting thresholds are modified. Overall reporting thresholds for the following three incident types have been modified.

• Fires—Current regulations require reporting of all fires, and the term fire is undefined. As noted earlier, MMS, in response to industry comments, is proposing a definition for fire based on the definition from API Recommended Practice 14G, Third Edition, December 1, 1993. Incidents involving smoke with no visible flame are also included to address questions we have received from the industry. The proposed rule requires reporting of all fires except those that are completely contained in the living quarters and result in $25,000 or less in property damage. This exception eliminates the need to report minor fires that pose little risk to safety. In this proposed rule, fires are reported in the “Immediate,” “12-Hour,” or “15-Day” categories, depending on the amount of property damage or number of injuries resulting from the fire.

• Loss of well control—Current regulations require reporting of all blowouts, and the term “blowout” is undefined. Because of the potential risks associated with these incidents, the term “loss of well control” is proposed as a substitute for “blowout,” and has been broadly defined to ensure all of these incidents are included. The proposed rule requires that all losses of well control be reported in the “Immediate” category.

• Injuries—Current MMS regulations require reporting of all serious injuries, without defining the term “serious.” In this MMS NPR, we have maintained the current MMS requirement to report all serious injuries. We have specified what constitutes a serious injury, using the same criteria that the USCG has included in its NPR. Although the USCG NPR does not include a requirement for reporting less serious injuries, MMS has determined that it is important for us to develop a better understanding of the causes of these incidents as precursors or “near misses” to the more serious injury incidents. To do this, we need to examine more than just the most serious incidents. Examining the causes of less serious incidents will enable us to work with the industry to identify effective ways for preventing serious injury incidents. When MMS began to prepare this proposed rule, we decided to use the Occupational Safety and Health Administration (OSHA) terms “lost workdays” and “first aid” to define reporting thresholds because these were widely used by the petroleum and other industries and had been in place for many years. For calendar year 1997, many OCS operators submitted incident data for the voluntary MMS/USCG/Industry performance measures program. Data from the resulting report (Outer Continental Shelf Performance Measures; Safety, Environmental and Regulatory Compliance Indicators from the U.S. Offshore Oil and Gas Industry, Report for 1996-1998), published in August 1999, indicated that there were 507 “lost workday” cases in 1997. In that same year, MMS received reports for 83 injuries, or only about 16 percent of the “lost workday” cases reported by the performance measures participants.

• “Lost workdays,” as defined by OSHA, encompassed relatively minor injuries and illnesses up through the most serious ones. To eliminate the more minor injuries and illnesses included under the OSHA definition of “lost workdays,” MMS considered establishing a reporting threshold based on a certain number of “lost workdays.” Discussions with offshore industry representatives indicated that the industry keeps basic information about lost workday cases, but that tracking the number of “lost workdays” for each case in order to determine which cases should be reported to MMS would be very burdensome. Therefore, we decided not to set the threshold at a certain number of “lost workdays.” Instead, we decided to propose that all “lost workday” cases as defined by OSHA be reported while minimizing the amount of information requested for these incidents.

On January 19, 2001, OSHA published a final rule for occupational injury and illness recording and reporting requirements (29 CFR 1904.7, 66 FR 5916) which became effective on January 1, 2002. In that rule, the term “lost workday” was eliminated. We have adopted the terms from OSHA's final rule that replace “lost workdays.” Therefore, to define reporting thresholds for injuries, we are proposing the use of “days away from work” and “restricted work or job transfer” where we originally had decided to use “lost workdays.” Similarly, to define a threshold for fires involving injuries, we are proposing OSHA's new term “medical treatment beyond first aid” instead of referring to “first aid” as defined in the previous version of OSHA's regulations. We have adopted these terms as defined by OSHA, to be consistent with these already existing recording requirements and definitions rather than promulgating requirements with different criteria.

In this proposed rule, an injury threshold for each reporting category is proposed. The most serious injuries would be reported in the “Immediate” category, and the reporting threshold is defined by the nature of the injury.

In the “12-Hour” category, we propose the reporting of: (1) incidents resulting in injuries or illnesses to more than one person that involve “days away from work” or “restricted work or job transfer “ and (2) all fires resulting in injuries or illnesses to more than one person that involve “medical treatment beyond first aid.” Incidents already reported under the “Immediate” category are excluded.

In the “15-Day” category, we propose the reporting of all incidents resulting in injuries or illnesses to one person that involve “days away from work” or “restricted work or job transfer.” Incidents already reported in the “Immediate” or “12-Hour” category are excluded.

Incident types that are not addressed in the current regulations. The following eight incident types are not addressed in current MMS regulations. Six of these must be reported to MMS; the others must be reported to the USCG or NRC.

• Collision—Because these incidents have potentially serious consequences, MMS wants to ensure that they are reported. A specific requirement is included to report collisions and sets the reporting threshold at those incidents resulting in more than $25,000 of property damage. All collisions are reported in either the “Immediate” or “12-Hour” category, depending on whether the amount of property damage is more or less than $100,000.

• Incidents Involving Property Damage—Although incidents involving property damage alone do not result in serious outcomes in terms of personal injury, they do represent unsafe conditions that have the potential for more serious consequences, including personal injury. Receiving information about these incidents will help MMS identify safety concerns and work with industry on appropriate preventative measures. The dollar amount of property damage is proposed as a reporting threshold for specific incidents such as collisions, fires, and explosions, as well as a general threshold for other incidents. The proposed rule requires that incidents resulting in property damage greater than $25,000 be reported. They are reported in either the “Immediate” or “12-Hour” category, depending on the amount of property damage.

• Gas Releases—Because of the potential hazard that a release of flammable gas poses to an offshore facility as a precursor to an explosion, MMS needs to determine how often and under what circumstances these incidents are occurring on the OCS. This information will enable us to work with the industry to determine if additional prevention measures are needed. The proposed rule defines gas releases as unintentional releases that without correction could raise gas concentrations to the lower flammable (explosive) limit. Gas releases do not include gas that is vented or flared. These events have their own reporting requirements. In this proposed rule, gas releases are reported in the “15-day” category.

• Non-weather-related incidents where personnel muster for evacuation—Incidents where personnel prepare for evacuation represent situations that have the potential to become serious. MMS needs to determine how often and under what circumstances these incidents are occurring on the OCS. This information will enable us to identify additional safety concerns that may need to be addressed and to work with the industry on prevention measures. The proposed rule requires that these incidents be reported in the “15-day” category.

• Incidents that impair the operation of an OCS facility's primary firefighting and lifesaving equipment—Firefighting and lifesaving equipment are critical to the protection of offshore operations, personnel, property, and the environment. If this equipment is impaired, MMS and the USCG need to know immediately to coordinate appropriate response. Therefore, we are proposing that these incidents be reported.

• Vessels engaged in OCS activities that are involved in incidents listed in the USCG regulations at 46 CFR 4.05-1(a)(1) through 4.05-1(a)(4)—These incidents involve things such as a vessel's loss of main propulsion, etc., and are the responsibility of the USCG. If such incidents occur near an OCS facility, they have the potential to jeopardize the safety of operations, personnel, or property, on the facility or the surrounding environment. In these situations, both MMS and the USCG need to know about the incident to coordinate appropriate response and investigation actions. As noted earlier, MMS is proposing a definition for “vessels engaged in OCS activities.” This definition is based on the vessel being within 500 meters of an OCS facility. Because vessels within this distance have the potential to be involved with or affect the safety of both the vessel and the facility, these incidents would be immediately reported to both agencies.

• Vessels not engaged in OCS activities that are involved in accidents listed in the USCG regulations at 46 CFR 4.05—This NPR is intended to address both MMS and the USCG reporting requirements for incidents where we have mutual interest. However, this NPR also includes a statement that nothing in this subpart would relieve the obligation for any vessel not engaged in OCS activities to provide notices or reports to the USCG as required by 46 CFR 4.05. These incidents are beyond the scope of MMS interest and responsibility and fall within the USCG's jurisdiction, but we added this statement to ensure that there is no ambiguity between MMS and USCG requirements.

• Hazardous spills—Current regulations do not specifically address reporting of hazardous spills. MMS is interested in these incidents as they relate to the safety of OCS operations and protection of the environment but does not have direct jurisdiction or expertise over hazardous substances. MMS is able to get initial reports from the NRC for incidents involving these substances. Therefore, this proposed rule reminds lessees/operators that all hazardous spills must be reported to the NRC as currently required by Environmental Protection Agency (EPA) regulations.

Incident type that is addressed in the current regulation, but not in this NPR .

• Serious accidents—The current regulation requires reporting of all serious accidents but does not define this term. We wrote this proposed rule to provide more specific reporting definitions and thresholds. We believe that these definitions and thresholds encompass the incidents that MMS would consider serious. Therefore, the general category of serious incidents is no longer needed, and we have not included it in the proposed rule.

The following table compares the reporting thresholds in current regulations with the ones that are proposed.

Except for oil spills, current MMS regulations do not require submission of written incident reports. Since written reports would be required under this proposed rule, we have included procedures for the timing, method, and format for these reports. Written reports must be submitted electronically. We are working with the USCG to develop an electronic reporting system that would allow lessees/operators to submit reports to both agencies through a single point.

• “Immediate” Reporting Category (§ 250.188). This category includes incidents that must be reported to both agencies. MMS and the USCG have worked together to make the reporting procedures as consistent as possible with the USCG proposed rule for these incidents. Most incidents listed in this section require immediate oral notification to both MMS and the USCG. This dual notification is essential so each agency can determine what immediate response, investigation, and coordination is needed. Written Follow-up Reports for most incidents in this category would be required. Some Follow-up Reports must be submitted to MMS and some to both MMS and the USCG. Written Final Reports must be submitted to MMS for the most serious incidents in this category.

Current USCG regulations require submission of written reports either in a narrative form or on their existing form CG-2692. Form CG-2692 provides some of the information that MMS needs, but not all. We have developed a new form, MMS-142, to supplement form CG-2692. Form MMS-142 is divided into four sections. For incidents where Follow-up Reports must be submitted to MMS or to both agencies, submission of a form CG-2692 and form MMS-142 (sections 1-3) is required.

We would require a complete form MMS-142 (sections 1-4) for incidents for which you must submit a Final Report to MMS. Company reports may be used to substitute for the Final Report if they contain the information requested by form MMS-142.

The USCG NPR proposes a new form, CG-RMAID, to submit written reports for fixed and floating facilities. We have not incorporated this form for incident reporting because it is still a proposed form subject to final USCG regulations. We may be ready to finalize our incident reporting rule before the form CG-RMAID is approved for use. Also, as recommended by NOSAC, MMS will continue to work with the USCG to develop a single incident reporting form for incidents that are of interest to both agencies. Although most of the information requested by form MMS-142 is not duplicative of information requested by form CG-2692, both agencies agree that a single incident reporting form will provide more efficient data submission for the regulated community and data collection and analysis for the agencies. Before developing a joint incident reporting form, both MMS and the USCG would like to consider comments we receive about the incident reporting requirements in our respective proposed rules.

• “12-Hour” and “15-Day” Reporting Categories. Incidents listed in §§ 250.189(a)(1)—250.189(a)(8) are reported only to MMS. No oral notifications are required. For incidents listed in §§ 250.189(a)(1)—250.189(a)(4), Initial and Follow-up written reports must be submitted using the forms CG-2692 and MMS-142 (sections 1-3). For incidents listed in §§ 250.189(a)(5)—250.189(a)(8), a “15-Day” written report must be submitted on a new MMS form, MMS-143.

The table in § 250.190(a)(4) specifies the forms that must be submitted for the various written report requirements. Forms CG-2692, MMS-142, and MMS-143 are included in the Appendix to this proposed rule.

A comparison between reporting procedures in the current MMS regulation and the proposed rule is shown in the table below.

The proposed revisions to this section include:

• Placement of the information about incident investigations in a separate section;

• Removing the reference to the USCG in relation to incident investigations;

• Removing the reference to the panel's legal advisors; and

• Removing the reference to “no civil and criminal issues.”

The first three revisions were made in response to comments on the previous proposed rule on “Postlease Safety Operations,” published on February 13, 1998 (63 FR 7335). For additional information, please refer to the “Response to Comments Section.”

In the fourth revision, we propose to remove the existing version's reference to “no civil and criminal issues” from this section. We believe that the presence of this language could be misconstrued by some as an exemption from MMS enforcement actions associated with incidents.

The sole purpose of MMS incident investigations is to find the facts relevant to the incident, draw conclusions from the facts with respect to the cause, and make recommendations to prevent incidents in the future. MMS strongly believes that the best way to accomplish this is to conduct our investigations in a non-adversarial manner. MMS incident investigations are not a forum for either potential plaintiffs or potential defendants in any civil action (tort, etc.) that may arise from the incident. However, regulatory violations may come to light as a result of the investigation, and MMS reserves the right to pursue any such violation according to the Outer Continental Shelf Lands Act and the procedures in 30 CFR 250, Subpart N.

We do not anticipate that removal of this language in the regulation will make any significant difference in the way we conduct our incident investigations.

Revisions to 30 CFR 250.490(l) are proposed so that this section conforms to the proposed reporting requirements. They include:

• Revision of the term “facility” to read “OCS facility'';

• Addition of a requirement to submit a written Follow-up Report; and

• Clarification that notifications and reports must be made according to §§ 250.187 through 250.188 and § 250.190.

Revisions to 30 CFR 254.46 are proposed so that this section conforms to the proposed reporting requirements. They include:

• Clarification that oil spill notifications must be made to the appropriate MMS “District” Supervisor rather than the MMS “Regional” Supervisor;

• Addition of a requirement to submit a written Final Report for spills of 200 barrels or more; and

• Clarification that notifications and reports must be made according to §§ 250.187 through 250.188 and § 250.190.

In addition to comments on the proposed rule, we specifically solicit comments on the following questions:

1. Should MMS require operators to submit information on the total number of hours worked by their employees and contractors offshore? If so, what recommendations do you have for MMS collecting the data, and how can we minimize the collection burden?

The Bureau of Labor Statistics uses a formula based on the total number of hours worked to normalize injury/illness data and calculate incident rates. MMS currently does not require “collection of hours worked” information for offshore workers and, therefore, cannot normalize the raw injury data we receive to produce comparable rates for the OCS. Through the voluntary joint Government/industry OCS Performance Measures Program, MMS does receive total hours worked for company employees and contractors (about 2/3 of all OCS operators participated in 1998). From these data, we are able to calculate rates for the data submitted. Receiving information on hours worked from all OCS operators would allow MMS to produce normalized injury/illness analyses and trend data for all injury incidents reported to MMS.

2. What kind of information should MMS collect about contractor performance on the OCS?

According to 1998 OCS Performance Measures data, contractors represented about 80 percent of the total hours worked on the OCS and were involved in over 80 percent of the recordable and lost workday injury and illness cases. Gathering and analyzing data specific to contractors and contract operations might provide insight to operators, contractors, and MMS about ways to decrease injuries to contractors and enhance the safety of contract operations.

3. What specific incident data analyses could MMS publish to help lessees/operators enhance the safety of their operations?

MMS intends to provide OCS lessees, operators, and others with the most useful incident data analyses possible. Are there specific analyses that would be particularly helpful to the industry or other regulators in preventing incidents and promoting safety?

4. What kind of electronic reporting methods are most accessible to you as an OCS lessee/operator? What recommendations do you have for developing an electronic system?

The table below lists the several comments (by organization) we received about incident reporting requirements in response to the February 13, 1998, proposed rule on “Postlease Operations Safety.” The “MMS Response” column provides our response with respect to this proposed rule. Letters from Chevron, Independent Petroleum Association of America, National Ocean Industries Association, and Shell Offshore Inc., indicated that they supported the comments submitted jointly by the API/Offshore Operators Committee.

The following appendices will not appear in the Code of Federal Regulations. Appendix A is included for reference. We solicit your comments on the new MMS forms in Appendices B and C.

Our practice is to make comments, including the names and home addresses of respondents, available for public review during regular business hours. Individual respondents may request that we withhold their home address from the rulemaking record, which we will honor to the extent allowable by law. There may be circumstances in which we would withhold from the rulemaking record a respondent's identity, as allowable by the law. If you wish us to withhold your name and/or address, you must state this prominently at the beginning of your comment. However, we will not consider anonymous comments. We will make all submissions from organizations or businesses, and from individuals identifying themselves as representatives or officials of organizations or businesses, available for public inspection in their entirety.

According to the criteria in Executive Order 12866, this rule is not a significant regulatory action.

(1) This proposed rule will not have an annual economic effect of $100 million or adversely affect an economic sector, productivity, jobs, the environment, or other units of government. A cost-benefit and economic analysis is not required. Current incident reporting regulations require that MMS be notified of certain types of incidents. This proposed rule revises these requirements by providing more specific definitions and thresholds for which incidents must be reported and by requiring submission of written incident reports. It provides more consistency with USCG reporting requirements for incidents where the two agencies have mutual interest and responsibility. Written reports must be submitted electronically. MMS and the USCG continue to work on changes to their procedures that would allow a report to be sent to both agencies in one submission. The proposed rule will have an economic effect, but it is much less than $100 million per year. Costs to comply with this proposed rule involve the cost of making the appropriate notifications and reports. These costs include some one-time set-up costs that we have estimated at $491,000 and an annual incremental reporting cost for making the oral notifications and submitting the written reports over and above the annual reporting cost in the current MMS regulations. The annual incremental reporting cost is estimated at $64,512. These costs are explained in the following Regulatory Flexibility Act section.

(2) This proposed rule will not create inconsistencies with other agencies' actions. The only agency affected is the USCG. As noted, MMS and the USCG have worked together on this proposed rule to minimize incident reporting inconsistencies between the two agencies and are working to develop a single point electronic reporting system to streamline the reporting process between the two agencies.

(3) This proposed rule will not materially affect entitlements, grants, user fees, loan programs, or the rights and obligations of their recipients. It only deals with incident reporting requirements for OCS lessees/operators and pipeline right-of-way holders.

(4) This proposed rule will not raise novel legal or policy issues. MMS worked with the USCG to make the requirements as consistent as possible with their requirements and is working with them to develop an electronic reporting system that would allow written reports to be submitted through a single point to both agencies. This proposed rule does have a unique feature—it lists USCG reporting requirements for incidents where both agencies have mutual interest and responsibility. We included the USCG requirements so that both MMS and USCG requirements for these incidents can be found in one location. However, this is an MMS proposed rule. It does not require reporting to the USCG. Those requirements are found in the USCG regulations. The USCG will also need to take some action that allows the appropriate segments of their regulated community to report incidents electronically according to the MMS regulation.

We will work closely with the USCG as we review the comments to the proposed rule and finalize the incident reporting regulation. As a result of this continued coordination, we anticipate that at an appropriate time, the USCG will issue a regulation, or other appropriate notice, that describes how electronic reporting under the MMS regulation can be used to satisfy USCG requirements. Once the USCG has issued this notice, submission of the required incident reports through the electronic system should satisfy both MMS and USCG requirements for incidents when both agencies have a mutual interest and responsibility. This should provide for continued coordination between the two agencies, while allowing each agency the flexibility to exercise its statutory responsibilities.

The Department of the Interior certifies that this proposed rule will not have a significant economic effect on a substantial number of small entities as defined under the RF Act (5 U.S.C. 601 et seq. ). An RF analysis is not required. Accordingly, a Small Entity Compliance Guide is not required.

This rule applies to all lessees/operators and pipeline right-of-way holders operating on the OCS. Lessees/operators fall under the Small Business Administration's North American Industry Classification System (NAICS) code 211111, Crude Petroleum and Natural Gas Extraction. Under this NAICS code, companies with less than 500 employees are considered small businesses. MMS estimates that 130 lessees/operators explore for and produce oil and gas on the OCS; approximately 70 percent of them (91 companies) fall into the small business category.

A pipeline company (non-producer) is a small entity if it is a liquid pipeline company with fewer than 1,500 employees, or a natural gas pipeline company with gross annual receipts of $25 million or less. MMS's database indicates that there are 88 pipeline right-of-way holders who do not own an interest in any oil and gas leases on the OCS. Fifty-seven of these companies are either major energy companies (large oil and gas or pipeline transmission companies), or wholly owned subsidiaries of these companies. Another 13 entities were either formed by partnerships among major producers and transporters or have “arms-length” contractual relationships with several major producers on the OCS for which they provide transportation services. It is our understanding that in such relationships one of the major partners usually serves as the “managing partner” of the entity so that the entity (whether a partnership or a corporation) is not actually independent in the usual sense. The remaining 18 entities could be categorized as small independent pipeline companies in the sense that they provide transportation services for several non-major oil or gas producers with which they have an “arms-length” but symbiotic business relationship. These companies are represented by NAICS code 213112, “Support Activities for Oil and Gas Operations.”

Thus, there are 218 companies affected by this proposed rule, of which 109 would be considered small businesses. The costs to comply with the reporting requirements proposed in this rule include: (1) some one-time set-up costs and, (2) an annual incremental reporting cost for making the required notifications and written reports over and above the reporting cost in the current MMS regulation. This proposed rule does not include any recordkeeping requirements.

This proposed rule will affect both small and large businesses. All companies, large and small, will incur some one-time costs to modify their incident reporting systems to incorporate the new requirements. And all companies, both large and small, will have to notify MMS and submit the appropriate reports when they have an incident on the OCS that falls within the scope of the regulation.

Although 109 of these companies are technically small, we believe that only those small businesses that do not have adequate computer equipment (one-time set-up costs) or Internet/email access (annual cost) at the location from where they will initiate or submit their written reports will incur some extra costs. We estimate that only 5 percent of the small companies (or 11 companies) would incur these costs. These 11 companies might incur $5,000 per company for one-time set-up costs and $360 per company for annual Internet/email maintenance. The estimated cost to be paid only by the 11 small companies compared to the estimated total cost for all companies is shown below. These costs are based on the portion of the costs that are over and above costs of the current regulations.

Your comments are important. The Small Business and Agriculture Regulatory Enforcement Ombudsman and 10 Regional Fairness boards were established to receive comments from small businesses about Federal agency enforcement actions. The Ombudsman will annually evaluate the enforcement activities and rate each agency's responsiveness to small business. If you wish to comment on the enforcement actions of MMS, call toll-free (888) 734-3247.

This proposed rule is not a major rule under 5 U.S.C. 804(2), the SBREFA. This rule:

(1) Does not have an annual effect on the economy of $100 million or more. Costs to comply with these revisions involve some one-time set-up costs and an annual incremental reporting cost (for making the oral notifications and submitting written reports) over and above the cost in the current MMS regulations. The total set-up costs were estimated at $491,000. The incremental annual reporting costs were estimated at $64,512.

(2) Will not cause a major increase in costs or prices for consumers, individual industries, federal, state, or local government agencies, or geographic regions. The minor costs involved in complying with the revised MMS reporting requirements will not change the way the oil and gas industry conducts business, nor will it affect regional oil and gas prices. Therefore, it will not cause major cost increases for consumers, the oil and gas industry, or any government agencies.

(3) Does not have significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of United States based enterprises to compete with foreign-based enterprises. All lessees/operators and pipeline right-of-way holders, regardless of nationality, will have to comply with the reporting requirements of this rule. The rule will not affect competition, employment, investment, productivity, innovation, or the ability of the United States-based enterprises to compete with foreign-based enterprises.

The proposed rule requires information collection. According to section 3507(d) of the PRA we have submitted an information collection request (ICR) (form OMB 83-I) to the OMB for review and approval of the proposed MMS reporting requirements.

The title of the MMS ICR for the proposed rule is “Proposed Rulemaking—30 CFR 250, Subpart A—Incident Reporting Requirements.” Potential respondents are approximately 130 Federal OCS lessees and operators, and 88 pipeline right-of-way holders who do not own an interest in any oil and gas leases on the OCS. Responses are mandatory. This collection of information does not include proprietary information and, for MMS reporting purposes, does not include questions of a sensitive nature.

It should be noted that the proposed rule does refer to, but does not require, reporting to the USCG on form CG-2692. OMB has approved the USCG form CG-2692 information collection requirements under OMB Control Number 2115-0003, with a current expiration date of January 31, 2005. To avoid duplicate reporting requirements as much as possible, the proposed rule allows respondents to use form CG-2692 to report certain incidents to MMS. Respondents would submit the form electronically to provide simultaneous transmission to both MMS and USCG. Our ICR to OMB includes the burden for completing this form when it is required by MMS. Although this might result in a small double counting of the burden hours, it would be very insignificant. The USCG estimates receiving 7,000 CG-2692/2692A forms each year, and we estimate only 124 of those 7,000 forms would apply to MMS reporting requirements.

As explained earlier in the preamble, the CG-2692 form does not cover all of the incidents pertinent to MMS nor does it contain certain information that MMS needs. Therefore, we are proposing two new MMS forms that would be submitted only to MMS. The forms are designed to avoid, to the extent possible, duplicating information captured on form CG-2692. The proposed new forms are:

Form MMS-142, Report of OCS Incident (Immediate and 12 Hour)

Form MMS-143, Report of OCS Incident (15 Day)

It also should be noted that the proposed rule does allow respondents to submit copies of internal reports in lieu of form MMS-142 as their “final report,” if the company report covers all of the required information.

The information collected on form CG-2692 and the new MMS forms expand and add to the currently approved notification and reporting requirements in 30 CFR 250.191 on accidents (994 burden hours), § 250.490 on H 2 S releases (26 burden hours), and 30 CFR 254.46 on oil spills (59 burden hours). We would reduce the respective reporting burdens for requirements in those sections in conjunction with final regulations becoming effective. The ICR submitted to OMB for this proposed rulemaking covers the total estimated burden for MMS reporting requirements. There are no proposed recordkeeping requirements. The following chart summarizes the estimated hour burden (column 4 has been rounded to the nearest hour) of the proposed rule.

As discussed in previous sections of the Preamble, in order to submit reports electronically, all companies may experience some one-time set-up costs. A few of the smaller companies may incur additional set-up costs and new annual Internet/email access costs.

Most companies already have reporting and data-gathering systems to investigate and report incidents internally. Most also have systems and procedures in place to notify MMS and the USCG of incidents and to submit required USCG written reports. These established systems may need to be modified and personnel trained to address the change in reporting thresholds and new MMS written report requirements. We estimate this may take 40 hours per company. At a cost of $50 per hour, the total cost for the 218 companies is estimated at $436,000 for one-time set-up costs.

Some of the approximately 109 small entities affected by the proposed rule may need to purchase additional computer equipment with Internet access at the location from where they will initiate or submit written reports. We estimate about 5 percent (11 companies) may experience an additional one-time investment of approximately $5,000 for a total of $55,000 that would not be a “usual and customary” business expense for these companies.

These same 11 companies would also incur a monthly Internet/email account expense of approximately $30 per month or $360 per year/company for a total recurring annual operation and maintenance cost of $3,960.

As part of our continuing effort to reduce paperwork and respondent burdens, MMS invites the public and other Federal agencies to comment on any aspect of the reporting burden in the proposed rule. You may submit your comments directly to the Office of Information and Regulatory Affairs, OMB. Send a copy of your comments to MMS. Refer to the “Addresses” section for mailing instructions. MMS will summarize written comments and address them in the final rule preamble. The PRA provides that an agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. OMB is required to make a decision concerning the collection of information contained in these proposed regulations between 30 to 60 days after publication of this document in the Federal Register . Therefore, a comment to OMB is best assured of having its full effect if OMB receives it by August 7, 2003. This does not affect the deadline for the public to comment to MMS on the proposed regulations.

a. We specifically solicit comments on the following questions:

(1) Is the proposed collection of information necessary for MMS to properly perform its functions, and will it be useful?

(2) Are the estimates of the burden hours of the proposed collection reasonable?

(3) Do you have any suggestions that would enhance the quality, clarity, or usefulness of the information to be collected?

(4) Is there a way to minimize the information collection burden on those who are to respond, including the use of appropriate automated electronic, mechanical, or other forms of information technology?

b. In addition, the PRA requires agencies to estimate the total annual reporting and recordkeeping “non-hour cost” burden resulting from the collection of information. We solicit your comments on this item, including the accuracy of our estimates previously discussed or any others we have not identified. For reporting and recordkeeping only, your response should split the cost estimate into two components: (1) the total capital and start-up cost component and, (2) annual operation, maintenance, and purchase of services component. Your estimates should consider the costs to generate, maintain, and disclose or provide the information. You should describe the methods you use to estimate major cost factors, including system and technology acquisition, expected useful life of capital equipment, discount rate(s), and the period over which you incur costs. Generally, your estimates should not include equipment or services purchased: before October 1, 1995; to comply with requirements not associated with the information collection; for reasons other than to provide information or keep records for the Government; or as part of customary and usual business or private practice.

According to Executive Order 13132, this rule does not have Federalism implications. It does not substantially and directly affect the relationship between the Federal and State governments. This rule applies to lessees/operators and pipeline right-of way holders on the OCS. It does not impose costs on States or localities. Any costs will be the responsibility of the lessees/operators and pipeline right-of way holders.

According to Executive Order 12630, this proposed rule does not have significant Takings implications. A Takings Implication Assessment is not required. This rule revises existing incident reporting regulations. It does not prevent any lessee, operator, or pipeline right-of-way holder from performing operations on the OCS, provided they follow the regulations.

According to Executive Order 12988, the Office of the Solicitor has determined that this rule does not unduly burden the judicial system and does meet the requirements of sections 3(a) and 3(b)(2) of the Order.

This rule does not constitute a major Federal action significantly affecting the quality of the human environment. An environmental assessment is not required. This rule only revises reporting requirements for incidents on the OCS through oral notification and electronic submission of written reports. It does not require, promote, or modify the conduct of operations or activities on the OCS.

According to the UMRA (2 U.S.C. 1501 et seq. ):

(1) This rule will not “significantly or uniquely” affect small governments. A Small Government Agency Plan is not required. This rule revises reporting regulations for oil and gas operations and does not involve the activities of any small governments, so no small governments are affected.

(2) This rule will not produce a Federal mandate of $100 million or greater in any year, i.e. , it is not a “significant regulatory action” under the UMRA. This rule does not have any Federal mandates.

According to the President's memorandum of April 29, 1994, “Government-to-Government Relations with Native American Tribal Governments” (59 FR 22951) and 512 DM 2, we have evaluated potential effects on federally recognized Indian tribes and have determined that there are no potential effects because the OCS operating regulations have no effect on any Indian tribe.

Executive Order 12866 requires each agency to write regulations that are easy to understand. We invite your comments on how to make this proposed rule easier to understand, including answers to questions, such as the following:

(1) Are the requirements in the proposed rule clearly stated?

(2) Does the proposed rule contain technical language or jargon that interfere with its clarity?

(3) Is the description in the Supplementary Information section of this preamble helpful in understanding the proposed rule? What else can we do to make it easier to understand?

Send a copy of any comments that concern how we could make this proposed rule easier to understand to: Office of Regulatory Affairs, Department of the Interior, Room 7229, 1849 C Street, NW., Washington, DC 20240. You may also e-mail the comments to this address: Exsec@ios.doi.gov .

For the reasons stated in the preamble, the MMS proposes to amend 30 CFR Part 250 and Part 254 as follows:

We encourage you to participate in this rulemaking by submitting comments and related material. If you do so, please include your name and address, identify the docket number for this rulemaking (CGD05-03-062), indicate the specific section of this document to which each comment applies, and give the reason for each comment. Please submit all comments and related material in an unbound format, no larger than 8 1/2 by 11 inches, suitable for copying. If you would like to know they reached us, please enclose a stamped, self-addressed postcard or envelope. We will consider all comments and material received during the comment period. We may change this proposed rule in view of them.

We do not now plan to hold a public meeting. But you may submit a request for a meeting by writing to the address listed under ADDRESSES explaining why one would be beneficial. If we determine that one would aid this rulemaking, we will hold one at a time and place announced by a later notice in the Federal Register .

Several times each year, O.C. Seacrets, Inc. sponsors fireworks displays over the waters of Isle of Wight Bay, Ocean City, Maryland. The fireworks are launched from two pontoon boats anchored near the O.C. Seacrets Dock in the vicinity of 117 W. 49th Street, Ocean City, Maryland. A small fleet of spectator vessels normally gathers nearby to view the event. Due to the need for vessel control during the fireworks, vessel traffic will be temporarily restricted to provide for the safety of spectators and transiting vessels.

The Coast Guard proposes to establish permanent special local regulations on specified waters of Isle of Wight Bay. The regulated area will include all waters within 150 feet around the pontoon boats. The special local regulations will be enforced annually from 9:15 p.m. to 10:15 p.m. on Memorial Day, July 4th, August 6th, and Labor Day. If the fireworks are delayed by inclement weather, the special local regulations will be enforced from 9:15 p.m. to 10:15 p.m. the next day. The effect will be to restrict general navigation in the regulated area during the fireworks displays. Except for vessels authorized by the Coast Guard Patrol Commander, no person or vessel may enter or remain in the regulated area. These regulations are needed to control vessel traffic during the event to enhance the safety of spectators and transiting vessels.

This proposed rule is not a “significant regulatory action” under section 3(f) of Executive Order 12866, Regulatory Planning and Review, and does not require an assessment of potential costs and benefits under section 6 (a)(3) of that Order. The Office of Management and Budget has not reviewed it under that Order. It is not “significant” under the regulatory policies and procedures of the Department of Homeland Security (DHS).

We expect the economic impact of this proposed rule to be so minimal that a full Regulatory Evaluation under the regulatory policies and procedures of DHS is unnecessary.

Although this proposed regulation will prevent traffic from transiting a portion of Isle of Wight Bay during the events, the effect of this proposed regulation will not be significant due to the limited duration that the regulated area will be in effect and the extensive advance notifications that will be made to the maritime community via the Local Notice to Mariners, marine information broadcasts, and area newspapers, so mariners can adjust their plans accordingly. Additionally, the proposed regulated area has been narrowly tailored to impose the least impact on general navigation yet provide the level of safety deemed necessary. Vessel traffic will be able to transit Isle of Wight Bay by navigating around the regulated area.

Under the Regulatory Flexibility Act (5 U.S.C. 601-612), we have considered whether this proposed rule would have a significant economic impact on a substantial number of small entities. The term “small entities” comprises small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000.

The Coast Guard certifies under 5 U.S.C. 605(b) that this proposed rule would not have a significant economic impact on a substantial number of small entities. This proposed rule would affect the following entities, some of which might be small entities: The owners or operators of vessels intending to transit or anchor in a portion of Isle of Wight Bay during the event.

This proposed rule would not have a significant economic impact on a substantial number of small entities for the following reasons. This proposed rule would be in effect for only 4 days each year. Vessel traffic could pass safely around the regulated area. Before the enforcement period, we would issue maritime advisories so mariners can adjust their plans accordingly.

If you think that your business, organization, or governmental jurisdiction qualifies as a small entity and that this proposed rule would have a significant economic impact on it, please submit a comment (see ADDRESSES ) explaining why you think it qualifies and how and to what degree this proposed rule would economically affect it.

Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Public Law 104-121), we want to assist small entities in understanding this proposed rule so that they can better evaluate its effects on them and participate in the rulemaking. If the rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact the address listed under ADDRESSES.

This proposed rule would call for no new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).

A rule has implications for federalism under Executive Order 13132, Federalism, if it has a substantial direct effect on State or local governments and would either preempt State law or impose a substantial direct cost of compliance on them. We have analyzed this proposed rule under that Order and have determined that it does not have implications for federalism.

The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) requires Federal agencies to assess the effects of their discretionary regulatory actions. In particular, the Act addresses actions that may result in the expenditure by a State, local, or tribal government, in the aggregate, or by the private sector of $100,000,000 or more in any one year. Though this proposed rule will not result in such an expenditure, we do discuss the effects of this rule elsewhere in this preamble.