Background

FSIS is proposing to amend the Federal meat inspection regulations to add San Marino to the list of countries eligible to export meat and meat products to the United States.

Section 20 of the FMIA (21 U.S.C. 620) prohibits the importation into the United States of carcasses, parts of carcasses, meat or meat food products of cattle, sheep, swine, goats, horses, mules, or other equines which are capable of use as human food that are adulterated or misbranded. The FMIA also requires that livestock from which imported meat products are produced be slaughtered and handled in connection with slaughter in accordance with the Humane Slaughter Act (7 U.S.C. 1901-1906). Imported meat products must be in compliance with part 327 of title 9, Code of Federal Regulations (9 CFR part 327) to ensure that they meet the standards provided in the FMIA. 9 CFR 327.2 establishes the procedures by which foreign countries wanting to export meat and meat products to the United States may become eligible to do so.

Section 327.2(a) requires authorities in a foreign country's meat inspection system to certify that (1) the system provides standards equivalent to those of the United States and (2) the legal authority for the system and its implementing regulations are equivalent to those of the United States. Specifically, a country's regulations must impose requirements equivalent to those of the United States in the following areas: (1) Ante-mortem and post-mortem inspection; (2) official controls by the national government over plant construction, facilities, and equipment; (3) direct and continuous supervision of slaughter activities, where applicable, and product preparation by official inspection personnel; (4) separation of establishments certified to export from those not certified; (5) maintenance of a single standard of inspection and sanitation throughout certified establishments; (6) official controls over condemned product; and (7) requirements of a Hazard Analysis and Critical Control Point (HACCP) system within certified establishments.

Section 327.2 also requires a meat inspection system maintained by a foreign country, with respect to establishments preparing products in that country for export to the United States, to ensure that those establishments and their meat products comply with requirements equivalent to the provisions of the FMIA and the meat product inspection regulations. Foreign country authorities must be able to ensure that all certifications required under part 327 of the meat product inspection regulations (Imported Products) can be relied upon before USDA-FSIS will grant approval to export meat products to the United States.

In addition to meeting the certification requirements, a foreign country's inspection system must be evaluated by FSIS before eligibility to export meat products can be granted. This evaluation consists of two processes: a document review and an on-site review. The document review is an evaluation of the laws, regulations, and other written materials used by the country to operate its meat inspection program. To help the country in organizing its material, FSIS gives the country questionnaires asking for detailed information about the country's inspection practices and procedures in five risk areas, which are the focus of the evaluation. These five risk areas comprise sanitation, animal disease, slaughter/processing, residues, and enforcement. FSIS evaluates the information to verify that the critical points in the five risk areas are addressed satisfactorily with respect to standards, activities, resources, and enforcement. If the document review is satisfactory, an on-site review is scheduled using a multi-disciplinary team to evaluate all aspects of the country's inspection program, including laboratories and individual establishments within the country.

The process of determining equivalence is described fully on the FSIS Web site at http://www.fsis.usda.gov/OPPDE/IPS/EQ/EQProcess.htm. Besides relying on its initial determination of a country's eligibility, coupled with ongoing reviews to ensure that products shipped to the United States are safe, wholesome and properly labeled and packaged, FSIS randomly samples imported meat and poultry products for reinspection as they enter the United States.

In response to a request from San Marino in 1997 for approval to export meat and meat products to the United States, FSIS conducted a thorough review of the San Marino meat inspection system to determine if it was equivalent to the U.S. meat inspection system. First, FSIS compared San Marino's meat inspection laws and regulations with U.S. requirements. The study concluded that the requirements contained in San Marino's meat inspection laws and regulations are equivalent to those mandated by the FMIA and implementing regulations. FSIS then conducted an on-site review of the San Marino meat inspection system in operation. The FSIS review team concluded that San Marino's implementation of meat processing standards and procedures was equivalent to those of the United States.

All meat products exported to the United States from San Marino will be subject to reinspection at the ports-of-entry for transportation damage, labeling, proper certification, general condition and accurate count. Other types of inspection will also be conducted, including examining product for defects and performing laboratory analyses to detect chemical residues or microbial contamination.

Products that pass reinspection will be stamped with the official mark of inspection and allowed to enter U.S. commerce. If they do not meet U.S. requirements, they will be “Refused Entry” and must be re-exported, destroyed or allowed entry for the purpose of converting to animal food.

Accordingly, FSIS is proposing to amend § 327 of the Federal meat inspection regulations to add San Marino as a country from which meat and meat products may be eligible for import into the United States. As a country eligible to export meat products to the United States, the government of San Marino would certify to FSIS those establishments wishing to export such products to the U.S. and operating according to U.S. requirements. FSIS would retain the right to verify that establishments certified by the San Marino government are meeting the U.S. requirements. This would be done through annual on-site reviews of the establishments while they are in operation.

Although a foreign country may be listed as eligible to export meat and meat products, products from that country must also comply with all other U.S. requirements, including those of the U.S. Customs Service and the restrictions under Title 9, part 94 of the Animal and Plant Health Inspection Service (APHIS) regulations that relate to the importation of meat and meat products from foreign countries into the United States. The Agency notes that APHIS has classified San Marino as having a substantial risk associated with Bovine Spongiform Encephalopathy (BSE). Although pork is the specific product proposed for import into the United States from San Marino, FSIS considered BSE risk in its evaluation process. APHIS is responsible for keeping foreign animal diseases out of the United States. APHIS sets forth restrictions on the importation of any fresh, frozen, and chilled meat, meat products, and edible products from countries in which certain animal diseases exist. Those products that APHIS has restricted from entering the United States will be refused entry.

FSIS and APHIS work closely together and communicate regularly to ensure that meat and meat products imported into the United States comply with the regulatory requirements of both agencies.

The full report on San Marino can be found on the FSIS Web site at http://www.fsis.usda.gov/OPPDE/Far/index.htm.

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.

This proposed rule has been reviewed under Executive Order 12866. It has been determined to be not significant for purposes of E.O. 12866 and therefore, has not been reviewed by the Office of Management and Budget (OMB).

There is only one establishment in San Marino that has applied to export meat products to the United States. This establishment would export non-shelf stable cooked meat products. U.S. imports from this establishment are expected to total approximately 500,000 pounds per year.

U.S. firms export small amounts of pork and poultry products to San Marino. Table A reports the most current information, from 1996-2000, on U.S. exports of poultry and pork products to San Marino. Poultry exports were highest in 1994, before declining and eventually falling to zero. Poultry exports reappeared again in 1998, but again at relatively low levels. Between 1994 and 2000, U.S. firms exported pork products to San Marino only once, in 1994. Since then, there have been no further exports of pork products.

Adoption of this proposed rule would continue to open trade between the U.S. and San Marino. This proposed rule would also increase the U.S. food supply.

The impact of this proposed rule on U.S. consumers is voluntary in that consumers will not be required to purchase meat products produced and processed in San Marino, although they may choose to do so. Expected benefits from this type of proposed rule would accrue primarily to consumers in the form of competitive prices due to a larger market variety of meat products. The volume of trade stimulated by this proposed rule, however, will likely be so small as to have little effect on supply and prices. Consumers, apart from any change in prices, would benefit from increased choices in the marketplace.

The costs of this rule will accrue primarily to producers in the form of greater competition from San Marino. Again, it must be noted that the volume of trade stimulated by this rule would be very small, likely having little effect on supply and prices. Nonetheless, it is possible that U.S. firms that produce products that would compete with San Marino imports could face short-term difficulty. However, in the long run, such firms could adjust their product mix in order to compete effectively.

The Administrator, FSIS, has made an initial determination that this proposed rule will not have a significant impact on a substantial number of small entities, as defined by the Regulatory Flexibility Act (5 U.S.C. 601). This proposed rule would add San Marino to the list of countries eligible to export meat products into the United States. Currently, only one San Marino establishment has applied to export product to the United States. This establishment is planning to export approximately 500,000 pounds of non-shelf stable cooked meat products to the United States per year. The volume of trade stimulated by this rule would be very small, likely having little effect on supply and prices. Therefore, this proposed rule is not expected to have a significant impact on small entities that produce these types of products domestically.

No new paperwork requirements are associated with this proposed rule. Foreign countries wanting to export livestock products to the United States are required to provide information to FSIS certifying that its inspection system provides standards equivalent to those of the United States and that the legal authority for the system and its implementing regulations are equivalent to those of the United States before they may start exporting such product to the United States. FSIS collects this information one time only. FSIS gave San Marino questionnaires asking for detailed information about the country's inspection practices and procedures to assist the country in organizing its materials. This information collection was approved under OMB number 0583-0094. The proposed rule contains no other paperwork requirements.

Public awareness of all segments of rulemaking and policy development is important. In an effort to ensure that this notice comes to the attention of the public—including minorities, women, and persons with disabilities—FSIS will announce it on-line through the FSIS Web page located at http://www.fsis.usda.gov. The Regulations.gov Web site is the central online rulemaking portal of the United States government. It is being offered as a public service to increase participation in the Federal government's regulatory activities. FSIS participates in Regulations.gov and will accept comments on documents published on the site. The site allows visitors to search by keyword or Department or Agency for rulemakings that allow for public comment. Each entry provides a quick link to a comment form so that visitors can type in their comments and submit them to FSIS. The Web site is located at http://www.regulations.gov.

FSIS also will make copies of this Federal Register publication available through the FSIS Constituent Update, which is used to provide information regarding FSIS policies, procedures, regulations, Federal Register notices, FSIS public meetings, recalls, and other types of information that could affect or would be of interest to our constituents and stakeholders. The update is communicated via Listserv, a free e-mail subscription service consisting of industry, trade, and farm groups, consumer interest groups, allied health professionals, scientific professionals, and other individuals who have requested to be included. The update also is available on the FSIS Web page. Through Listserv and the Web page, FSIS is able to provide information to a broader and more diverse audience.

For the reasons set out in the preamble, 9 CFR part 327 would be amended as follows:

For additional information, see the direct final rule published in the final rules section of this Federal Register .

This rule is limited to the changes contained in Amendment 4 to CoC No. 1025 and does not include other aspects of the NAC-MPC cask system design. The NRC is using the “direct final rule procedure” to issue this amendment because it represents a limited and routine change to an existing CoC that is expected to be noncontroversial. Adequate protection of public health and safety continues to be ensured.

Because NRC considers this action noncontroversial and routine, the proposed rule is being published concurrently as a direct final rule. The direct final rule will become effective on October 27, 2004. However, if the NRC receives significant adverse comments by September 13, 2004, then the NRC will publish a document that withdraws the direct final rule. If the direct final rule is withdrawn, the NRC will address the comments received in response to the proposed revisions in a subsequent final rule. The NRC will not initiate a second comment period on this action.

A significant adverse comment is a comment where the commenter explains why the rule would be inappropriate, including challenges to the rule's underlying premise or approach, or would be ineffective or unacceptable without a change. A comment is adverse and significant if:

(1) The comment opposes the rule and provides a reason sufficient to require a substantive response in a notice-and-comment process. For example, a substantive response is required when—

(A) The comment causes the NRC staff to reevaluate (or reconsider) its position or conduct additional analysis;

(B) The comment raises an issue serious enough to warrant a substantive response to clarify or complete the record; or

(C) The comment raises a relevant issue that was not previously addressed or considered by the NRC staff.

(2) The comment proposes a change or an addition to the rule, and it is apparent that the rule would be ineffective or unacceptable without incorporation of the change or addition.

(3) The comment causes the NRC staff to make a change (other than editorial) to the CoC or TS.

For the reasons set out in the preamble and under the authority of the Atomic Energy Act of 1954, as amended; the Energy Reorganization Act of 1974, as amended; and 5 U.S.C. 553; the NRC is proposing to adopt the following amendments to 10 CFR part 72.

The FAA invites interested persons to participate in this rulemaking by submitting written comments, data, or views. We also invite comments relating to the economic, environmental, energy, or federalism impacts that might result from adopting the proposals in this document. The most helpful comments reference a specific portion of the proposal, explain the reason for any recommended change, and include supporting data. We ask that you send us two copies of written comments.

We will file in the docket all comments we receive, as well as a report summarizing each substantive public contact with FAA personnel concerning this proposed rulemaking. The docket is available for public inspection before and after the comment closing date. If you wish to review the docket in person, go to the address in the ADDRESSES section of this preamble between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. You may also review the docket using the Internet at the Web address in the ADDRESSES section.

Privacy Act: Using the search function of our docket Web site, anyone can find and read the comments received into any of our dockets, including the name of the individual sending the comment (or signing the comment on behalf of an association, business, labor union, etc. ). You may review DOT's complete Privacy Act Statement in the Federal Register published on April 11, 2000 (65 FR 19477-78) or you may visit http://dms.dot.gov .

Before acting on this proposal, we will consider all comments we receive on or before the closing date for comments. We will consider comments filed late if it is possible to do so without incurring expense or delay. We may change this proposal in light of the comments we receive.

If you want the FAA to acknowledge receipt of your comments on this proposal, include with your comments a pre-addressed, stamped postcard on which the docket number appears. We will stamp the date on the postcard and mail it to you.

Do not file in the docket information that you consider to be proprietary or confidential business information. Send or deliver this information directly to the person identified in the FOR FURTHER INFORMATION CONTACT section of this document. You must mark the information that you consider proprietary or confidential. If you send the information on a disk or CD ROM, mark the outside of the disk or CD ROM and also identify electronically within the disk or CD ROM the specific information that is proprietary or confidential.

Under 14 CFR 11.35(b), when we are aware of proprietary information filed with a comment, we do not place it in the docket. We hold it in a separate file to which the public does not have access, and place a note in the docket that we have received it. If we receive a request to examine or copy this information, we treat it as any other request under the Freedom of Information Act (5 U.S.C. 552). We process such a request under the DOT procedures found in 49 CFR part 7.

On July 14, 2004, the Federal Aviation Administration (FAA) issued Notice No. 04-10, Use of Certain Portable Oxygen Concentrator Devices Onboard Aircraft (69 FR 42324, 7/14/2004). Comments to that document were to be received on or before August 13, 2004.

In a letter dated August 4, 2004, ATA requested that the FAA extend the comment period for Notice No. 04-10 for 60 days. ATA stated that the NPRM came as a surprise and that they had not completed testing the Airsep Lifestyle portable oxygen concentrator (POC). ATA also feels that the NPRM raises questions of important technical, operational, and legal issues, such as the potential impact of having to train employees on the operation of POC devices. On August 6, 2004, we received a letter from the Regional Airline Association (RAA) supporting ATA's request to extend the comment period for 60 days. RAA specifically cited the uncertainty that the Airsep device would not affect navigation or communication systems onboard regional aircraft.

In response, two separate letters were received on August 5, 2004, objecting to ATA's request to extend the comment period on the NPRM. Gary Ewart, Director of the American Thoracic Society, wrote to inform the FAA that he had personally met with ATA and other concerned parties for over 3 years and that the NPRM was not unexpected in the physician, patient, oxygen device, or airline communities. Phillip Porte, Executive Director of the National Association for Medical Direction of Respiratory Care, and Jon Tiger, President of the National Home Oxygen Patients Association, jointly submitted their opposition to extending the comment period for the NPRM. They believe the 30 day comment period was enough time to develop comments and that any extension would unnecessarily delay promulgation of the final regulation.

We have considered the request for extension presented by ATA and weighed that request against the work done by the Department of Transportation, the opposition referenced above, and the momentum of the rulemaking, and the specific proposal. We agree that it is important for ATA and its members to review and consider this rule, but we feel that a 60-day extension of the comment period would be excessive.

Notice No. 04-10 makes very clear that this is an enabling proposal. No operator will be required to permit passengers to carry a POC device onboard an aircraft. If an operator decides to allow a passenger to use the Airsep (or any future approved device), it would have to determine if the device would interfere with the navigation or communication systems on its own. We also recognize that an operator would have to take several steps to train crewmembers and make appropriate administrative changes, but examining those potential actions is not necessary before our proposal is completed.

We will extend the comment period for Notice No. 04-10 for an additional 15 days only. We believe the total of 45 days is adequate for all interested parties to comment on this proposal. Absent unusual circumstances, the FAA does not anticipate any further extension of the comment period for this rulemaking.

In accordance with § 11.29(c) of Title 14, Code of Federal Regulations, the FAA has reviewed the petitions made by the Air Transport Association for extension of the comment period to Notice No. 04-10. The petitioner has a substantive interest in the proposed rule and the FAA has determined that a short extension of the comment period is consistent with the public interest.

Accordingly, the comment period for Notice No. 04-10 is extended until August 30, 2004.

I. Background A. CAN-SPAM Act of 2003

On December 16, 2003, the President signed into law the CAN-SPAM Act. 1 The Act, which took effect on January 1, 2004, imposes a series of new requirements on the use of commercial electronic mail (“email”) messages. In addition, the Act gives federal civil and criminal enforcement authorities new tools to combat unsolicited commercial email (“UCE” or “spam”). The Act also allows state attorneys general to enforce its civil provisions, and creates a private right of action for providers of Internet access services.

In enacting the CAN-SPAM Act, Congress made the following determinations of public policy, set forth in § 7701(b) of the Act:

Based on these policy determinations, Congress set forth in §§ 7704(a) and (b) of the CAN-SPAM Act certain acts and practices that are unlawful in connection with the transmission of commercial email messages, including those practices which are aggravated violations that compound the available statutory damages when alleged and proven in combination with other CAN-SPAM violations. Section 7704(a)(1) of the Act prohibits transmission of any email that contains false or misleading header or “from” line information, and clarifies that a header will be considered materially misleading if it fails to identify accurately the computer used to initiate the message because the person initiating the message knowingly uses another protected computer to relay or retransmit the message in order to disguise its origin. 2 The Act also prohibits false or misleading subject headings, 3 and requires a functioning return email address or similar Internet-based mechanism for recipients to use to “opt-out” of receiving future commercial email messages. 4 The Act prohibits the sender, or others acting on the sender's behalf, from initiating a commercial email to a recipient more than 10 business days after the recipient has requested not to receive additional emails from the sender, 5 and prohibits sending a commercial email message without providing three disclosures: (1) clear and conspicuous identification that the message is an advertisement or solicitation, (2) clear and conspicuous notice of the opportunity to decline to receive further commercial email messages from the sender, and (3) a valid physical postal address of the sender. 6 Section 7704(b) of the Act specifies four aggravated violations: address harvesting, dictionary attacks, automated creation of multiple email accounts, and relaying or retransmitting through unauthorized access to a protected computer or network. 7

The Act authorizes the Commission to enforce violations of the Act in the same manner as an FTC trade regulation rule. 8 Section 7706(f) authorizes the attorneys general of the states to enforce compliance with certain provisions of § 7704(a) of the Act by initiating enforcement actions in federal court, after serving prior written notice upon the Commission when feasible. 9 Finally, CAN-SPAM authorizes providers of Internet access services to bring a federal court action for violations of certain provisions of §§ 7704(a), (b), and (d). 10

Congress directed the Commission to issue regulations, not later than 12 months after December 16, 2003, “defining the relevant criteria to facilitate the determination of the primary purpose of an electronic mail message.”  11 The term “primary purpose” is incorporated in the Act's definition of the key term “commercial electronic mail message.” Specifically, “commercial electronic mail message” encompasses “any electronic mail message the primary purpose of which is the commercial advertisement or promotion of a commercial product or service (including content on an Internet web site operated for a commercial purpose).”  12 In addition to the mandatory rulemaking regarding the definition of “primary purpose,” CAN-SPAM also provides discretionary authority for the Commission to issue regulations concerning certain of the Act's other definitions and provisions. 13 Specifically, the Commission is authorized to:

• Modify the definition of the term “transactional or relationship message” under the Act “to the extent that such modification is necessary to accommodate changes in electronic mail technology or practices and accomplish the purposes of [the] Act”;  14

• Modify the 10-business-day period prescribed in the Act for honoring a recipient's opt-out request;  15

• Specify activities or practices as aggravated violations (in addition to those set forth as such in § 7704(b) of CAN-SPAM) “if the Commission determines that those activities or practices are contributing substantially to the proliferation of commercial electronic mail messages that are unlawful under subsection [7704(a) of the Act]”;  16 and

• “issue regulations to implement the provisions of this Act.”  17

On March 11, 2004, the Commission published an Advance Notice of Proposed Rulemaking (“ANPR”) which solicited comments on a number of issues raised by the CAN-SPAM Act, most importantly, the definition of “primary purpose.” In addition, the ANPR requested comment on the modification of the definition of “transactional or relationship message,” on the appropriateness of the 10-business-day opt-out period that had been set by the Act, on additional aggravated violations that might be appropriate, and on implementation of the Act's provisions generally. 18 The ANPR set a date of April 12, 2004, to submit comments. In response to petitions from several trade associations, the Commission announced on April 7 that it would extend the comment period to April 20, 2004. 19

In response to the ANPR, the Commission received approximately 13,517 comments from representatives from a broad spectrum of the online commerce industry, trade associations, individual consumers, and consumer and privacy advocates. 20 Commenters generally applauded CAN-SPAM as an effort to stem the flood of unsolicited and deceptive commercial email that has threatened the convenience and efficiency of online commerce. Commenters also offered several suggestions for the Commission's consideration in drafting regulations to implement the Act. Suggestions with respect to the Commission's “primary purpose” rulemaking and CAN-SPAM's definition of “commercial electronic mail message” and the Commission's reasons for accepting or rejecting them are discussed in detail in Section II. Because the “primary purpose” proceeding must meet a tight statutory deadline, the Commission will address issues of discretionary rulemaking upon which comment was solicited in the ANPR in a future Federal Register notice that the Commission anticipates will be published shortly.

Based on the comments received in response to the ANPR, as well as the Commission's law enforcement experience, the Commission proposes in this NPRM regulations establishing criteria for determining “the primary purpose” of an email message. The Commission invites written comment on the questions in Section VII to assist the Commission in determining whether the proposed Rule provisions strike the appropriate balance, maximizing protections for email recipients while avoiding the imposition of unnecessary compliance burdens on legitimate industry.

Section 316.1 of the proposed Rule states that this part implements the CAN-SPAM Act. The Commission received a number of comments in response to the ANPR asking that the Commission expressly exempt from CAN-SPAM those entities that are not subject to the FTC's jurisdiction under the FTC Act (“FTC Act”), 15 U.S.C. 41 et seq. 21

Section 7706(d) of the CAN-SPAM Act makes clear that the Commission may not initiate an enforcement action under the Act against any person or entity over which the Commission lacks jurisdiction under the FTC Act. 22 The CAN-SPAM Act does not expand or contract the Commission's jurisdiction or the scope of the proposed Rule's coverage. Limits on the FTC's jurisdiction, however, do not affect the ability of other federal agencies, the states, or providers of Internet access service to bring actions under the Act against any entity within their jurisdiction as authorized. 23 Thus, many persons and entities not within the FTC's jurisdiction may still be subject to an enforcement action for violating the CAN-SPAM Act.

Section 316.2 of the proposed Rule includes the definitions of a number of key terms of the Rule. 24 Thirteen of these terms are defined by references to the corresponding sections of the Act; the definition of the fourteenth term—“character”—is repeated verbatim from the Sexually Explicit Labeling Rule. Section 316.2 tracks § 316.1(c) of the Sexually Explicit Labeling Rule. 25

The Commission believes that by referencing the definitions found in the Act, and any future modifications to those definitions, the Rule will accurately and effectively track any future changes made to the definitions in the Act. Thus, with the sole exception of the addition of the definition of “character,” the Commission has defined key terms of the proposed Rule by reference to the Act without any substantive changes to any definition.

Section 7702(2)(C) of the CAN-SPAM Act directs the Commission to “issue regulations pursuant to section 13 [of the Act] defining the relevant criteria to facilitate the determination of the primary purpose of an electronic mail message.” (Emphasis supplied.) The term “primary purpose” comes into play in the Act's definition of “commercial electronic mail message,” which is “any electronic mail message the primary purpose of which is the commercial advertisement or promotion of a commercial product or service (including content on an Internet web site operated for a commercial purpose).”  26 Section 7702(2)(B) expressly excludes from the Act's definition of “commercial electronic mail message” messages that meet the definition of “transactional or relationship message,”  27 which also incorporates the term “primary purpose.” Generally, CAN-SPAM applies only to messages that fall within the Act's definition of “commercial electronic mail message.”  28

Proposed § 316.3 sets forth criteria for determining the “primary purpose” of an email message. 29 Because the Commission does not believe that a single standard can adequately cover the various ways that senders present commercial content in email messages, this proposal includes three sets of criteria that apply in specified circumstances. All three sets of criteria are based on a single fundamental principle: determining “the primary purpose” of an email message must focus on what the message's recipient would reasonably interpret the primary purpose to be.

First, proposed § 316.3(a)(1) states that if an email message contains only content that advertises or promotes a product or service (“commercial content”), then the “primary purpose” of the message would be deemed to be commercial.

Second, proposed § 316.3(a)(2) covers email messages that contain both commercial content and content that falls within one of the categories listed in § 7702(17)(A) of the Act (“transactional or relationship content”). The “primary purpose” of such an email message would be deemed to be commercial if either: (1) a recipient reasonably interpreting the subject line of the message would likely conclude that the message advertises or promotes a product or service; or (2) the message's transactional or relationship content does not appear at or near the beginning of the message.

Third, proposed § 316.3(a)(3) covers email messages that contain both commercial content and content that is neither commercial nor “transactional or relationship.” In such a case, the primary purpose of the message would be deemed to be commercial if either: (1) a recipient reasonably interpreting the subject line of the message would likely conclude that the message advertises or promotes a product or service; or (2) a recipient reasonably interpreting the body of the message would likely conclude that the primary purpose of the message is to advertise or promote a product or service. Proposed § 316.3(a)(3)(ii) sets out certain factors as illustrative of those relevant to this interpretation, including the placement of commercial content at or near the beginning of the body of the message; the proportion of the message dedicated to commercial content; and how color, graphics, type size, and style are used to highlight commercial content.

Proposed § 316.3(b) restates subparagraph (A) of the Act's definition of “transactional or relationship message” for clarity in applying the criteria that would be established in proposed § 316.3(a).

The Commission believes that the subject line is important because consumers reasonably use the information it contains to decide whether to read a message or delete it without reading it. For this reason, bona fide email senders likely use the subject line to announce or provide a preview of their messages. 30 These email senders, when they are advertising or promoting a product or service, will likely highlight that fact in their subject lines so that recipients may decide whether to read the messages.

The Commission is well aware that, in contrast, spammers frequently misrepresent or fail to disclose the commercial purpose of their messages in the subject line in order to induce recipients to open messages they otherwise would delete without opening. 31 Section 7704(a)(2) of CAN-SPAM, however, prohibits the use of “a subject heading * * * [that] would be likely to mislead a recipient, acting reasonably under the circumstances, about a material fact regarding the contents or subject matter of the message (consistent with the criteria used in enforcement of Section [5 of the FTC Act]).” (Emphasis supplied.) Thus, CAN-SPAM specifically applies to the subject line of covered email messages the deception jurisprudence the Commission has developed under § 5(a) of the FTC Act. 32 Accordingly, actual deception need not be shown, only that a representation, omission, or practice is likely to mislead. 33 The “acting reasonably under the circumstances” aspect of the analysis considers the representation from the perspective of the ordinary consumer to whom it is directed. 34 A material fact “is one which is likely to affect a consumer's choice of or conduct regarding a product. In other words, it is information that is important to consumers.”  35

CAN-SPAM's focus on subject lines that misrepresent the content or subject matter of the message is in accord with case law developed under § 5 of the FTC Act with respect to deceptive “door-openers.” The subject line of an email message serves as a door-opener—an initial contact between a sender and a recipient that typically makes an express or implied representation about the purpose of the contact. Before the recipient views the body of an email message, he typically may view the subject line that, as the designation “subject line” implies, announces what the email message concerns. Some senders may be tempted to use misrepresentations in the subject line to induce recipients to open their messages. These senders would be well advised that CAN-SPAM prohibits using the subject line as an initial contact with consumers to get their attention by misrepresenting the purpose of the contact. 36

In view of the legal obligation under both CAN-SPAM and § 5 of the FTC Act for senders to ensure that the subject lines of their email messages are not deceptive, the Commission believes that when the body of an email message contains only content that advertises or promotes a product or service, then the subject line of that message must be consistent with that content. A non-deceptive subject line of such a message is therefore not a separate signifier of the primary purpose of the email; it complements and is consistent with the body of the email message. Therefore, the proposed criterion covering such messages does not include a separate element addressing the subject line.

In the case of a dual-purpose message with a subject line that a recipient would reasonably interpret as signaling a commercial message, under the proposed criteria, the message would be deemed to be commercial, regardless of whether the body of the message contained—in addition to commercial content—either: content that is “transactional or relationship;” or content that is neither commercial nor “transactional or relationship.”  37 This criterion is supported by the Commission's belief, discussed above, that bona fide email senders, when they are advertising or promoting a product or service, likely highlight that fact in their subject lines so that recipients may decide whether to read the messages. Thus it is reasonable to deem an email message to have a commercial primary purpose if the sender highlights the message's commercial content in the subject line.

With respect to dual-purpose email messages, if a recipient reasonably interpreting the subject line of the message would not likely conclude that the message advertises or promotes a product or service, then the Commission proposes two additional criteria relevant to determining a message's “primary purpose.”

The Commission proposes a criterion to apply to messages containing both commercial content and transactional or relationship content. That criterion states that the “primary purpose” of the message shall be deemed to be commercial if the message's content pertaining to one of the functions listed in subparagraph (b)(1)-(5) of the proposed Rule provision  38 ( i.e. , the message's transactional or relationship content) does not appear at or near the beginning of the message.

Commenters argued that CAN-SPAM's “primary purpose” standard should distinguish between such dual-purpose messages—which arise from a business relationship between the sender and the recipient—and dual-purpose messages that are basically “cold-call” contacts where no relationship exists between the sender and recipient. These commenters claimed that senders of messages with transactional or relationship content will not abuse their ability to communicate with customers via email by sending unnecessary transactional or relationship messages larded with commercial content, or by continuing to send unwanted messages to customers who have expressed a desire not to receive the sender's commercial messages. 39

One commenter noted that the Act's legislative history supports treating as “transactional or relationship” messages that contain both commercial and transactional or relationship content:

The Act's use of the phrase “primary purpose” in the “commercial” and “transactional or relationship” definitions establishes that a message can contain both types of content and still be regulated as either commercial or transactional or relationship. The Act does not specify that a “transactional or relationship message” is one containing only transactional or relationship content.

Commenters' arguments regarding messages containing commercial and transactional or relationship content, as well as the legislative history quoted above, persuade the Commission that the proposed “primary purpose” criteria should distinguish between messages that contain transactional or relationship content and those that do not. The Commission's proposed criteria give clear guidance to senders of messages that contain both commercial and transactional or relationship content: if the subject line criterion is not determinative, such dual-purpose messages have a commercial primary purpose unless the transactional or relationship content appears at or near the beginning of the message. 41

There is no evidence on the record establishing that senders of bona fide transactional or relationship content would suffer any detriment under a CAN-SPAM regime calling for transactional or relationship content to be placed before commercial content in an email message. 42 Moreover, the harm that CAN-SPAM is meant to address—primarily, the time and resources wasted in dealing with unwanted unsolicited commercial messages—probably does not result from messages that begin with transactional or relationship content, followed by commercial content, if any. 43 Congress's decision largely to exempt transactional or relationship messages from CAN-SPAM requirements supports this determination. CAN-SPAM's definition of “transactional or relationship message” includes specific categories of messages that Congress determined to be ones that consumers want to receive. These categories include vital information such as bank account statements, product recalls, transaction confirmations, and warranty information. For messages containing both commercial and transactional or relationship content to be considered “transactional” rather than commercial, the Commission's proposed “primary purpose” criteria would require only that senders of such messages place their transactional or relationship content “at or near the beginning of the message.” This would allow recipients quickly to identify messages providing transactional or relationship content without first having to wade through commercial content. The Commission seeks comment and information regarding this approach to messages containing both commercial and transactional or relationship content.

In addition to the subject line criterion that would apply to all dual-purpose messages under the Commission's proposed “primary purpose” criteria, a separate criterion would apply to messages containing both commercial content and other content that is neither commercial nor transactional/relationship. Even if a recipient reasonably interpreting the subject line of the message would not likely conclude that the message advertises or promotes a product or service, the primary purpose of the message still would be deemed to be commercial if a recipient reasonably interpreting the body of the message would likely conclude that the primary purpose of the message is to advertise or promote a product or service. Factors relevant to this interpretation include, but are not necessarily limited to, the placement of commercial content at or near the beginning of the body of the message; the proportion of the message dedicated to commercial content; and how color, graphics, type size, and style are used to highlight commercial content.

The criterion for this type of dual-purpose message derives from the Commission's traditional analysis of advertising under § 5 of the FTC Act. 44 The Commission assesses claims made in advertising by, among other things, evaluating the entire document. “[I]n advertising, the Commission will examine ‘the entire mosaic, rather than each tile separately.' ”  45 “[T]he Commission looks to the impression made by the advertisement as a whole.”  46 The Commission draws on this approach in its proposed criteria to determine whether a dual-purpose email message is commercial when it contains both commercial content and content that is neither commercial nor transactional/relationship. The Commission believes this approach would provide guidance to email marketers while preventing spammers from evading CAN-SPAM by adding noncommercial content to an email sales pitch.

This proposed criterion is rooted firmly in traditional Commission legal analysis. Marketers have long been under an obligation to evaluate their advertising material from the reasonable consumer's perspective and determine what impression their material makes on consumers. 47

In enforcing CAN-SPAM and the primary purpose criteria, the Commission will approach the issue of whether the body of an email message, taken as a whole, is primarily commercial in the same way it approaches the issue of whether certain claims are made in a challenged advertisement. “In cases of implied claims, the Commission will often be able to determine meaning through an examination of the representation itself, including an evaluation of such factors as the entire document, the juxtaposition of various phrases in the document, the nature of the claim, and the nature of the transactions.”  48 In other situations, extrinsic evidence—such as expert opinion, consumer testimony, copy tests, surveys, or any other reliable evidence of consumer interpretation—may be necessary to make this determination. 49 In all instances, the Commission will carefully consider any extrinsic evidence that is introduced. 50

In response to the ANPR, the Commission received approximately 220 comments addressing “primary purpose” issues. Many individual consumers opined that a message has a commercial primary purpose if it contains any commercial content. Other consumers expressed the view that CAN-SPAM should regulate only unsolicited messages and should not apply to messages sent with the recipient's consent or where there is an established business relationship between the sender and the recipient.

Many commenters noted that criteria based upon the “importance” of a message's commercial content relative to any noncommercial content would not, on their own, provide adequate guidance. 51 According to these commenters, such criteria would need additional substance and structure to provide industry with the guidance it needs to comply with the Act's requirements. Many of these commenters—particularly email marketers—advocated criteria based on the sender's intent.

Other commenters supported criteria based on the “net impression” of a message, which was a possible approach suggested in the questions included in the ANPR. Under this approach, the primary purpose of an email message would be determined by assessing the message from the recipient's point of view, not the sender's. Many of these comments endorsed the “net impression” elements suggested in the ANPR—chiefly, placement and prominence of commercial content within the message. A number of comments also proposed that if a message's subject line refers to a promotion or advertisement, then the message likely has a commercial primary purpose. Each of these proposals is discussed below.

In addition to suggesting several possible approaches to determine the “primary purpose” of an email message, the ANPR sought to elicit alternatives. The commenters responded with approximately 25 proposals. Some commenters were concerned primarily with advocating an objective standard for determining an email message's primary purpose. A second group advocated the sender's intent as the characteristic that determines an email's primary purpose. A third group focused on certain attributes that, in their view, rendered messages possessing them commercial. A fourth group discussed characteristics that, in their view, placed messages exhibiting those characteristics outside the commercial category. 52 The following sections discuss each of these groups.

Many comments from industry members criticized some or all of the “primary purpose” standards suggested in the ANPR questions. 53 A common thread throughout these critiques was that any “subjective” standard would provide inadequate guidance to industry members who need to determine (1) whether CAN-SPAM applies to their messages, and, if so, (2) whether their messages comply with the law. 54 These commenters recommended that the Commission adopt some form of “objective” test for determining the primary purpose of a message. 55

Many advocates of an objective standard supported a “proportion of content” standard. Under such a proposal, a message would have a commercial primary purpose if its commercial content comprised, for example, at least 25%, 56 33 1/3 %, 57 or 51%  58 of the message's total content. Supporters of these “percentage” proposals claimed that a quantitative standard had the advantage of providing a clear standard while preserving marketers' flexibility in message design. 59

On the other hand, a number of commenters criticized such a “proportion” standard as unworkable. AeA wrote that “[d]etermining whether a message is a commercial promotion or not based on pre-set proportions is not a viable alternative, because setting a formula * * * would be arbitrary and unreliable.” AeA noted that, with respect to messages with both commercial and transactional content— e.g. , “account balance information”—a “proportion” standard could yield different results depending on whether or not a recipient's account reflected a lot of activity. 60 Presumably, this is because the amount of space in a message occupied by transactional content would increase as account activity increased. If so, a message reflecting a lot of account activity could be considered transactional and a message reflecting little account activity could be considered commercial even if both messages contained the same amount of commercial content. IAC opposed a bright-line test which would “likely be easy for those intent on violating the statute to exploit and circumvent.”  61

The Commission declines to adopt a rigidly mechanical “proportion” standard for determining the primary purpose of a message. A standard that, for example, counts the lines of commercial versus noncommercial content is not responsive to the countless ways to market products and services via email. Such an approach would likely miss entirely the nuances that characterize any communication, including email. Moreover, as one commenter noted, a percentage-based standard is inadequate when non-commercial content is presented as text and commercial content is in the form of a Web site URL. 62 As IAC noted, such a standard could be easily sidestepped by email marketers seeking to evade CAN-SPAM. The Commission is particularly persuaded by this critique.

As was explained above, the Commission's proposed criteria distinguish between messages that package commercial content with transactional or relationship content and those that package commercial content with some other type of content. The Commission believes that senders of the former category of dual-purpose message are far less likely to attempt to evade CAN-SPAM. Moreover, messages in the former category provide content that Congress has legislatively determined to be particularly important to recipients. 63 The Commission's proposed “primary purpose” criteria for these messages would require them to provide transactional or relationship content at or near the beginning of the message in order to qualify as “transactional or relationship” rather than commercial.

IAC's cautionary comment, however, supports the Commission's view that messages that contain both commercial content and content that is neither commercial nor transactional/relationship merit a different standard. Such messages may or may not deliver content that is important to recipients; Congress has made no legislative determination on this issue. Therefore, the proposed criterion does not rely entirely on placement of the noncommercial content, although placement is one element to consider in determining the net impression. The Commission's proposed criteria with respect to these messages looks to the net impression created by the message.

As a whole, industry members expressed greatest support for a “primary purpose” standard based on the sender's intent. Most of these commenters framed this proposal as a “but for” test, under which a message would not be considered “commercial” if it would have been sent in any event because of its noncommercial content. These comments framed the “but for” test in several ways, such as asking whether a message would have been sent but for its commercial purpose  64 or its non-commercial purpose. 65 Other comments refined the standard and stated that the relevant question is whether a message would have been sent but for particular commercial content  66 or any commercial content. 67 Several other commenters proposed that the sender's intent should be part of a “net impression” approach to determining a message's primary purpose.

Several commenters argued that Congress's use of the phrase “primary purpose” evidences its “clear intent to establish a standard which evaluates the status of the email based on the sender's objective and motivation.”  68 The Commission is not persuaded by this argument. CAN-SPAM refers to the primary purpose of the message , not of the sender. While one way to determine a message's purpose could be to assess the sender's intent, a more appropriate way is to look at the message from the recipient's perspective. 69 Several commenters made this point. One urged the Commission “to refrain from adopting any ‘primary purpose’ test that seeks to prioritize the subjective motivations of email senders.”  70

Based largely on the analytical approach the Commission takes with respect to advertising—which looks at claims in marketing material from the consumer's perspective rather than the marketer's  71 —the Commission declines, at this time, to adopt an approach that instead considers the advertiser's intent. Nevertheless, as is discussed in more detail below, the Commission recognizes that some spammers could attempt to evade CAN-SPAM by deceptively portraying commercial content as noncommercial content. 72

The Union Pacific Railroad Company has a new state-of-the-art intermodal rail facility that is located 25 miles south of Rockford in Rochelle, Illinois. This facility provides the capacity necessary to support the efficient interchange of shipments to and from rail connections, and expedite the operations of trains and containers. In order to accommodate this new facility and provide better service to carriers, importers, and the public, the Bureau of Customs and Border Protection (CBP) is proposing to extend the port limits of the port of Rockford, Illinois, to include the City of Rochelle, Illinois.

The current port limits of Rockford, Illinois, are described as follows in Treasury Decision (T.D.) 95-62 of August 14, 1995:

Bounded to the north by the Illinois/Wisconsin border; bounded to the west by Illinois State Route 26; bounded to the south by Illinois State Route 72; and bounded to the east by Illinois State Route 23 north to the Wisconsin/Illinois border.

The new port limits of Rockford, Illinois, are proposed as follows: Bounded to the north by the Illinois/Wisconsin border; bounded to the west by Illinois State Route 26; bounded to the south by Interstate Route 88; bounded to the east by Illinois State Route 23 to the Wisconsin/Illinois border.

If the proposed port limits are adopted, CBP will amend § 101.3(b)(1), CBP Regulations (19 CFR 101.3(b)(1)) to reflect the new boundaries of the Rockford, Illinois port of entry.

This change is proposed under the authority of 5 U.S.C. 301 and 19 U.S.C. 2, 66 and 1624.

The signing authority for this document falls under § 0.2(a), CBP Regulations (19 CFR 0.2(a)) because this port extension is not within the bounds of those regulations for which the Secretary of the Treasury has retained sole authority. Accordingly, the notice of proposed rulemaking may be signed by the Secretary of Homeland Security (or his or her delegate).

Before adopting this proposal, consideration will be given to any written comments that are timely submitted to CBP. All such comments received from the public pursuant to this notice of proposed rulemaking will be available for public inspection in accordance with the Freedom of Information Act (5 U.S.C. 552) and § 103.11(b), CBP Regulations (19 CFR 103.11(b)) during regular business days between the hours of 9 a.m. and 4:30 p.m. at the Regulations Branch, Office of Regulations and Rulings, Customs and Border Protection, Department of Homeland Security, 799 9th Street, NW., Washington, DC. Arrangements to inspect submitted documents should be made in advance by calling Mr. Joseph Clark at 202-572-8768.

CBP establishes, expands and consolidates CBP ports of entry throughout the United States to accommodate the volume of CBP-related activity in various parts of the country. Thus, although this document is being issued with notice for public comment, because it relates to agency management and organization, it is not subject to the notice and public procedure requirements of 5 U.S.C. 553. Accordingly, this document is not subject to the provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ). Agency organization matters such as this proposed port extension are exempt from consideration under Executive Order 12866.

The principal author of this document was Christopher W. Pappas, Regulations Branch, Office of Regulations and Rulings, CBP. However, personnel from other offices participated in its development.

Temporary regulations in the Rules and Regulations section of this issue of the Federal Register amend 26 CFR part 1 relating to section 1031(a)(1). The temporary regulations substitute NAICS classification codes for the SIC classification codes in the regulatory text and permit the use of NAICS codes for determining product classes, and therefore property of like kind, of depreciable tangible personal property exchanged under section 1031. The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments.

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 the regulations do 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.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (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 clarity of these proposed regulations and how they may 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 author of these regulations is J. Peter Baumgarten, Office of Associate Chief Counsel (Income Tax and Accounting). 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:

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of information should be received by October 12, 2004. Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the proper performance of the functions of the Internal Revenue Service, including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed collection of information (see below);

How the quality, utility, and clarity of the information to be collected may be enhanced;

How the burden of complying with the proposed collection of information can be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

The collection of information in this proposed regulation is in § 1.1363-2(e)(3). This information is required to inform the IRS of partnerships electing to increase the basis of inventory to reflect any amount included in a partner's income under section 1363(d). Thus, the collection of information is required to obtain a benefit. The likely respondents are businesses or other for-profit institutions.

The burden for the collection of information in § 1.1363-2(e)(3) is reflected on Form 1065, “Partnership Return of Income”.

The estimated burden for the collection of information in § 1.1363-2(e)(3) is as follows:

Estimated total annual reporting burden: 200 hours.

The estimated annual burden per respondent varies from 1 to 3 hours, depending on individual circumstances, with an estimated average of 2 hours.

Estimated number of respondents: 100.

Estimated annual frequency of responses: On occasion.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

This document contains proposed amendments to 26 CFR part 1 under section 1363(d) of the Internal Revenue Code (Code). Section 1363(d)(1) provides that a C corporation that owns LIFO inventory and that elects under section 1362(a) to be taxed as an S corporation must include in its gross income for its final tax year as a C corporation the LIFO recapture amount. Under section 1363(d)(3), the LIFO recapture amount is the excess of the inventory amount of the inventory using the first-in, first-out (FIFO) method (the FIFO value) over the inventory amount of the inventory using the LIFO method (the LIFO value) at the close of the corporation's final tax year as a C corporation (essentially, the amount of income the corporation has deferred by using the LIFO method rather than the FIFO method).

Final regulations (TD 8567) under section 1363(d) were published in the Federal Register on October 7, 1994 (59 FR 51105) to describe the recapture of LIFO benefits when a C corporation that owns LIFO inventory elects to become an S corporation or transfers LIFO inventory to an S corporation in a nonrecognition transaction. The final regulations do not explicitly address the indirect ownership of inventory through a partnership. These proposed regulations provide guidance for situations in which a C corporation that owns LIFO inventory through a partnership (or through tiered partnerships) converts to an S corporation or transfers its partnership interest to an S corporation in a nonrecognition transaction.

Section 1374, modified as part of the repeal of the General Utilities doctrine, see General Utilities & Operating Co. v. Helvering , 296 U.S. 200 (1935), imposes a corporate level tax on certain income or gain recognized by an S corporation to the extent the income or gain is attributable to appreciation that occurred while the assets were held by a C corporation. Specifically, section 1374 imposes a corporate level tax on an S corporation's net recognized built-in gain attributable to assets that it held on the date it converted from a C corporation to an S corporation. The tax is imposed only during the 10-year period beginning on the first day the corporation is an S corporation. In addition, section 1374 imposes a corporate level tax on an S corporation's net recognized built-in gain attributable to assets that the S corporation acquires if the S corporation's bases in such assets are determined (in whole or in part) by reference to the bases of such assets (or any other property) in the hands of a C corporation. This tax is imposed only during the 10-year period beginning on the date that the S corporation acquires the assets.

In Announcement 86-128 (1986-51 I.R.B. 22), the IRS stated that, for purposes of section 1374(d)(2)(A), the inventory method used by a taxpayer for tax purposes (FIFO, LIFO, etc.) shall be used in determining whether goods disposed of following a conversion from C corporation to S corporation status were held by the corporation at the time of conversion. After the issuance of this announcement, Congress became concerned that taxpayers owning LIFO inventory might avoid the built-in gain rules of section 1374. Congress believed that taxpayers owning LIFO inventory, who have enjoyed the deferral benefits of the LIFO method during their status as a C corporation, should not be treated more favorably than their FIFO counterparts. To eliminate this potential disparity in treatment, Congress enacted section 1363(d) in 1987, requiring a taxpayer owning LIFO inventory to recapture the benefits of using the LIFO method. H.R. Rep. No. 100-391 (Parts 1 and 2), 1098 (1987).

In Coggin Automotive Corp. v. Commissioner , 292 F.3d 1326 (11th Cir. 2002), rev'g 115 T.C. 349 (2000), a holding company owned majority interests in several subsidiaries that operated automobile dealerships owning LIFO inventory. As part of a restructuring, each subsidiary contributed its assets (including its LIFO inventory) to a different partnership. The subsidiaries were then merged into the holding company, which elected to be taxed as an S corporation. The court of appeals held that the holding company's S corporation election did not trigger LIFO recapture under section 1363(d) because it was the partnerships in which the holding company held interests, and not the holding company itself, that used the LIFO method.

Section 337(d)(1) authorizes the Secretary to prescribe regulations to prevent the circumvention of the purposes of the repeal of the General Utilities doctrine through the use of any provision of law or regulations. The Treasury Department and the IRS believe that these proposed regulations are necessary to implement General Utilities repeal. Congress enacted section 1363(d) because the use of the LIFO method by a C corporation that converts to S corporation status creates the potential for the permanent avoidance of corporate level tax on the built-in gain reflected in the LIFO reserve. This avoidance possibility is present regardless of whether the converting corporation owns inventory directly or indirectly through a partnership or tiered partnerships. Accordingly, the Treasury Department and the IRS believe it is appropriate to require the recapture of a converting corporation's share of the LIFO reserves of partnerships in which it participates. Such an approach is consistent with the regulations under section 1374, which generally adopt a lookthrough approach to partnerships.

The proposed regulations provide that a C corporation that holds an interest in a partnership owning LIFO inventory must include the lookthrough LIFO recapture amount in its gross income where the corporation either elects to be an S corporation or transfers its interest in the partnership to an S corporation in a nonrecognition transaction. The proposed regulations define the lookthrough LIFO recapture amount as the amount of income that would be allocated to the corporation, taking into account section 704(c) and § 1.704-3, if the partnership sold all of its LIFO inventory for the FIFO value. A corporate partner's lookthrough LIFO recapture amount must be determined, in general, as of the day before the effective date of the S corporation election or, if the recapture event is a transfer of a partnership interest to an S corporation, the date of the transfer (the recapture date). The proposed regulations provide that, if a partnership is not otherwise required to determine inventory values on the recapture date, the lookthrough LIFO recapture amount may be determined based on inventory values of the partnership's opening inventory for the year that includes the recapture date.

The proposed regulations provide that a corporation owning LIFO inventory through a partnership must increase its basis in its partnership interest by the lookthrough LIFO recapture amount. The proposed regulations also allow the partnership through which the LIFO inventory is owned to adjust the basis of partnership inventory (or lookthrough partnership interests held by that partnership) to account for LIFO recapture. This adjustment to basis is to be patterned in manner and effect after the adjustment in section 743(b). Thus, the basis adjustment constitutes an adjustment to the basis of the LIFO inventory (or lookthrough partnership interests held by that partnership) with respect to the corporate partner only; no adjustment is made to the partnership's common basis. The IRS and the Treasury Department request comments on whether the partnership should be required, in some or all circumstances, to increase the basis of partnership assets by the lookthrough LIFO recapture amount attributable to those assets.

Under § 1.1374-4(i)(1), an S corporation's distributive share of partnership items is not taken into account in determining the S corporation's share of net recognized built-in gain or loss if the S corporation's partnership interest represents less than 10 percent of the partnership capital and profits and has a fair market value of less than $100,000. This exception reduces the burden on the S corporation and the partnership of tracking built-in gain assets that are relatively small in amount.

The burden of looking through a partnership interest under section 1374 is greater than the burden of looking through a partnership interest under section 1363(d). Under section 1374, partnership assets must be tracked for a 10-year period. No such tracking problem exists under section 1363 because recapture generally occurs on the date of the S election. Accordingly, the proposed regulations do not contain an exception for partnership interests that are smaller than a specified threshold.

These regulations are proposed to apply to S elections and transfers made on or after August 13, 2004. No inference is intended as to the tax consequences of S elections and transfers made before the effective date of these regulations.

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in EO 12866; therefore, a regulatory assessment is not required. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that few corporations engage in the type of transactions that are subject to these regulations (the conversion from C corporation to S corporation status while holding an interest in a partnership that owns LIFO inventory or the transfer of an interest in such a partnership by a C corporation to an S corporation in a nonrecognition transaction). Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) 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 comments (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 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 has been scheduled for Wednesday, December 8, 2004 beginning at 10 a.m. in the auditorium of the Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit electronic or written comments and an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by Wednesday, November 17, 2004. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

The principal authors of these regulations are Martin Schäffer and Pietro Canestrelli, Office of Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and the Treasury Department participated in their development.

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

Background and Explanation of Provisions

This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under section 1502 of the Internal Revenue Code. On July 18, 1995, final regulations (TD 8597) under § 1.1502-13, amending the intercompany transaction system of the consolidated return regulations, were published in the Federal Register (60 FR 36671). Those final regulations provide rules for taking into account items of income, gain, deduction, and loss of members from intercompany transactions. Their purpose is to clearly reflect the taxable income (and tax liability) of the group by preventing intercompany transactions from creating, accelerating, avoiding, or deferring consolidated taxable income or consolidated tax liability.

Under § 1.1502-13(b)(1), an intercompany transaction is a transaction between corporations that are members of the same consolidated group immediately after the transaction. For purposes of § 1.1502-13, S is the member transferring property or providing services, and B is the member receiving the property or services.

S's income, gain, deduction, and loss from an intercompany transaction, whether directly or indirectly, are its intercompany items, and may include amounts from an intercompany transaction that are not yet taken into account under its separate entity method of accounting. B's income, gain, deduction, and loss from an intercompany transaction, or from property acquired in an intercompany transaction, are its corresponding items. An item is a corresponding item whether it is directly or indirectly from an intercompany transaction (or from property acquired in an intercompany transaction). The recomputed corresponding item is the corresponding item that B would take into account if S and B were divisions of a single corporation and the intercompany transaction were between those divisions. Although neither S nor B actually takes the recomputed corresponding item into account, it is computed as if B did take it into account.

In general, under the matching rule of § 1.1502-13(c), B takes its corresponding item into account under its separate entity accounting method and S takes its intercompany item into account to reflect the difference for the year between B's corresponding item taken into account and the recomputed corresponding item. The matching rule determines when the intercompany transaction regulations override the members' timing of items under their otherwise applicable separate entity methods of accounting.

Section 1.1502-13(c)(7)(ii), Example 13 , illustrates how the matching rule of the intercompany transaction regulations treats manufacturer incentive payments made by one member of a group to another. In this example, B is a manufacturer that sells its products to dealers, and S is a credit company that offers financing, including financing to customers of the dealers. Under B's incentive program, in Year 1, S purchases the product from an independent dealer for $100 and leases it to a nonmember. S pays $90 to the dealer for the product, and assigns to the dealer its $10 incentive payment from B. Under their separate entity accounting methods, B would deduct the $10 incentive payment in Year 1 and S would take a $90 basis in the product. The example assumes that if S and B were divisions of a single corporation, the $10 payment would not be deductible and S's basis in the property would be $100. The example concludes that under the matching rule of § 1.1502-13(c), S takes its $10 intercompany item into account as income in Year 1 to reflect the difference between B's $10 corresponding item (the $10 deduction taken into account by B) and the $0 recomputed corresponding item. S's basis in the product is $100 (rather than the $90 it would be under S's separate entity method of accounting) and the additional $10 of basis in the product is recovered based on subsequent events ( e.g. , S's cost recovery deductions or its sale of the product).

Since § 1.1502-13 was issued, it has become clear that the facts and the underlying assumptions in Example 13 do not provide adequate guidance to address the variety of transactions involving manufacturer incentive payments. Accordingly, the IRS and Treasury Department believe that § 1.1502-13(c)(7)(ii), Example 13 , should be amended to address certain of these transactions and to clarify the proper treatment of such payments under the intercompany transaction regulations. Therefore, these proposed regulations supplement the fact pattern of Example 13 with two additional fact patterns involving manufacturer incentive payments.

The regulations are proposed to apply to any consolidated return year for which the due date of the income tax return (without regard to extensions) is on or after the date that is sixty days after the date these regulations are filed as final regulations with 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 is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that these regulations will primarily affect affiliated groups of corporations that have elected to file consolidated returns, which tend to be larger businesses. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rule making will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

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 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 or electronic 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 author of these proposed regulations is William F. Barry, Office of the 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:

The Agency included in the proposed rule and the supplemental notice a list of those who may be potentially affected by this action. If you have questions regarding the applicability of this action to a particular entity, consult the person listed under FOR FURTHER INFORMATION CONTACT .

In 1980, Congress enacted the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. 9601-9675 (“CERCLA” or “the Act”), in response to the dangers of uncontrolled releases or threatened releases of hazardous substances and releases or substantial threats of releases into the environment of any pollutant or contaminant which may present an imminent or substantial danger to the public health or welfare. CERCLA was amended on October 17, 1986, by the Superfund Amendments and Reauthorization Act (“SARA”), Pub. L. 99-499, 100 Stat. 1613 et seq. As part of SARA, Congress created the Defense Environmental Restoration Program (DERP), 10 U.S.C. 2701, et seq. , which authorized the Secretary of Defense to carry out restoration activities on current and former military facilities. Under Executive Order 12580, the Secretary of Defense exercises the President's authority under sections 104(a), (b) and (c)(4), 113(k), 117(a) and (c)), 119, and 121 of CERCLA with respect to releases or threatened releases where either the release is on or the sole source of the release is from any facility or vessel under the jurisdiction, custody, or control of the Department of Defense. The Secretary of Defense has delegated this authority to the Secretary of the Navy for sites the Department of the Navy controlled after 1986, which includes both the eastern and western portions of Vieques. The U.S. Army, through the U.S. Army Corps of Engineers (USACE), executes DERP's Formerly Used Defense Sites (FUDS) Program in accordance with CERCLA and the National Contingency Plan (NCP), and is authorized under this program to conduct investigation and response actions relating to areas on Culebra that were once under Defense jurisdiction.

To implement CERCLA, EPA promulgated the revised National Oil and Hazardous Substances Pollution Contingency Plan (“NCP”), 40 CFR part 300, on July 16, 1982 (47 FR 31180), pursuant to CERCLA section 105 and Executive Order 12316 (46 FR 42237, August 20, 1981). The NCP sets guidelines and procedures for responding to releases and threatened releases of hazardous substances, or releases or substantial threats of releases into the environment of any pollutant or contaminant which may present an imminent or substantial danger to the public health or welfare. EPA has revised the NCP on several occasions. The most recent comprehensive revision was on March 8, 1990 (55 FR 8666).

As required under section 105(a)(8)(A) of CERCLA, the NCP also includes “criteria for determining priorities among releases or threatened releases throughout the United States for the purpose of taking remedial action and, to the extent practicable, taking into account the potential urgency of such action for the purpose of taking removal action.” (“Removal” actions are defined broadly and include a wide range of actions taken to study, clean up, prevent or otherwise address releases of hazardous substances, pollutants or contaminants (42 U.S.C. 9601(23)).

The NPL is a list of national priorities among the known or threatened releases of hazardous substances, pollutants, or contaminants throughout the United States. The list, which is appendix B of the NCP (40 CFR part 300), was required under section 105(a)(8)(B) of CERCLA, as amended by SARA. Section 105(a)(8)(B) defines the NPL as a list of “releases” and the highest priority “facilities” and requires that the NPL be revised at least annually. The NPL is intended primarily to guide EPA in determining which sites warrant further investigation to assess the nature and extent of public health and environmental risks associated with a release of hazardous substances, pollutants or contaminants. The NPL is only of limited significance, however, as it does not assign liability to any party or to the owner of any specific property. Neither does placing a site on the NPL mean that any remedial or removal action necessarily need be taken.

For purposes of listing, the NPL includes two sections, one of sites that are generally evaluated and cleaned up by EPA (the “General Superfund Section”), and one of sites that are owned or operated by other Federal agencies (the “Federal Facilities Section”). With respect to sites in the Federal Facilities section, these sites are generally being addressed by other Federal agencies. Under Executive Order 12580 (52 FR 2923, January 29, 1987) and CERCLA section 120, each Federal agency is responsible for carrying out most response actions at facilities under its own jurisdiction, custody, or control, although EPA is responsible for preparing an HRS score and determining whether the facility is placed on the NPL. EPA generally is not the lead agency at Federal Facilities Section sites, and its role at such sites is accordingly less extensive than at other sites.

There are three mechanisms for placing sites on the NPL for possible remedial action (see 40 CFR 300.425(c) of the NCP): (1) A site may be included on the NPL if it scores sufficiently high on the Hazard Ranking System (“HRS”), which EPA promulgated as appendix A of the NCP (40 CFR part 300). The HRS serves as a screening device to evaluate the relative potential of uncontrolled hazardous substances to pose a threat to human health or the environment. On December 14, 1990 (55 FR 51532), EPA promulgated revisions to the HRS partly in response to CERCLA section 105(c), added by SARA. The revised HRS evaluates four pathways: ground water, surface water, soil exposure, and air. As a matter of Agency policy, those sites that score 28.50 or greater on the HRS are eligible for the NPL. This listing proposal is not based on scoring pursuant to the HRS. (2) Pursuant to 42 U.S.C. 9605(a)(8)(B), each State may designate a single site as its top priority to be listed on the NPL, regardless of the HRS score. This mechanism, provided by the NCP at 40 CFR 300.425(c)(2) requires that, to the extent practicable, the NPL include within the 100 highest priorities, one facility designated by each State representing the greatest danger to public health, welfare, or the environment among known facilities in the State (see 42 U.S.C. 9605(a)(8)(B)). This is the option chosen by Puerto Rico for the Vieques and Culebra areas addressed in this listing proposal; (3) The third mechanism for listing, included in the NCP at 40 CFR 300.425(c)(3), allows certain sites to be listed regardless of their HRS score, if all of the following conditions are met:

• The Agency for Toxic Substances and Disease Registry (ATSDR) of the U.S. Public Health Service has issued a health advisory that recommends dissociation of individuals from the release.

• EPA determines that the release poses a significant threat to public health.

• EPA anticipates that it will be more cost-effective to use its remedial authority than to use its removal authority to respond to the release.

EPA promulgated an original NPL of 406 sites on September 8, 1983 (48 FR 40658). The NPL has been expanded since then, most recently on July 22, 2004 (69 FR 43755).

In addition, as a matter of policy, EPA may defer sites or portions of sites from the NPL. (See, e.g. , 56 FR 5601-5602, See also “Guidance on Deferral of NPL Listing Determinations While States Oversee Response Actions,” OSWER Directive 9375.6-11.)

A site may undergo remedial action financed by the Trust Fund established under CERCLA (commonly referred to as the “Superfund”) only after it is placed on the NPL, as provided in the NCP at 40 CFR 300.425(b)(1). (“Remedial actions” are those “consistent with permanent remedy, taken instead of or in addition to removal actions * * *.” 42 U.S.C. 9601(24).) However, under 40 CFR 300.425(b)(2) placing a site on the NPL “does not imply that monies will be expended.” EPA may pursue other appropriate authorities to respond to the releases, including enforcement action under CERCLA and other laws. Response activities undertaken by DoD components pursuant to DERP receive their funding from specific environmental restoration accounts under 10 U.S.C. 2703, not from the Trust Fund.

The NPL does not describe releases in precise geographical terms; it would be neither feasible nor consistent with the limited purpose of the NPL (to identify releases that are priorities for further evaluation), for it to do so.

Although a CERCLA “facility” is broadly defined to include any area where a hazardous substance has “come to be located” (CERCLA section 101(9)), the listing process itself is not intended to define or reflect the boundaries of such facilities or releases. Of course, HRS data (if the HRS is used to list a site) upon which the NPL placement was based will, to some extent, describe the release(s) at issue. That is, the NPL site would include all releases evaluated as part of that HRS analysis. Because Puerto Rico has proposed to add certain areas on and around Vieques and Culebra as the Commonwealth's “single highest priority facility” pursuant to 42 U.S.C. 9605(a)(8)(B), no specific HRS analysis is applicable to this listing proposal.

When a site is listed, the approach generally used to describe the relevant release(s) is to delineate a geographical area (usually the area within an installation or plant boundaries) and identify the site by reference to that area. As a legal matter, the site is not coextensive with that area, and the boundaries of the installation or plant are not the “boundaries” of the site. Rather, the site consists of all contaminated areas within the area used to identify the site, as well as any other location to which that contamination has come to be located, or from which that contamination came.

In other words, while geographic terms are often used to designate the site ( e.g. , the “Jones Co. plant site”) in terms of the property owned by a particular party, the site properly understood is not limited to that property ( e.g. , it may extend beyond the property due to contaminant migration), and conversely may not occupy the full extent of the property ( e.g. , where there are uncontaminated parts of the identified property, they may not be, strictly speaking, part of the “site”). The “site” is thus neither equal to nor confined by the boundaries of any specific property that may give the site its name, and the name itself should not be read to imply that this site is coextensive with the entire area within the property boundary of the installation or plant. The precise nature and extent of the site are typically not known at the time of listing. Also, the site name is merely used to help identify the geographic location of the contamination. For example, the name “Jones Co. plant site,” does not imply that the Jones company is responsible for the contamination located on the plant site.

EPA regulations provide that the “nature and extent of the problem presented by the release” will be determined by a Remedial Investigation/Feasibility Study (RI/FS) as more information is developed on site contamination (40 CFR 300.5). During the RI/FS process, the release may be found to be larger or smaller than was originally thought, as more is learned about the source(s) and the migration of the contamination. However, this inquiry focuses on an evaluation of the threat posed; the boundaries of the release need not be exactly defined. Moreover, it generally is impossible to discover the full extent of where the contamination “has come to be located” before all necessary studies and remedial work are completed at a site. Indeed, the boundaries of the contamination can be expected to change over time. Thus, in most cases, it may be impossible to describe the boundaries of a release with absolute certainty.

Further, as noted above, NPL listing does not assign liability to any party or to the owner of any specific property. Thus, if a party does not believe it is liable for releases on discrete parcels of property, supporting information can be submitted to the Agency at any time after a party receives notice it is a potentially responsible party.

For these reasons, the NPL need not be amended as further research reveals more information about the location of the contamination or release.

EPA may delete sites from the NPL where no further response is appropriate under Superfund, as explained in the NCP at 40 CFR 300.425(e). This section also provides that EPA shall consult with States on proposed deletions and shall consider whether any of the following criteria have been met:

(vii) Responsible parties or other persons have implemented all appropriate response actions required;

(viii) All appropriate Superfund-financed response has been implemented and no further response action is required; or

(ix) The remedial investigation has shown the release poses no significant threat to public health or the environment, and taking of remedial measures is not appropriate. As of August 9, 2004, the Agency has deleted 285 sites from the NPL.

In November 1995, EPA initiated a new policy to delete portions of NPL sites where cleanup is complete (60 FR 55465, November 1, 1995). Total site cleanup may take many years, while portions of the site may have been cleaned up and available for productive use. As of August 9, 2004, EPA has deleted 45 portions of 37 sites.

EPA also has developed an NPL construction completion list (“CCL”) to simplify its system of categorizing sites and to better communicate the successful completion of cleanup activities (58 FR 12142, March 2, 1993). Inclusion of a site on the CCL has no legal significance.

Sites qualify for the CCL when: (1) any necessary physical construction is complete, whether or not final cleanup levels or other requirements have been achieved; (2) EPA has determined that the response action should be limited to measures that do not involve construction ( e.g. , institutional controls); or (3) the site qualifies for deletion from the NPL.

As of August 9, 2004, there are a total of 899 sites on the CCL. For the most up-to-date information on the CCL, see EPA's Internet site at http://www.epa.gov/superfund.

Yes, documents that form the basis for evaluations by Puerto Rico, EPA, and other agencies concerning the site in this rule are contained in public dockets located both at EPA Headquarters in Washington, DC and in the Region 2 office.

You may view the documents, by appointment only, in the Headquarters or the Regional docket after the publication of this proposed rule. The hours of operation for the Headquarters docket are from 9 a.m. to 4:30 p.m., Monday through Friday, excluding Federal holidays. Please contact the Region 2 docket for hours.

The following is the contact information for the EPA Headquarters docket: Docket Coordinator, Headquarters; U.S. Environmental Protection Agency; CERCLA Docket Office; 1301 Constitution Avenue; EPA West, Room B102, Washington, DC 20004, (202) 566-0276. (Please note this is a visiting address only. Mail comments to EPA Headquarters as detailed at the beginning of this preamble.)

The contact information for the Region 2 docket is as follows: Dennis Munhall, Region 2, U.S. EPA, 290 Broadway, New York, NY 10007-1866; (212) 637-4343.

You may also request copies from either the EPA Headquarters or the Region 2 docket. An informal request, rather than a formal written request under the Freedom of Information Act, should be the ordinary procedure for obtaining copies of any of these documents.

You may also access this Federal Register document electronically through the EPA Internet under the “ Federal Register ” listings at http://www.epa.gov/fedrgstr . You may use EPA Dockets at http://www.epa.gov/edocket to access the index listing of the contents of the Headquarters docket, and to access those documents in the Headquarters docket. Once in the system, select “search”, then key in the Docket ID No. SFUND-2004-0011. The documents contained in the Headquarters and Region 2 Dockets are outlined below.

The Headquarters and Region 2 dockets for this rule contain: The June 13, 2003 letter from Governor Sila M. Calderon of Puerto Rico designating certain areas on and around Vieques and Culebra, identified by the Governor as AFWTA, as her highest priority facility and requesting listing of AFWTA on the NPL; additional letters from Puerto Rico clarifying the June 13, 2003 letter; maps; ecological information for Vieques and Culebra; Corps of Engineers Archive search for Culebra; and Navy supporting material.

Comments must be submitted to EPA Headquarters as detailed at the beginning of this preamble in the Addresses section. Please note that the addresses differ according to method of delivery. There are two different addresses that depend on whether comments are sent by express mail or by postal mail.

EPA considers all comments received during the comment period. Significant comments will be addressed in a support document that EPA will publish concurrently with the Federal Register document if, and when, the site is listed on the NPL.

EPA is soliciting comments on the listing of certain areas on and around Vieques and Culebra, identified by the Governor collectively as the AFWTA, and requested by the Governor of Puerto Rico pursuant to 42 U.S.C. 9605(a)(8)(b). EPA is also soliciting comments on an approach for final listing that would separate the final listing decision for the Culebra from Vieques (see a more detailed description of this approach below under Section III.A. “Contents of this Proposed Rule”). In addition EPA is seeking comment on treating the noncontiguous islands of Vieques and Culebra as one facility, considering court decisions such as Mead Corp. v. Browner , 100 F 3d 152 (D.C. Cir. 1996).

Generally, EPA will not respond to late comments. EPA can only guarantee that it will consider those comments postmarked by the close of the formal comment period. EPA has a policy of not delaying a final listing decision solely to accommodate consideration of late comments.

During the comment period, comments are placed in the Headquarters docket and are available to the public on an “as received” basis. A complete set of comments will be available for viewing in the Regional dockets approximately one week after the formal comment period closes.

All public comments, whether submitted electronically or in paper, will be made available for public viewing in EPA's electronic public docket as EPA receives them and without change, unless the comment contains copyrighted material, Confidential Business Information (CBI), or other information whose disclosure is restricted by statute. For additional information about EPA's electronic public docket, visit EPA Dockets online at http://www.epa.gov/edocket or see the May 31, 2002 Federal Register (67 FR 38102).

In certain instances, interested parties have written to EPA concerning sites which were not at that time proposed to the NPL. If those sites are later proposed to the NPL, parties should review their earlier concerns and, if still appropriate, resubmit those concerns for consideration during the formal comment period. Site-specific correspondence received prior to the period of formal proposal and comment will not generally be included in the docket.

Pursuant to section 105 (a)(8)(B) of CERCLA, Puerto Rico has requested that EPA propose to list certain areas on and around Vieques and Culebra, identified by the Governor as the AFWTA, on the NPL. The AFWTA includes certain land areas, waters and keys in and around the islands of Vieques and Culebra where military exercises carried out primarily by the Department of Defense have potentially left CERCLA hazardous substances, pollutants or contaminants.

Section 105(a)(8)(B) of CERCLA provides that the NPL “to the extent practicable, shall include among the one hundred highest priority facilities one such facility from each State which shall be the facility designated by the State as presenting the greatest danger to public health or welfare or the environment among the known facilities in such State. A State shall be allowed to designate its highest priority facility only once.” In a letter from Governor Sila M. Calderon to former EPA Administrator Christine Todd Whitman dated June 13, 2003, Puerto Rico designated the AFWTA, comprising certain areas of concern in and around Vieques and Culebra as the Commonwealth's single highest priority facility (“State pick”) and requested that EPA list the AFWTA on the NPL. Puerto Rico clarified its designation in letters dated October 21, 2003 , and July 28, 2004 with respect to both Vieques and Culebra, and May 26, 2004 with respect to Vieques. Support for Puerto Rico's designation of the AFWTA as their highest priority facility and a detailed description of areas preliminarily identified as part of the facility or as requiring investigation can be found in the docket for this rulemaking. EPA seeks comment on treating the noncontiguous islands of Vieques and Culebra as one facility considering court decisions such as Mead Corp . v. Browner , 100 F.3d. 152 (D.C. Cir. 1996). The Mead court rejected EPA's attempt to treat non-contiguous sites as one NPL site in a case in which one of the sites qualified for listing on the basis of an ATSDR advisory. The only rationale presented for combining the two sites for the purposes of the listing was that there were joint operations carried out at the two sites. In the Mead case, EPA had relied on a 1984 aggregation policy (49 FR 37,070 (Sept. 21, 1984)) that was premised on language in section 104(d)(4) of CERCLA which authorizes EPA to treat non-contiguous facilities as one for purposes of section 104. EPA no longer relies on the 1984 aggregation policy in the listing context.

EPA would also like to solicit comment on an approach that would separate the final listing decision for Culebra from the final listing decision for Vieques. Under such an approach, EPA would go forward with a final rule listing Vieques and postpone the final listing decision of Culebra to allow the completion of a Memorandum of Agreement between Puerto Rico and Army. The Memorandum of Agreement would govern the response actions necessary to protect Culebra's human health and environment. The EPA, Puerto Rico and the Army have agreed to pursue this alternate arrangement. The terms or progress under such agreement may determine the point at which it may be appropriate to withdraw the proposal to list the Culebra areas. EPA's intent would be to allow the Culebra areas to be addressed by the two parties under their agreement.

The Culebra portions of the proposal consist of land and water areas identified by Puerto Rico that were owned by, leased to, or otherwise utilized by the United States and under the jurisdiction of the Secretary of Defense that potentially contain CERCLA hazardous substances, pollutants or contaminants left from past military activities. These land areas and associated water areas include, but are not limited to, the following: the Flamenco Peninsula (Northwest Peninsula), Alcarraza Cay (Fungy Bowl), Los Gemelos (Twin Rocks), Cayo del Agua, Culebrita, Cayos Geniqui (Palada Cays), Cayo Tiburon (Shark Cay), Cayo Botella (Ladrone Cay), and a former mortar range Area in Culebra's Cerro Balcon region. Vieques includes all areas agreed to by Puerto Rico and the Navy in May 26, 2004 letter to EPA. For more detailed information on the Vieques portions, please refer to the May 26, 2004 letter with attached maps in the Docket (Docket ID No. SFUND-2004-0011). The description of the site may change as more information is gathered on the nature and extent of contamination.

With this proposal, there are now 57 sites proposed and awaiting final agency action, 50 in the General Superfund Section and 7 in the Federal Facilities Section. There are currently 1,242 final sites, 1,084 in the General Superfund Section and 158 in the Federal Facilities Section. Final and proposed sites now total 1,299. (These numbers reflect the status of sites as of August 9, 2004. Site deletions occurring after this date may affect these numbers at time of publication in the Federal Register .)

Under Executive Order 12866, (58 FR 51735 (October 4, 1993)) the Agency must determine whether a regulatory action is “significant” and therefore subject to OMB review and the requirements of the Executive Order. The Order defines “significant regulatory action” as one that is likely to result in a rule that may: (1) Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities; (2) create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (3) materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in the Executive Order.

No. The listing of sites on the NPL does not impose any obligations on any entities. The listing does not set standards or a regulatory regime and imposes no liability or costs. Any liability under CERCLA exists irrespective of whether a site is listed. It has been determined that this action is not a “significant regulatory action” under the terms of Executive Order 12866 and is therefore not subject to OMB review.

According to the Paperwork Reduction Act (PRA), 44 U.S.C. 3501 et seq. , an agency may not conduct or sponsor, and a person is not required to respond to a collection of information that requires OMB approval under the PRA, unless it has been approved by OMB and displays a currently valid OMB control number. The OMB control numbers for EPA's regulations, after initial display in the preamble of the final rules, are listed in 40 CFR part 9. The information collection requirements related to this action have already been approved by OMB pursuant to the PRA under OMB control number 2070-0012 (EPA ICR No. 574).

No. EPA has determined that the PRA does not apply because this rule does not contain any information collection requirements that require approval of the OMB.

Pursuant to the Regulatory Flexibility Act (5 U.S.C. 601 et seq. , as amended by the Small Business Regulatory Enforcement Fairness Act (SBREFA) of 1996) whenever an agency is required to publish a notice of rulemaking for any proposed or final rule, it must prepare and make available for public comment a regulatory flexibility analysis that describes the effect of the rule on small entities ( i.e. , small businesses, small organizations, and small governmental jurisdictions). However, no regulatory flexibility analysis is required if the head of an agency certifies the rule will not have a significant economic impact on a substantial number of small entities. SBREFA amended the Regulatory Flexibility Act to require Federal agencies to provide a statement of the factual basis for certifying that a rule will not have a significant economic impact on a substantial number of small entities.

This proposed rule listing sites on the NPL, if promulgated, would not impose any obligations on any group, including small entities. This proposed rule, if promulgated, also would establish no standards or requirements that any small entity must meet, and would impose no direct costs on any small entity. Whether an entity, small or otherwise, is liable for response costs for a release or threatened release of hazardous substances and releases or substantial threats of releases into the environment of any pollutant or contaminant which may present an imminent or substantial danger to the public health or welfare depends on whether that entity is liable under CERCLA 107(a). Any such liability exists regardless of whether the site is listed on the NPL through this rulemaking. Thus, this proposed rule, if promulgated, would not impose any requirements on any small entities. For the foregoing reasons, I certify that this proposed rule, if promulgated, will not have a significant economic impact on a substantial number of small entities.

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, and tribal governments and the private sector. Under section 202 of the UMRA, EPA 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, and tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year. Before EPA promulgates a rule for which a written statement is needed, section 205 of the UMRA generally requires EPA to identify and consider a reasonable number of regulatory alternatives and adopt the least costly, most cost-effective, or least burdensome alternative that achieves the objectives of the rule. The provisions of section 205 do not apply when they are inconsistent with applicable law. Moreover, section 205 allows EPA to adopt an alternative other than the least costly, most cost-effective, or least burdensome alternative if the Administrator publishes with the final rule an explanation why that alternative was not adopted. Before EPA establishes any regulatory requirements that may significantly or uniquely affect small governments, including tribal governments, it must have developed under section 203 of the UMRA a small government agency plan. The plan must provide for notifying potentially affected small governments, enabling officials of affected small governments to have meaningful and timely input in the development of EPA regulatory proposals with significant Federal intergovernmental mandates, and informing, educating, and advising small governments on compliance with the regulatory requirements.

No, EPA has determined that this rule does not contain a Federal mandate that may result in expenditures of $100 million or more for State, local, and tribal governments in the aggregate, or by the private sector in any one year. This rule will not impose any Federal intergovernmental mandate because it imposes no enforceable duty upon State, tribal or local governments. Listing a site on the NPL does not itself impose any costs. Listing does not mean that EPA or other Federal agencies or private parties will undertake remedial action. Nor does listing require any action by a private party or determine liability for response costs. Costs that arise out of site responses result from site-specific decisions regarding what actions to take, not directly from the act of listing a site on the NPL.

For the same reasons, EPA also has determined that this rule contains no regulatory requirements that might significantly or uniquely affect small governments. In addition, as discussed above, the private sector is not expected to incur costs exceeding $100 million. EPA has fulfilled the requirement for analysis under the Unfunded Mandates Reform Act.

Executive Order 13132, entitled “Federalism” (64 FR 43255, August 10, 1999), requires EPA to develop an accountable process to ensure “meaningful and timely input by State and local officials in the development of regulatory policies that have federalism implications.” “Policies that have federalism implications” is defined in the Executive Order to include regulations that have “substantial direct effects 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.”

Under section 6 of Executive Order 13132, EPA may not issue a regulation that has federalism implications, that imposes substantial direct compliance costs, and that is not required by statute, unless the Federal government provides the funds necessary to pay the direct compliance costs incurred by State and local governments, or EPA consults with State and local officials early in the process of developing the proposed regulation. EPA also may not issue a regulation that has federalism implications and that preempts State law, unless the Agency consults with State and local officials early in the process of developing the proposed regulation.

This proposed rule does not have federalism implications. It will not have substantial direct effects on the States (including the Commonwealth of Puerto Rico), on the relationship between the Federal government and the States and the Commonwealth, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132. Thus, the requirements of section 6 of the Executive Order do not apply to this rule.

Executive Order 13175, entitled “Consultation and Coordination with Indian Tribal Governments” (65 FR 67249, November 6, 2000), requires EPA to develop an accountable process to ensure “meaningful and timely input by tribal officials in the development of regulatory policies that have tribal implications.” “Policies that have tribal implications” is defined in the Executive Order to include regulations that have “substantial direct effects on one or more Indian tribes, on the relationship between the Federal government and the Indian tribes, or on the distribution of power and responsibilities between the Federal government and Indian tribes.”

This proposed rule does not have tribal implications. It will not have substantial direct effects on tribal governments, on the relationship between the Federal government and Indian tribes, or on the distribution of power and responsibilities between the Federal government and Indian tribes, as specified in Executive Order 13175. Thus, Executive Order 13175 does not apply to this proposed rule.

Executive Order 13045: “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997) applies to any rule that: (1) is determined to be “economically significant” as defined under Executive Order 12866, and (2) concerns an environmental health or safety risk that EPA has reason to believe may have a disproportionate effect on children. If the regulatory action meets both criteria, the Agency must evaluate the environmental health or safety effects of the planned rule on children, and explain why the planned regulation is preferable to other potentially effective and reasonably feasible alternatives considered by the Agency.

This proposed rule is not subject to Executive Order 13045 because it is not an economically significant rule as defined by Executive Order 12866, and because the Agency does not have reason to believe the environmental health or safety risks addressed by this proposed rule present a disproportionate risk to children.

Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355 (May 22, 2001), requires EPA to prepare and submit a Statement of Energy Effects to the Administrator of the Office of Information and Regulatory Affairs, Office of Management and Budget, for certain actions identified as “significant energy actions.” Section 4(b) of Executive Order 13211 defines “significant energy actions” as “any action by an agency (normally published in the Federal Register) that promulgates or is expected to lead to the promulgation of a final rule or regulation, including notices of inquiry, advance notices of proposed rulemaking, and notices of proposed rulemaking: (1)(i) that is a significant regulatory action under Executive Order 12866 or any successor order, and (ii) is likely to have a significant adverse effect on the supply, distribution, or use of energy; or (2) that is designated by the Administrator of the Office of Information and Regulatory Affairs as a significant energy action.”

This proposed rule is not subject to Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355 (May 22, 2001)) because it is not a significant regulatory action under Executive Order 12866 ( See discussion of Executive Order 12866 above.)

Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (NTTAA), Pub. L. 104-113, section 12(d) (15 U.S.C. 272 note), directs EPA to use voluntary consensus standards in its regulatory activities unless to do so would be inconsistent with applicable law or otherwise impractical. Voluntary consensus standards are technical standards ( e.g. , materials specifications, test methods, sampling procedures, and business practices) that are developed or adopted by voluntary consensus standards bodies. The NTTAA directs EPA to provide Congress, through OMB, explanations when the Agency decides not to use available and applicable voluntary consensus standards.

No. This proposed rulemaking does not involve technical standards. Therefore, EPA did not consider the use of any voluntary consensus standards.

We invite you to submit comments about these proposed regulations. To ensure that your comments have maximum value in helping us develop the final regulations, we urge you to identify clearly the specific section or sections of the proposed regulations that each comment addresses and to arrange your comments in the same order as the proposed regulations. During and after the comment period, you may inspect all public comments about these proposed regulations in room 8417, 1201 New York Avenue, NW., Washington, DC, between the hours of 9 a.m. and 4:30 p.m., eastern time, Monday through Friday of each week except Federal holidays.

In addition, the Corporation is planning five public meetings and three conference calls during August and September for purposes of soliciting input on this proposed rule. Please visit our Web site at http://www.americorps.org/rulemaking for information on the dates, places, and times of these meetings and calls.

On request, we will supply an appropriate aid, such as a reader or print magnifier, to an individual with a disability who needs assistance to review the comments or other documents in the public rulemaking record for these proposed regulations. If you want to schedule an appointment for this type of aid, please contact the person listed under FOR FURTHER INFORMATION CONTACT .

Under the National and Community Service Act of 1990, as amended (hereinafter “NCSA, or the Act,” 42 U.S.C. 12501 et seq. ), the Corporation makes grants to support community service through the AmeriCorps program. In addition, the Corporation, through the National Service Trust, provides education awards to and certain interest payments on behalf of AmeriCorps participants who successfully complete a term of service in an approved national service position.

On February 27, 2004, President Bush issued Executive Order (E.O.) 13331 aimed at making national and community service programs better able to engage Americans in volunteering, more responsive to State and local needs, more accountable and effective, and more accessible to faith-based and grassroots organizations. The E.O. directed the Corporation to review and modify its policies as necessary to accomplish the goals of the E.O.

In the Consolidated Appropriations Act for 2004, Congress required the Corporation to reduce the Federal cost per participant in the AmeriCorps program and to increase the level of matching funds and in-kind contributions provided by the private sector. The Conference Report accompanying the 2004 Consolidated Appropriations Act directed the Corporation to engage in notice and comment rulemaking around the issue of “sustainability.”

On September 23, 2003, the Corporation's Board of Directors (the Board) directed the Corporation to “undertake rulemaking to establish regulations on significant issues, such as sustainability and the limitation on the Federal share of program costs, consistent with any applicable directives from Congress.” On June 21, 2004, the Board approved draft specifications for the proposed rule, and directed the Corporation to develop and submit a proposed rule based on those specifications.

The Corporation is initiating two separate rulemaking processes in 2004. This first one will address significant and time-sensitive issues with the goal of incorporating them, to the extent practicable, into the AmeriCorps 2005 program year. The second process grows out of a recommendation by the Board's Taskforce on Grant-making and is largely an effort to streamline and improve our current grant making processes. That streamlining effort is already underway, and we plan to issue a Notice of Proposed Rulemaking for that purpose later in the year. These two rulemakings address distinct and separate issues.

On March 4, 2004, the Corporation published a notice in the Federal Register inviting informal preliminary public input in advance of rulemaking. The notice outlined the general topics the Corporation was interested in addressing through rulemaking and posed questions for the public to consider in providing input. Following the notice, the Corporation held four conference calls and five public meetings across the country in Columbus, Ohio, Seattle, Washington, Boston, Massachusetts, Washington, DC, and Fort Worth, Texas, to frame the issues and hear public input. Through the hearings, conference calls, and e-mail and paper submissions, the Corporation received responses from nearly 600 individuals, and has used this input to inform the drafting of this proposed rule.

This proposed rule includes a targeted series of reforms designed to strengthen the impact, efficiency, and reach of the AmeriCorps program, our AmeriCorps grantees, and the Corporation. Our primary objectives are to:

• Create a framework for long-term growth and sustainability of the AmeriCorps program as a public-private partnership;

• Provide consistency, reliability, and predictability for AmeriCorps grantees and State commissions;

• Enhance the demonstrable positive impact of the AmeriCorps program on:

◦ Communities and beneficiaries that receive service;

◦ Non-profit organizations and community infrastructures that host service; and

◦ AmeriCorps members who serve;

• Resolve longstanding issues relating to Federal share, cost per full-time-equivalent member, and sustainability of AmeriCorps projects in a way that minimizes annual uncertainty about grantee funding levels and restrictions; and

• Assure fiscal and programmatic accountability and performance measurement for the Corporation, the AmeriCorps program, and grantees.

In addition, wherever possible, this rule reflects the Corporation's determination to:

• Decrease the bureaucratic and paperwork burdens on Corporation grantees;

• Strengthen the program's ability to respond to State and local needs;

• Engage more community volunteers;

• Include faith-based and grassroots community organizations in all Corporation programs; and

• Invigorate the competitive grant-making process.

Existing and potential AmeriCorps grantees constitute a rich and diverse group of talented and innovative forces for change, with different needs, circumstances, and abilities. Therefore, the Corporation has endeavored, throughout these regulations, to:

• Use competitive criteria to encourage, rather than require, desired actions or activities, wherever possible; and

• Calibrate implementation of the regulatory requirements based on the unique goals, circumstances, and limitations of grantees, including waivers where appropriate.

As announced in the March 4, 2004, Federal Register notice, the Corporation is focusing these reforms on five main areas: (1) Sustainability of AmeriCorps programs, including decreasing grantee reliance on Federal funds and decreasing Federal costs per full-time equivalent; (2) Selection criteria; (3) Performance measures and evaluation; (4) Tutor qualifications and requirements for tutoring programs; and (5) Streamlining continuation applications and grant cycles. The following discussion addresses the issues of sustainability and intermediaries generally, and then addresses the specifics of the proposed rule in more detail. Section V of this preamble addresses implementation of the proposed rule, and section VI addresses several policy issues we have considered in light of the public input we received.

The issues about which we received the most input were those relating to sustainability, Federal share, and cost per full-time-equivalent (FTE). Much of the input sought to define sustainability in broad terms, and included many elements, other than finances, as part of the definition. While the Corporation agrees that there are many measures and elements of sustainability, the most recent discussion has focused on the monetary aspects of sustainability—Federal share and cost per FTE.

The Corporation understands that other forms of sustainability are important; they are reflected in the proposed changes to the selection criteria so that an organization achieving sustainability through any or all of those measures will be more competitive when applying for an AmeriCorps grant. But ultimately, we believe that the focus of Congress in this discussion of sustainability is at the organizational or program level—specifically on the financial resources of the organization or program. In other words, how can organizations that the Corporation supports better leverage Federal dollars by expanding and diversifying their non-Federal funding? To the extent that this is a broader question, we would frame it as: how much more national service can AmeriCorps provide across the country with the Federal dollars available to it?

The Corporation's annual appropriations and its authorizing legislation, as well as E.O. 13331, support this approach. In our annual appropriations act each year dating back to fiscal year 1996, Congress directed the Corporation to “increase significantly the level of matching funds and in-kind contribution provided by the private sector,” and “reduce the total Federal costs per participant in all programs.” Section 130(b)(3) of the Act, as amended, authorizes the Corporation to ask an organization “re-competing” for funding after a three-year initial grant period to include a “description of the success of the programs in reducing their reliance on Federal funds.” In addition, E.O. 13331 directs that “national and community service programs should leverage Federal resources to maximize support from the private sector and from State and local governments.”

While the Corporation is committed to meeting these goals, they do not require imposing limitations on the number of years an organization may receive funds, particularly given the many organizations providing valuable infrastructure and experience that enable national and community service to continue to thrive across the country. At the national level, we do not think it necessary to disqualify an organization from receiving Federal funding based on the number of years that organization has received funding. To do so would result, in future years, in a loss of some of the strongest organizations with the capacity, infrastructure, and experience to provide high-quality service and deliver results that contribute to the strengthening and growth of national and community service. We do believe, however, that most, if not all, organizations that receive Corporation funds can and should contribute a higher share of program costs over time.

The Corporation's objectives in the proposed rule relating to sustainability are to make more resources available in order to increase national service activities and opportunities. In addition, we seek to strengthen existing national and community service programs by encouraging grantees to expand and diversify their non-Federal funding sources while strengthening the competitive framework. At the same time, we want to strengthen the independence, operating flexibility, and autonomy of grantees, and treat grantees fairly and equitably.

The Corporation's strategy to increase organizational sustainability and expand national and community service has six main elements:

1. Incorporates the broad spectrum of sustainability criteria throughout the Corporation's grant selection criteria.

2. Makes an applicant's budgeted Corporation cost per full-time-equivalent (FTE) a more meaningful factor in the selection process. All else being equal, the lower a program's cost per FTE, the better chance it will have to receive Corporation funding. At the same time, the Corporation will explicitly take into account the goals, performance outcomes, and the individual circumstances of programs and the communities in which they operate, thereby considering both costs and benefits.

3. Increases, based on a predictable and incremental schedule, the grantee share of program costs to a 50 percent aggregate level by the 10th year in which an organization receives an AmeriCorps grant for the same program.

4. Expects State commissions to develop and implement a sustainability approach as part of their oversight function.

5. Reserves a percentage of non-continuation AmeriCorps State and national grant funds each year for applicants that have not received AmeriCorps competitive funding from the Corporation for at least five years.

6. Builds meaningful tools, including limited exceptions, for accommodating organizations that have demonstrated hardship in meeting the increasing match requirements.

With the exception of the fourth element—reserving a percentage of non-continuation funds each year for applicants new to the Corporation—we address each of the elements in more detail in the individual section discussions that follow. On the issue of reserving a percentage of funds for applicants new to the Corporation, we anticipate reserving annually a percentage of AmeriCorps funds for grants to new applicants— i.e. , applicants who have not received an AmeriCorps State or national competitive grant for at least five years. The Corporation will determine this percentage annually based on the availability of appropriations and the projected number of recompeting applications, and publish this information, including posting it on the Web site at http://www.nationalservice.org, in advance of the selection process.

The Corporation believes that its sustainability approach represents a fair, equitable, and authoritative resolution of the issue of organizational financial sustainability. The proposed rules are authorized by, and consistent with, our enabling legislation, and strike a reasonable balance between our objectives of supporting and strengthening high-quality programs while leveraging Federal resources to achieve the greatest benefit possible for our nation's communities. Predictability and consistency are crucial elements of this rulemaking. Thus, we seek to provide clear guidance to our grantees on our long-term expectations for sustainability, which we believe decisively resolves the ongoing discussion on the issue.

The Corporation received a substantial amount of input regarding intermediaries and, in particular, the potential effect of efforts to promote sustainability on those entities. We believe that there is and should continue to be a prominent place for intermediaries in the national and community service portfolio, particularly given their important role in reaching faith-based and small community-based organizations. The Corporation understands that many intermediary models include a regular infusion of new sites, which, as with any start-up, may have higher costs initially. In designing the selection criteria, we have explicitly included that feature of intermediaries as a possible factor in considering several of the cost-effectiveness competitive factors.

We note, however, that we have set matching requirements at the grantee level, rather than at the placement or operating site level, and we have not adjusted the matching requirements based on the proportion of new sites in any given year. We believe that establishing the matching requirements at the grantee level gives greater flexibility to intermediaries to manage and achieve a mix of new and older sites.

As discussed in more detail below, the proposed rule:

1. Defines the term “target community” as the geographic community for which an AmeriCorps grant applicant identifies an unmet need to be addressed.

2. Clarifies the types of service activities in which AmeriCorps members may engage and explains the parameters for grantees and members to engage in capacity-building service activities, including volunteer recruitment and support.

3. Increases, in an incremental and predictable fashion, the grantee's share of program costs to a 50 percent aggregate plateau over 10 years.

4. Codifies that the amount of childcare payments the Corporation makes on behalf of an AmeriCorps member may not exceed the amount provided under the Child Care and Development Block Grant Act of 1990 (P.L. 101-508).

5. Codifies the grant selection process and criteria, and aligns the criteria with indicators of high-quality and sustainable programs.

6. Clarifies how grantees will calculate their budgeted Corporation cost per FTE.

7. Codifies the Corporation's requirements for grantees to establish performance measures and to evaluate program outcomes, and establishes grant size threshold for evaluations.

8. Establishes qualifications for members serving as tutors and requirements for tutoring programs.

9. Prohibits displacement of volunteers.

10. Removes obsolete references to “transitional entities” serving as State commissions on national and community service.

11. Broadens State commission flexibility to directly operate national service programs, except to the extent prohibited by statute.

12. Modifies State commission State plan requirements to include a description of their program sustainability approach.

Except for those member activities specifically prohibited in sections 132 and 174 of the Act, as amended, the Corporation has broad authority to determine appropriate service activities for AmeriCorps members. The proposed regulation largely codifies and clarifies the Corporation's current guidelines and grant provisions on this issue. Specifically, this regulation clarifies that AmeriCorps members may: (1) Perform direct service activities, and (2) engage in other activities that build the organizational and financial capacity of nonprofit organizations and communities, including volunteer recruitment and certain fundraising activities.

One focus of Executive Order 13331 is leveraging of Federal resources “to enable the recruitment and effective management of a larger number of volunteers than is currently possible.” The proposed regulations more clearly direct that some component of an AmeriCorps grant must help build the long-term capacity of nonprofit organizations and the community by recruiting and supporting volunteers. While this has implicitly been a requirement over the past two years, clarifying and reinforcing this requirement is expected to encourage more Americans to engage in service and volunteer activities, and advance President Bush's call to service.

The Corporation does not, however, intend for this requirement to distract from an organization's mission, nor is our goal to replace direct service with volunteer generation and other capacity-building activities. In most cases, direct service and volunteer leveraging can complement each other to strengthen programs and communities. When considering how an AmeriCorps program can promote the effective involvement of volunteers, applicants have the flexibility to determine the best way to enhance or build upon the direct service goals of the program in which the AmeriCorps members are serving and to propose capacity-building activities accordingly.

The Corporation recognizes, however, that some program models, such as certain professional corps, youth corps, and programs in some rural locations with a limited volunteer pool, may not be able to include volunteer recruitment and support in their program model, and the Corporation will take these factors into account in considering requests to waive the volunteer leveraging requirement.

The proposed regulation also clarifies that AmeriCorps members may help organizations raise funds directly in support of service activities that meet local environmental, educational, public safety, homeland security, or other human needs. Members may participate in a wide range of fundraising activities if these activities make up only a relatively small amount of any individual member's overall service hours. Members may write grant applications excepting those for AmeriCorps or any other Federal funding.

The rule's provisions governing fundraising are more flexible for AmeriCorps members than those for grantee staff, which are subject to Federal cost principles described in the Office of Management and Budget Circulars that generally disallow costs incurred in organized fundraising. The Corporation believes that these activities will enhance the use of AmeriCorps members to build the capacity of nonprofit organizations, as well as advance the professional development of the members themselves.

Finally, the rule codifies the Corporation's existing so-called “80/20” rule, which limits a program's aggregate number of hours for education and training activities to not more than 20 percent of its members' total service hours. The rule also clarifies that capacity-building activities count towards the 80 percent and not the 20 percent education and training hours.

Sections 121 and 140 of the Act, as amended, establish a ceiling on the Corporation share for program operating costs and the Federal share for member support costs of 75 percent and 85 percent, respectively. In other words, at a minimum, the statute requires an AmeriCorps grantee to provide not less than 25 percent of operating costs, and 15 percent of member support costs. While the Act does not allow the Corporation to decrease the grantee share requirements below the statutory minimum, the Corporation has the discretion under the statute to increase the grantee share of costs, and did so in 1996, when we increased the grantee share of operating costs from 25 percent to 33 percent.

As discussed earlier, the Corporation believes that the essence of the current public discussions of sustainability relates to the financial resources of our grantee organizations. Section 130 of the Act, as amended, explicitly authorizes the Corporation to ask an organization applying for renewal of assistance (“recompete” funding) after an initial three-year grant period to describe how it has decreased its reliance on Federal funding. In addition, in our annual appropriations act each year dating back to fiscal year 1996, Congress has directed the Corporation to “increase significantly the level of matching funds and in-kind contribution provided by the private sector,” and to “reduce the total Federal costs per participant in all programs.” Finally, E.O. 13331 directs that “national and community service programs should leverage Federal resources to maximize support from the private sector and from State and local governments.”

Consequently, this proposed rulemaking would increase, in a predictable and incremental fashion, the grantee share of program costs to a 50 percent aggregate level in the 10th year that an organization receives an AmeriCorps grant. Each grantee will be required to meet the current minimum requirements of 33 percent match (cash or in-kind) for operating costs and 15 percent match (non-Federal cash only) for member support costs. After meeting those minimum requirements, the grantee may meet the balance of its aggregate share of costs through any combination of operating or member support matching funds. The grantee aggregate share will apply beginning in the fourth year and increase in each year thereafter in which an organization receives a program grant as follows:

The proposed rule establishes that a current grantee who has received an AmeriCorps grant for 4 years or more, must begin meeting the match requirements at the year three-level. For the first two years, that organization will be required to meet current, or marginally higher, match requirements, before its required share begins to increase more systematically.

The Corporation intends to provide training and technical assistance to grantees to assist them in achieving their matching goals. For example, we may provide training on documenting in-kind match to enable grantees to maximize their ability to use in-kind towards their overall matching requirements. We will consult with grantees to determine the most useful and appropriate training and technical assistance.

We believe, based on our research into current grantee match levels, that it is reasonable to expect all grantees, even those operating in remote or impoverished communities, to achieve this level of matching, and we expect State commissions to continue managing their portfolios to achieve even higher match levels. However, to the extent that an organization is unable to achieve or increase its share of costs, we intend to consider targeting the following assistance to organizations that are demonstrably at risk of not meeting the matching requirements:

1. Providing additional training and technical assistance: The Corporation plans to provide training and technical assistance to help grantees identify new strategies to raise matching funds and community support.

2. Redirecting Corporation assets: The Corporation will consider using, on a short-term basis, other program assets to help an organization struggling to meet its match requirements. For example, we might temporarily allocate a VISTA member to help build the capacity and broaden the community support of a VISTA-eligible organization.

3. Conducting Corporation outreach to the regional and national philanthropic community: The Corporation will seek to broaden its outreach to the philanthropic community to promote those national and community service programs that are potentially at risk and explain the impact of the changes we are implementing.

4. Allowing State commission portfolio flexibility: If a subgrantee of a State commission is not meeting its minimum matching requirements, we are providing the State commissions the ability to make up for the short-fall in a low-matching grantee's matching funds by pairing that grantee up with one or more grantees that are meeting more than the required level of matching funds. This will provide some flexibility to State commissions to manage their formula and, to some extent, competitive portfolios, while effectively reducing Federal share.

5. Allowing a waiver: On a limited basis, the Corporation will use its current statutory waiver authority for those satisfactorily performing and otherwise compliant programs that demonstrate an inability, in spite of reasonable efforts, to achieve sufficient financial support to meet the increased matching requirements. This waiver would be granted on an annual basis and subject to revision or revocation based on grantee performance and resources.

The Corporation believes the increased match requirements, together with the measures described above that are designed to assist grantees in meeting the new requirements, represent a fair, equitable, and authoritative resolution of the issue of organizational financial sustainability, such that additional measures in annual appropriations bills, or through rulemaking, are not necessary. We intend to make public information on an annual basis reporting the progress that grantees are making in leveraging Federal resources.

Section 140(e) of the Act, as amended, authorizes the Corporation to establish guidelines on the availability and value of child-care assistance. By current regulation, child-care payments for AmeriCorps State and National members are “based on” amounts authorized under the Child Care and Development Block Grant of 1990. The Corporation is proposing to eliminate any ambiguity in the current language by explicitly capping the amount of child-care benefits for any individual AmeriCorps member at the level established by each State under the Child Care and Development Block Grant.

In addition to establishing specific AmeriCorps grant application requirements, section 130 of the Act, as amended, gives the Corporation broad authority to set additional application requirements and to establish the selection process. We are proposing adjustments to our grant selection criteria to meet three objectives: (1) To better align the selection criteria with elements that predict program success; (2) To incorporate into the selection criteria greater emphasis on sustainability; and (3) To provide transparency, predictability, and consistency for organizations applying for AmeriCorps funds.

The proposed rule describes the Corporation's processes and criteria for selecting grantees. In selecting AmeriCorps programs, the Corporation generally needs to know four things: (1) An organization's plan and its expected outcomes; (2) Whether the organization has the capability to manage Federal funds, and operate and support the proposed program; (3) The cost implications of the proposed program; and (4) For an existing program, whether the organization has implemented a sound program, including achieving strong outputs and outcomes, organizational capability, and cost-effectiveness.

To address these issues, the proposed rule modifies the current structure of three overall categories of criteria—Program Design, Organizational Capability (formerly Organization Capacity), and Cost-Effectiveness (formerly Budget/Cost-Effectiveness). We have adjusted the weights of the three categories to better balance program design against organizational strength, which is reflected through organizational capability, and cost-effectiveness. Consequently,

• Program Design is 50 percent of the score (as opposed to 60 percent currently),

• Organizational Capability remains at its current 25 percent weight, and

• Cost-Effectiveness is 25 percent (as opposed to 15 percent currently).

The Corporation's focus within Program Design is now on the relationship between an applicant's rationale and approach, and the outputs and outcomes to be achieved for members and the community. Most of the criteria from the Corporation's current AmeriCorps 2004 guidelines remain part of the revised selection criteria, although they may now appear under a different category. (Please visit our Web site at http://www.nationalservice.org to view the AmeriCorps 2004 guidelines). We have also added criteria across all three categories to better reflect our focus on outcomes and sustainability. With respect to financial sustainability, we have included a specific criterion on Corporation cost per FTE, so that, all things being equal, an applicant proposing a lower cost per FTE will be more advantaged in the selection process, in the context of fully weighing the benefits, contributions and circumstances of each program.

In applying the selection criteria, the Corporation intends to ensure, to the maximum extent possible, that similar program models are evaluated together. This will help to ensure equity and fairness. The proposed rule would allow the Corporation to also consider relevant information it has received or that is otherwise available during the grant review process—the proposed rule sets out in detail the type of information that the Corporation may choose to consider.

After the Corporation applies the basic selection criteria, we may then apply one or more of the Corporation's selection priorities, as described in this proposed rule. The Corporation may also announce additional priorities in the Notice of Funding Availability, or other notice to the public. Our intent, however, in codifying the selection priorities in these regulations is to provide transparency and baseline consistency for current and prospective grantees. This list of selection priorities reflects several long-standing Board priorities as well as new priorities that we believe are appropriate as a matter of policy—and for the Programs Supporting Distressed Communities, as a matter of law.

The proposed rule reaffirms that the Corporation will seek to ensure innovation and diversity across its portfolio of AmeriCorps programs. In addition, we are requiring State commissions to prioritize their State competitive proposals in rank order to help inform our selection process. While the Corporation will not be bound by the commissions' rankings, we may consider them when making funding decisions. We may, in the future, choose to limit the number of proposals any one State may submit for State competitive funding to streamline the selection process and make optimal use of outside peer review panels. If so, we will announce the limitation in the appropriate Notice of Funding Availability.

The input we received raised some questions over State commission peer review requirements and why the Corporation conducts peer reviews of proposals that State commissions may have already peer reviewed. While the regulatory language does not specify this, we wish to clarify that the Corporation does not require State commissions to peer review AmeriCorps State competitive proposals. The Corporation conducts peer reviews of those proposals at the national level to ensure equitable consideration of all applications. However, a State commission may be required, under State law, to peer review proposals, or it may choose to do so on its own.

As discussed earlier, the proposed rule strengthens the Corporation's basic selection criteria, and explicitly includes a program's proposed Corporation cost per FTE as an indicator of cost-effectiveness at § 2522.435. The proposed regulations also quantify an individual program's Corporation cost per FTE. For individual programs, the Corporation cost per FTE is the budgeted grant costs divided by the number of member FTEs awarded in the grant. The budgeted grant costs exclude: (1) Child-care for individual members, for which the Corporation pays directly; and (2) The education award a member may receive from the National Service Trust after fulfilling a term of service.

The Corporation will announce annually any changes in a program's Corporation cost per FTE. We anticipate that making cost per FTE a competitive factor and gradually decreasing the Federal share of grantee costs will cause the cost per FTE for most programs to decrease over time. Generally, however, the Corporation will consider granting continuation and recompete program requests to increase their Corporation cost per FTE up to the statutorily-required percentage increase in their previous year's AmeriCorps member living allowance. (42 U.S.C. § 12594(a)).

The Corporation will continue to hold State commissions and national direct grantees to a maximum average Corporation cost per FTE. State commissions and national direct grantees will calculate their portfolio's average Corporation cost per FTE by dividing the budgeted grant costs for all their AmeriCorps programs by the number of member FTEs awarded across their portfolio of AmeriCorps programs, including Education Award programs. The budgeted grant costs do not include child-care for individual members, the education award a member may receive from the National Service Trust for fulfilling a term of service, or non-program grant funds such as a State commission's administrative grant or Program Development and Training (PDAT) funds. We encourage State commissions and national direct grantees to use the Education Award Program as a way to lower their average Corporation cost per FTE, to the extent feasible while maintaining high quality programs.

Currently, the average cost per FTE for each commission includes the formula funds they use for planning grants. Some of the input suggested that the Corporation give States more leeway to use planning grants to foster new AmeriCorps programs by taking the cost of planning grants out of the average cost per FTE calculation for each commission. The Corporation is considering allowing commissions, in calculating their average Corporation cost per FTE, to exclude some amount of planning grants from their budgeted grant costs, in an amount to be determined by the Corporation each year. The Corporation plans to study the budgetary and National Service Trust implications of this approach in the coming months. However, we invite the public to suggest other ideas for expanding the use of planning grants.

The Corporation will announce in the Federal Register and on its Web site at http://www.nationalservice.org the annual maximum average Corporation cost per FTE for State commissions and national direct portfolios. For the 2004 and 2005 program years, the maximum average Corporation cost per FTE for both State commissions and national directs will remain at the current level of $12,400. The Corporation recognizes that the member living allowance may increase and we will review the maximum average cost per FTE annually with this and other changes to program costs in mind.

While we acknowledge that cost per FTE may be defined in several different ways, our proposed calculations of Corporation cost per FTE are primarily to enable grantees and subgrantees to manage Corporation costs at the program and State commission level, and to estimate costs for the grant selection process.

To ensure that the Corporation continues to demonstrate the true impact of national service, and that programs continue to improve, as well as to fulfill the expectations laid out in the Government Performance Results Act of 1993 and OMB's Program Assessment Rating Tool (or PART), we are continuing to build on the progress we have made in demonstrating results. The proposed rule codifies the Corporation's current requirements for performance measurement, focuses independent evaluation requirements on large grantees, and generally reflects current Corporation practice. In addition, the proposed rule clearly describes the relationship between performance measures, evaluations, and funding decisions. The Corporation believes that a stronger emphasis on performance measurement and evaluation will strengthen AmeriCorps programs and foster continuous improvement. In line with E.O. 13331, emphasizing performance measures and evaluation will also help us identify both best practices and models that merit replication, and programmatic weaknesses that can be corrected most effectively when identified early.

The proposed rule distinguishes performance measurement from program evaluation, while making explicit that grant funds used to pay for either activity are not considered “administrative costs” or subject to the 5 percent statutory cap. A grantee would be allowed to use grant funds to pay for performance measurement and evaluation up to the approved amounts for such activities in its grant.

While the proposed rule allows an applicant organization to propose and negotiate performance measures unique to the applicant's program, the rule provides that the Corporation will establish one or more national performance measures on which all grantees would have to report. The Corporation will establish a national performance measure on volunteer leveraging, and may establish performance indicators of member satisfaction. The Corporation will develop national standardized performance measures in consultation with AmeriCorps grantees.

Section 131(d)(1) of the Act specifies that an applicant must arrange for an independent evaluation of an AmeriCorps national service program receiving assistance under Subtitle C of Title I of the Act, unless the applicant obtains Corporation approval to conduct an internal evaluation. The statute also authorizes the Corporation to make alternative evaluation requirements “based upon the amount of assistance” a grantee receives.

In light of these provisions, the Corporation is revising its current requirement that all grantees arrange for evaluations every 4 years. The proposed rule requires that only grantees receiving an average annual program grant of $500,000 or more conduct an evaluation that covers a period of at least 5 years, and submit the evaluation results with their application for recompete funding. The Corporation intends to strictly enforce this requirement. Our rationale for this approach is that it is burdensome to require evaluation for smaller grants, and, for larger grants, we want to give a grantee enough time to complete a rigorous evaluation, and ensure that the Corporation receives it in time to consider with a grantee's second recompete application for funding. The Corporation will not consider for funding any recompete application that does not include the required evaluation summary, or results, as applicable.

For grantees that do not meet the dollar threshold, the Corporation encourages (but does not require) them to perform evaluations and may consider the results of these evaluations when making decisions on an organization's application for funds. See our Web site ( http://www.nationalservice.org ), under the AmeriCorps application guidelines and AmeriCorps application instructions for the relevant program year for information on how to submit evaluation materials.

To continuously improve the results of programs for both participants and the people they serve, we encourage all grantees to provide for evaluations as part of their programs.

E.O. 13331 directs that school-based national and community service programs “should employ tutors who meet required paraprofessional qualifications, and use such practices and methodologies as are required for supplemental educational services.” The Corporation believes strongly that it is important to maintain consistency with the No Child Left Behind Act (NCLBA) and ensure that children who need tutoring are receiving the best possible support.

At the same time, we recognize that thousands of AmeriCorps members are providing invaluable support to children through a wide range of activities. In setting qualifications, we have narrowly defined “tutor” in these regulations to include only individuals whose primary goal is to increase academic achievement in reading or other core subjects through planned, consistent, one-to-one or small-group reading, or other small-group sessions, that build on students' academic strengths and target students' academic needs. We do not intend to establish qualifications for national service participants who engage in other school-related support activities, such as homework help provided as part of a safe-place-after-school program.

The proposed rule also confirms that the qualification requirements for tutors and other paraprofessionals under the NCLBA apply to tutors who are employees of the Local Education Agency (LEA) or school, but do not apply to AmeriCorps members serving as tutors under the sponsorship of an organization other than the school district.

Under the NCLBA, paraprofessionals who provide instructional support in Title I schools must have a secondary school diploma or its equivalent and must have: (a) Completed two years of study at an institution of higher education; or (b) Obtained an associate's or higher degree; or (c) Met a rigorous standard of quality and be able to demonstrate the appropriate and relevant job skills through a formal State or local academic assessment. As stated above, these requirements apply only to tutors who are employees of the LEA or school, but do not apply to AmeriCorps members serving as tutors under the sponsorship of an organization other than the school.

For a member serving as a tutor, other than one employed by the LEA or school , the proposed rule requires either that the member has a high school diploma (or its equivalent), or that the member passes a proficiency test that the grantee has determined effective in ensuring that the member has the necessary skills to serve as a tutor. A member serving as a tutor would also have to successfully complete any pre- and in-service specialized training required by the program.

In addition, tutoring programs are required to show competency to provide tutoring service through their recruitment, specialized training, performance measures, and supervision. We believe that these requirements will help improve the overall quality of tutoring and literacy programs in which AmeriCorps members serve.

The Corporation's focus has always been, pursuant to the Act, to fund programs meeting unmet needs in their communities. The non-displacement rules are one way to ensure that programs are meeting unmet needs, rather than needs that employees or volunteers are meeting already. Consequently, we are proposing to clarify, in the regulation, that the service of an AmeriCorps member must complement, and may not displace, the service of other volunteers in the community. This clarification is consistent with the directive in E.O. 13331 that national and community service programs avoid or eliminate any practice that displaces volunteers.

The National Service Trust Act of 1993 and the Corporation's regulations, originally issued in 1994, contemplated the existence of transitional entities, in addition to State commissions and alternative administrative entities, as State bodies that could be eligible to receive Corporation funding and administer national service programs on an interim basis. The provisions relating to transitional entities, however, sunsetted 27 months after the passage of the Act, or December 1995. The proposed rule amends the regulations to remove any obsolete references to transitional entities.

Part of the Corporation's sustainability strategy is to build upon what some States are already doing in the sustainability arena. Through the public input process and follow-up discussions, we learned that roughly one-quarter of the State commissions have written sustainability policies or approaches through which they promote sustainability and encourage new programs in their States. Some States, for example, gradually and predictably reduce their programs' Corporation cost per FTE over 12 years, to allow the commission to invest funds in new programs and encourage on-going programs to develop efficiencies and enhance community support. Other State commissions require, among other things, that their subgrantees develop their own sustainability plans, and increase the subgrantee share of program operating costs over a seven-year period to 75 percent. Some States, in addition to requiring a small increase in program share of member support costs over a three-year period, actively solicit private donations to use, in part, to help AmeriCorps programs meet corporate donors and improve private support.

We expect these States to continue their sustainability efforts, and other States to begin planning how they can help make national and community service sustainable at the state level. For this reason, the proposed rule requires each State to describe its sustainability approach in its State plan. To address this requirement, States will need to consider how best to use the Corporation's sustainability approaches in conjunction with State needs to achieve sustainable national and community service programs, and the Corporation will have the opportunity to learn from what the States are doing and to share best practices.

The Corporation proposes to ease the restriction on State commissions directly carrying out national and community service programs. Under the Act, a State commission or alternative administrative entity may not directly carry out any national service program that receives assistance under subtitle C. 42 U.S.C. 12638(f). Currently, however, 45 CFR 2550.80 goes further than the statute by prohibiting State commissions from directly operating any national service program receiving assistance, in any form, from the Corporation. This means that, currently, a State commission is prohibited from operating not only a subtitle C AmeriCorps program, but also any subtitle H, Learn and Serve, or Senior Corps program. The Corporation is relaxing the restriction by amending the regulations to conform to the Act and to give commissions more flexibility to directly operate programs other than subtitle C AmeriCorps programs.

The Corporation intends to make any final rule based on this proposal effective no sooner than 30 days after the final rule is published in the Federal Register . We will include an implementation schedule in the final rule, based on the final rule's date of publication.

The Corporation announced in its March 4, 2004 Federal Register notice that we would not respond to the input we received during the preliminary input process, but that we would use it to inform our drafting process. That said, we received sufficient input on certain issues that we feel we should address here, even in the absence of regulatory language.

Much of the public input we received focused on suggestions for streamlining our grant application and grant-making processes, and streamlining and aligning with grantee needs our reporting and other requirements. The following are some of the issues we considered and our response.

During the preliminary public input process, we heard that our current grant calendar is not optimal for many organizations with start dates in the fall. To the extent that appropriations are made available, we intend to move application deadlines and grant awards to earlier in the fiscal year. Our goal is to execute grant awards to allow grantees as much time as possible from the time they receive the grant to the date that they start their programs. Part of this process will also include revisiting our current application requirements to tailor them more closely to the information we reasonably need to make decisions.

The Corporation received several requests to authorize grantees to allow members to begin serving before we actually execute the grant award. By law, the Corporation cannot meet this request. The Strengthen AmeriCorps Act re-emphasizes the statutory requirement that the obligational event for an education award is the execution of the grant award. Thus, we cannot allow programs to enroll members before we have awarded both the grant and the member FTEs associated with the grant.

Section 130 of the National and Community Service Act of 1990, as amended, authorizes the Corporation to determine the timing and content of applications for AmeriCorps funding. The public input we received overwhelmingly indicated that we should streamline our current process for applying for continuation funding in years two and three of a three-year grant period. We agree and intend to change our continuation application requirements to minimize the burden on grantees, while ensuring that the Corporation receives the information it needs to make fiscally responsible continuation awards. Our intent is to streamline the application, reporting requirements, and the review process for continuations, as well as to give grantees more predictability over the three-year grant cycle.

We propose:

• Allowing grantees, generally, to request their continuation award on a rolling basis, according to their needs, rather than by a specific due date;

• Requiring grant applicants to submit a three-year budget and three-year plan for performance measures with their initial application for funding, and to update it annually when they request additional funds for years two and three of the grant;

• Requiring grantees to submit their progress report and, if applicable, a narrative describing any proposed changes in the scope of the program with their request for continuation funding;

• Eliminating the requirement that grantees submit a new SF 424 Face sheet, a complete program narrative, and other information that we determine to be unnecessary; and

• Eliminating the requirement that State commissions provide annual summaries, and other information we determine to be unnecessary for their State competitive programs.

Accordingly, the Corporation will be revising and streamlining many of the information collection requirements related to grant applications. The Corporation intends, to the maximum extent possible, to award continuation grants within one month of a grantee's request, or within one month of the Corporation's receipt of its annual appropriation, whichever is later. This means that, as a general rule, the Corporation intends to award continuation requests on a rolling basis, rather than requiring all applications to be submitted on a specific day and considering them at the same time. We intend to work with State commissions on a schedule that accommodates the different start dates of programs within a State's portfolio. Because of the uncertainties of annual appropriations, however, we are reviewing how this process would affect continuation requests that include an expansion request (including both requests for more program funds and requests for more member FTEs), and may establish an alternate timetable for considering those requests.

The Corporation intends to approve continuation requests based on:

1. The Grantee's satisfactory performance, as demonstrated in the progress report and other information the Corporation may have obtained;

2. Whether the grantee is in compliance with its grant provisions;

3. Any proposed changes to the grantee's program or budget; and

4. The availability of appropriations.

To make this new process work, the Corporation intends to tie reporting requirements, such as the progress report, to the start date of individual grants, rather than setting an arbitrary deadline for all grantees. We anticipate issuing a three-year schedule of reporting due dates with each initial grant award so that the grantee will know what is expected at the outset. This will also ensure that the Corporation receives the reports at the optimal point in time for making funding decisions. In addition, we are committed to focusing and streamlining our current reporting requirements to reduce grantee burden.

In sum, these anticipated changes are expected to decrease the burden on grantees, increase the efficiency of the grant-making process, and increase the utility of what grantees report. We will inform our grantees once we have finalized our continuation request processes.

The input we received indicated a strong preference for providing three years of funding up front to a grantee. However, funding three-year grants up front would necessarily decrease the size of the national service field, at least initially, as we would only be able to award about a third of the annual grants we award now. We, therefore, decline to accept this suggestion and do not anticipate providing three years of funding up front for a three-year grant.

As mentioned earlier, the Corporation is initiating a second rulemaking process this year to rewrite and reorganize our current regulations, and streamline and incorporate the grant provisions and guidelines into regulation. We believe that this will result in much clearer, more focused, and transparent guidance for applicants and grantees and a decrease in grantee burden.

Since last year, the Corporation has prohibited programs from re-filling a slot when a member left without completing a term of service. We received a significant amount of input asking that we revisit this policy. We are still examining this possibility for the 2004 program year and will issue more specific guidance on this issue in the near future. We will address this issue outside of rulemaking.

Many individuals who provided input saw challenge grants as a way to increase the capacity of the national and community service field. The Corporation supports making challenge grants under certain circumstances. Under the VA/HUD appropriation, however, challenge grants are currently authorized and funded under subtitle H of the Act, as amended, and are not available for the purpose of supporting AmeriCorps programs. To date, we have not had authority in our appropriations statute to fund challenge grants with AmeriCorps State and National funds and are, therefore, unable to accept this suggestion.

The Corporation received a substantial amount of input on behalf of professional corps grantees requesting separate application guidelines and requirements for professional corps programs. We have concluded that we do not need to establish separate guidelines in regulation. The Corporation believes, however, that professional corps programs, particularly those for which the cost is largely borne by sponsoring organizations, will continue to compete well in our AmeriCorps grant competitions. By using an “apples to apples” approach during our selection process, we will ensure, to the maximum extent possible, that we evaluate professional corps programs together. In addition, for a program able to demonstrate the requirement to leverage volunteers is a fundamental program structure alteration, we will consider a request to waive such leveraging requirement.

Finally, we recently issued a Notice of Funding Availability directed only at professional corps, and would consider doing so again in the future.

We received input from current and former AmeriCorps members asking us to focus on their experience and the resources available to them. The Corporation has a strong interest in the AmeriCorps member experience and intends to further explore ways to improve it.

In particular, we intend to explore creating a member satisfaction survey through which AmeriCorps members would be able to evaluate their programs and their AmeriCorps experience.

The Corporation received many suggestions for reforms that it is unable to address without legislation. The following table lists examples of these proposed reforms and the associated statutory constraints.

This is a summary of the Commission's Notice of Proposed Rulemaking (NPRM) in WC Docket No. 04-259, RM-10603, FCC 04-174, adopted on July 14, 2004, and released on July 19, 2004. The full text of this document is available on the Commission's Web site Electronic Comment Filing System and for public inspection Monday through Thursday from 8 a.m. to 4:30 p.m. and Friday from 8 a.m. to 11:30 a.m. in the FCC Reference Center, Room CY-A257, 445 12th Street, SW., Washington, DC 20554. Alternative formats are available to persons with disabilities by contacting Brian Millin at (202) 418-7426 or TTY (202) 418-7365. The full text of the NPRM may also be purchased from the Commission's duplicating contractor, Best Copy and Printing, Inc., Portals II, 445 12th Street, SW., Washington, DC 20554, telephone (202) 488-5300, facsimile (202) 488-5563, or e-mail fcc@bcpiweb.com , or via its Web site at http://www.bcpiweb.com .

1. This document does not contain proposed information collection requirements subject to the Paperwork Reduction Act of 1995, Pub. L. 104-13. In addition, therefore, it does not contain any proposed information collection burden “for small business concerns with fewer than 25 employees,” pursuant to the Small Business Paperwork Relief Act of 2002, Pub. L. 107-198, see 44 U.S.C. 3506(c)(4).

2. This NPRM, adopted July 14, 2004, and released July 19, 2004, in WC Docket No. 04-259, RM-10603, FCC 04-174, initiates a proceeding to examine the proper number of SLCs that rate-of-return and price cap carriers may assess upon customers that obtain derived channel T-1 service where the customer provides the terminating channelization equipment and upon customers that obtain PRI ISDN service.

3. The Commission's rules specify that carriers must assess one SLC “per line,” which is defined to mean per channel. For derived channel T-1 services, therefore, one SLC currently is assessed for each derived channel ( i.e. , up to 24 channels per T-1) provided to the customer.

4. In 1997 in the Access Charge Reform First Report and Order , 62 FR 31868, June 11, 1997, the Commission modified the SLC rules for loops used to provide Basic Rate Interface (BRI) ISDN and PRI ISDN services for price cap carriers. Specifically, the Commission created exceptions to the general rule that one SLC be assessed for each channel of service provided, finding that a single SLC may be assessed for a loop used to provide BRI ISDN service, and that up to five SLCs may be assessed for a loop used to provide PRI ISDN service. In 2001, in the MAG Order , 66 FR 57919, November 30, 2001, the Commission adopted identical rule changes for rate-of-return carriers.

5. On September 26, 2002, the National Exchange Carrier Association, Inc. (NECA) filed a petition for rulemaking requesting that the Commission initiate a rulemaking proceeding to modify the rules governing the assessment of the SLC for derived channel T-1 services where the customer provides the terminating channelization equipment. Specifically, NECA proposed modifying section 69.104(p) of the Commission's rules, 47 CFR 69.104(p), to permit rate-of-return carrier to assess no more than five SLCs on customers of derived channel T-1 services. Verizon has requested that any rule change be applied as well to price cap carriers for new T-1 service offerings.

6. NECA and other local exchange carriers and carrier associations claim that the proposed rule changes are necessary to bring SLC assessments more in line with costs because treating derived channel T-1 services differently from PRI ISDN services creates artificial price incentives that favor PRI ISDN services over derived channel T-1 services.

7. NECA proposed recovering revenue lost due to the reduction in the number of SLCs assessed through the development of a port charge and through an increase in the interstate common line support universal service fund (ICLS).

8. The Commission initiates this NPRM to examine the assessment of SLCs on derived channel T-1 services where the customer provides the terminating channelization equipment. We find that our current rules, which require the assessment of 24 SLCs for these derived channel T-1 services, may be inconsistent with the Commission's long-standing efforts to align rates with costs. We also find it appropriate to re-examine our earlier finding, based on Bell Operating Companies' cost studies from the mid-1990s, that up to five SLCs may be assessed on customers of PRI ISDN service. Our examination of these issues will encompass both rate-of-return and price cap carriers.

9. We request that any party that proposes the Commission change the SLC rules include in its comments the specific language of its requested rule change(s).

10. Cost of provisioning and Cost Studies. We tentatively conclude that the number of SLCs that may be assessed on customers of derived channel T-1 service where the customer provides the terminating channelization equipment should be based on the actual common line cost relationship between these services. We seek comment on this tentative conclusion.

11. We seek comment on the actual common line cost relationship between derived channel T-1 service and basic analog service, and ask parties asserting a particular cost relationship to support their claims with a cost study showing the common line costs for derived channel T-1 service and basic, analog service, respectively. The cost studies should be sufficiently detailed to enable us to discern the common line cost relationship between these services with reasonable accuracy.

12. We also seek comment on the current relationship between PRI ISDN common line costs and basic, analog common line costs. We ask parties asserting a particular cost relationship to support their claims with a cost study showing the common line costs for PRI ISDN service and basic, analog service, respectively. The cost studies should be sufficiently detailed to enable us to discern the common line cost relationship between these services with reasonable accuracy.

13. We ask that all cost studies include all of the underlying data used in the study, as well as the source(s) of the data, and clearly identify all of the assumptions made and formulas used. In particular, we ask parties to identify clearly all of the demand and growth assumptions reflected in their cost studies. In order to facilitate review by other parties and Commission staff, all cost studies should be fully transparent and verifiable. To the extent that a party expects to include confidential or proprietary data in a cost study, it may seek a protective order.

14. Impact of Network Architecture. We seek comment on the network architectures that carriers use to provide derived channel T-1 and PRI ISDN services. For example, in addition to using short copper loops, are carriers using fiber-based digital loop carrier systems to provide these services? Are carriers providing these services using all fiber loops, fiber to the premises, or other fiber-based loop architectures? Commenters should identify clearly the loop network architectures that they use to provide derived channel T-1 service, PRI ISDN service, and basic, analog service, including the relative frequency with which they deploy different architectures to provide these services. Commenters should also identify whether and, if so, why the loop architectures and their relative deployment frequencies are different from those used in their cost studies. We further request that commenters identify the key factors they consider to determine which loop network architecture(s) to deploy to provide derived channel T-1, PRI ISDN, and basic, analog services.

15. We seek comment on whether we should establish different rules for different loop architectures. Do variations in cost relationships resulting from the use of different architectures support different SLC assessment rules reflecting these cost relationships? For example, what incentives might different SLC assessment rules create regarding the deployment of efficient loop technologies? If we conclude that cost disparities among different network architectures counsel against adoption of SLC assessment rules based on relative cost relationships, are there alternative means of aligning common line costs with SLC cost recovery rules?

16. We also seek comment on whether carriers might incur different costs in providing derived channel T-1, PRI ISDN, and basic, analog services, even if those services use the same loop architectures. For example, are copper loops used to provide T-1 or PRI ISDN services shorter or longer, on average, than copper loops used to provide basic, analog services? Do derived channel T-1 or PRI ISDN loops cause interference when they share cables with loops providing other services? Should factors like these affect our analysis? If so, we seek comment on the effect of any such factors on the costs and relative costs of loops used to provide these different services.

17. We also seek comment on the relationship between loop costs for derived channel T-1 loops and the loop costs of T-1 special access services. To the extent that these costs differ, we ask parties to explain in detail the causes of such variances.

18. Line Port Charges. Carriers assess a separate line port charge for ISDN line ports, and for other line ports, to the extent that the costs of these line ports exceed the costs of line ports used for basic, analog service. See 47 CFR 69.130, 69.157. We ask parties to identify with specificity the amount of (as well as the methodology used to calculate) the port charge that they would expect to assess for the port associated with derived channel T-1 service, as well as the amount (and calculation methodology) of the PRI ISDN port charge they currently assess upon end user customers. Carriers should include in their comments the amount of the port charge that they may have developed prior to the comment date. More generally, we ask parties to comment on the principles that should be used to determine whether a cost should be included in the basic common line costs recovered through the SLC or in the line port costs recovered through the separate line port charge.

19. Impact on ICLS and Other Universal Service Issues. ICLS seeks to ensure that each rate-of-return carrier continues to provide affordable, quality telecommunications services to its customers while also recovering its common line revenue requirement. We recognize that assessing fewer than 24 SLCs for derived channel T-1 services will tend to decrease each carrier's revenues from SLCs and increase its ICLS. We seek comment on whether this is consistent with the goals of universal service.

20. We seek comment from on the effect that changes in the SLC assessment rules for PRI ISDN and for derived channel T-1 services (including the development of any new port charges for derived channel T-1 service) will have on ICLS. We ask parties to quantify the changes in the size of ICLS that they would expect as a result of possible rule changes that would alter the number of SLCs assessed for PRI ISDN service or for derived channel T-1 service. Parties should clearly identify the methodology used to perform such a calculation. In particular, parties should identify any changes in the demand for these services that would result from changing the SLC assessment rules and should identify how demand assumptions are used in their cost study calculations. With regard to changes to ICLS resulting from any SLC assessment rule change, we expect that the parties' demand assumptions will differ from current demand figures and we ask parties to identify clearly the current demand figures, the anticipated demand figures associated with the proposed rule changes, and the basis for changes in demand assumptions resulting from any rule changes.

21. We also seek comment on the implications of rule changes for other universal service issues. Commenters should address the effect of rule changes on competitive eligible telecommunications carriers (ETCs) and the portability of universal service under our current ETC and portability rules. See 47 CFR 54.307. In particular, we seek comment on whether, pursuant to any rule change, competitive ETCs should report 24 lines for derived channel T-1 services or should report the same number of lines for these services that the incumbent LECs are required to report. Commenters should also address whether changing the method of developing line counts will affect universal service support mechanisms.

22. Impact on PICC, CCLC, and Retail Rates. We seek comment on the effect that changes in the SLC assessment rules for PRI ISDN and for derived channel T-1 services (including the development of any new port charges for derived channel T-1 service) will have on the multi-line business (MLB) primary interexchange carrier charge (PICC) and carrier common line charge (CCLC). To the extent that we modify the SLC assessment rule for derived channel T-1 service so that the number of SLCs assessed for this service is no longer based on the number of lines ( i.e. , channels), should we also modify the PICC rule to make the same change? Should SLC or PICC rules for price cap carriers distinguish between new and existing T-1 services? If we change the SLC and PICC assessment rules, should we also modify the maximum CMT revenues per line permitted under section 61.3(d) of the Commission's rules, 47 CFR 61.3(d)?

23. Commenting price cap carriers should also identify the new SLC (both residential and single line business (RES/SLB) and MLB), MLB PICC, and CCLC rates that would result from their proposals. Parties should identify clearly the methodology used to perform such calculations. We ask parties to quantify, based on their individual proposals, the amount of foregone SLC revenues (on an annualized basis) that they expect to recover from the MLB PICC and CCLC.

24. Commenting carriers that currently assess the SLC at rates below the SLC cap(s) should identify the increase in the level of the SLCs they assess (both RES/SLB and MLB) that would result from their desired rule change(s).

25. We seek comment on whether setting the number of SLCs that may be assessed equal to the common line cost ratio between derived channel T-1 or PRI ISDN and basic, analog service may result in MLB customers paying less than the full common line costs, with carriers having to recoup the shortfall from ICLS (for rate of return carriers) or from the MLB PICC and CCLC (for price cap carriers). We seek comment on whether such a result is consistent with our policy goals and, if not, we ask parties to propose an alternative that would result in all of the common line costs, but no more, for these services being recovered from MLB customers.

26. We also seek comment on the effect of any proposed rule changes on all classes ( i.e. , residential, SLB, MLB) of end user customers. We ask parties that propose changes to the SLC assessment rules for customers of derived channel T-1 service to identify with specificity the rate change(s), both interstate and intrastate, that would result for customers of this service. Parties should identify the aggregate rate change(s) for these customers, and should further identify the changes that would result from Commission rule changes, and any changes in intrastate rates that the commenter anticipates would result. In light of the waiver we grant herein, we ask that rate-of-return carriers identify with specificity the changes that they may have made by the comment date to the rates for their derived channel T-1 service.

27. Other Matters. Finally, for good cause shown, we grant an interim, partial waiver of rule 69.104(q), 47 CFR 69.104(q), permitting rate-of-return carriers to assess SLCs for only five channels upon customers subscribing to derived channel T-1 service where the customer provides the terminating channelization equipment without foregoing recovery of the associated SLC revenues from ICLS. The waiver is interim and will remain in place only until we resolve the issues raised in the NPRM, at which time the waiver will expire. Carriers subject to this waiver order, when filing line count data pursuant to the Commission's rules, shall calculate their line counts in a manner consistent with this order. Competitive ETCs, which are not subject to this order, shall continue to file line count data using the existing assessment of 24 loops per derived channel T-1 service.

28. As required by the Regulatory Flexibility Act of 1980, as amended (RFA), 5 U.S.C. 603, the Commission has prepared this present Initial Regulatory Flexibility Analysis (IRFA) of the possible significant economic impact on a substantial number of small entities by the policies and rules proposed in this NPRM. The RFA, see 5 U.S.C. 601 et seq. , has been amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), Pub. L. 104-121, Title II, 190 Stat. 867 (1996). Written public comments are requested on this IRFA. Comments must be identified as responses to the IRFA and must be filed by the deadlines for comments provided below. The Commission will send a copy of the NPRM, including this IRFA, to the Chief Counsel for Advocacy of the Small Business Administration (SBA). See 5 U.S.C. 603(a). In addition, the NPRM and IRFA (or summaries thereof) will be published in the Federal Register .

29. In this NPRM, the Commission continues to explore means of better aligning cost recovery ( i.e. , rates) with the manner in which costs are incurred. SLCs are generally assessed by carriers on customers on a per channel basis. In 1997 in the Access Charge Reform First Report and Order, 62 FR 31868, June 11, 1997, the Commission created an exception to the SLC assessment rules for price cap carriers for PRI ISDN and BRI ISDN services, determining that five SLCs could be assessed for PRI ISDN service and one SLC could be assessed for BRI ISDN service. In 2001 in the MAG Order, 66 FR 57919, November 30, 2001, the Commission made the equivalent rule changes for rate-of-return carriers.

30. NECA requests that we amend the Commission's SLC assessment rules to reduce the number of SLCs from twenty-four to five that carriers may assess upon customers of derived channel T-1 services (where the customer provides the terminating channelization equipment), with carriers recovering the foregone SLC revenues from a line port charge and from ICLS. This NPRM tentatively concludes that the number of SLCs that carriers may assess on customers of derived channel T-1 service (where the customer provides the terminating channelization equipment) should be based on the actual common line cost relationship between loops used to provide these services and loops used to provide basic, analog services, rather than on a per channel basis. We seek comment on this conclusion. The Commission also seeks comment on whether the PRI ISDN exception to the general ISLC assessment rules should be modified. The Commission also requests that parties detail the affects their proposals will have on line port charges, ICLS and other universal service mechanisms, other access charges ( i.e. , the PICC and the CCLC), and retail rates. The Commission requests that commenting parties provide detailed, transparent cost studies to support their proposals.

31. This rulemaking action is supported by sections 1, 2, 4(i), 4(j), 201-205, and 303 of the Communications Act of 1934, as amended, 47 U.S.C. 151, 152, 154(i), (j), 201-205, and 303.

32. The RFA directs agencies to provide a description of, and, where feasible, an estimate of the number of small entities that may be affected by the proposed rules. The RFA generally defines the term “small entity” as having the same meaning as the terms “small business,” “small organization,” and “small governmental jurisdiction.” In addition, the term “small business” has the same meaning as the term “small business concern” under the Small Business Act. A “small business concern” is one which: (1) Is independently owned and operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by the SBA.

33. In this section, we further describe and estimate the number of small entity licensees and regulatees that may also be directly affected by rules adopted in this order. The most reliable source of information regarding the total numbers of certain common carrier and related providers nationwide, as well as the number of commercial wireless entities, appears to be the data that the Commission publishes in its Trends in Telephone Service report. The SBA has developed small business size standards for wireline and wireless small businesses within the three commercial census categories of Wired Telecommunications Carriers, Paging, and Cellular and Other Wireless Telecommunications. Under these categories, a business is small if it has 1,500 or fewer employees. Below, using the above size standards and others, we discuss the total estimated numbers of small businesses that might be affected by our actions.

34. We have included small incumbent LECs in this present RFA analysis. As noted above, a “small business” under the RFA is one that, inter alia, meets the pertinent small business size standard ( e.g. , a wired telecommunications carrier having 1,500 or fewer employees), and “is not dominant in its field of operation.” The SBA's Office of Advocacy contends that, for RFA purposes, small incumbent LECs are not dominant in their field of operation because any such dominance is not “national” in scope. We have therefore included small incumbent LECs in this RFA analysis, although we emphasize that this RFA action has no effect on Commission analyses and determinations in other, non-RFA contexts.

35. Wired Telecommunications Carriers. The SBA has developed a small business size standard for Wired Telecommunications Carriers, which consists of all such companies having 1,500 or fewer employees. According to Census Bureau data for 1997, there were 2,225 firms in this category, total, that operated for the entire year. Of this total, 2,201 firms had employment of 999 or fewer employees, and an additional 24 firms had employment of 1,000 employees or more. Thus, under this size standard, the majority of firms can be considered small.

36. Incumbent Local Exchange Carriers (LECs). Neither the Commission nor the SBA has developed a size standard for small businesses specifically applicable to incumbent local exchange services. The closest applicable size standard under SBA rules is for Wired Telecommunications Carriers. Under that size standard, such a business is small if it has 1,500 or fewer employees. According to Commission data, 1,337 carriers reported that they were engaged in the provision of local exchange services. Of these 1,337 carriers, an estimated 1,032 have 1,500 or fewer employees and 305 have more than 1,500 employees. Consequently, the Commission estimates that most providers of incumbent local exchange service are small businesses that may be affected by the rules and policies adopted herein.

37. Competitive Local Exchange Carriers (CLECs), Competitive Access Providers (CAPs), and “Other Local Exchange Carriers.” Neither the Commission nor the SBA has developed a size standard for small businesses specifically applicable to providers of competitive exchange services or to competitive access providers or to “Other Local Exchange Carriers,” all of which are discrete categories under which TRS data are collected. The closest applicable size standard under SBA rules is for Wired Telecommunications Carriers. Under that size standard, such a business is small if it has 1,500 or fewer employees. According to Commission data, 609 companies reported that they were engaged in the provision of either competitive access provider services or competitive local exchange carrier services. Of these 609 companies, an estimated 458 have 1,500 or fewer employees and 151 have more than 1,500 employees. In addition, 35 carriers reported that they were “Other Local Service Providers.” Of the 35 “Other Local Service Providers,” an estimated 34 have 1,500 or fewer employees and one has more than 1,500 employees. Consequently, the Commission estimates that most providers of competitive local exchange service, competitive access providers, and “Other Local Exchange Carriers” are small entities that may be affected by the rules and policies adopted herein.

38. The NPRM explores options for further aligning SLC rates with loop costs in the Commission's access charge regime and examines the universal service implications of any such SLC rule changes. The NPRM considers the varying operating circumstances of rate-of-return and price cap carriers, the implications of competitive and intrastate regulatory conditions on the options available, and the need to facilitate and ensure the deployment of advanced services in rural America. If adopted, changes to the Commission's SLC assessment rules may require additional or modified recordkeeping.

39. The RFA requires an agency to describe any significant alternatives that it has considered in reaching its proposed approach, which may include the following four alternatives (among others): (1) The establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) the clarification, consolidation, or simplification of compliance or reporting requirements under the rule for small entities; (3) the use of performance, rather than design, standards; and (4) an exemption from coverage of the rule, or any part thereof, for small entities.

40. We will consider any proposals made to minimize significant economic impact on small entities. The overall objective of this proceeding is to consider the NECA proposal, as well as other proposals, that may better align rates with costs by amending the Commission's SLC assessment rules for PRI ISDN service and for derived channel T-1 services (where the customer provides the terminating channelization equipment). The NPRM seeks comment on the merits of changes in the SLC assessment rules. Comments should be supported by specific economic analysis and cost studies. The adoption of rule changes may require LECs to amend their end user tariffs. To the extent that the Commission may adopt rule changes that better enable small rate-of-return carriers to compete in offering advanced services, such carriers may stand to benefit from this proceeding.

41. None.

42. This proceeding will continue to be governed by “permit-but-disclose” ex parte procedures that are applicable to non-restricted proceedings. See 47 CFR 1.1206. Parties making oral ex parte presentations are reminded that memoranda summarizing the presentation must contain a summary of the substance of the presentation and not merely a listing of the subjects discussed. More than a one-or two-sentence description of the views and arguments presented generally is required. Other rules pertaining to oral and written presentations are set forth in section 1.1206(b) as well. See 47 CFR 1.1206(b). Interested parties are to file any written ex parte presentations in this proceeding with the Commission's Secretary, Marlene H. Dortch, 445 12th Street, SW., TW-B204, Washington, DC 20554, and serve with one copy: Pricing Policy Division, Wireline Competition Bureau, 445 12th Street, SW., Room 5-A452, Washington, DC 20554, Attn: Jeremy D. Marcus. Parties shall also serve with one copy: Best Copy and Printing, Inc., Portals II, 445 12th Street, SW., Room, CY-B402, Washington, DC 20554, telephone (202) 488-5300, facsimile (202) 488-5563, e-mail fcc@bcpiweb.com, or via its Web site http://www.bcpiweb.com.

43. Pursuant to Sections 1.415 and 1.419 of the Commission's rules, 47 CFR 1.415, 1.419, interested parties may file comments on or before 60 days and reply comments on or before 90 days after publication of this NPRM in the Federal Register . All pleadings must reference WC Docket No. 04-259 and RM-10603. Comments may be filed using the Commission's Electronic Comment Filing System (ECFS) or by filing paper copies. Comments filed through the ECFS can be sent as an electronic file via the Internet to http://www.fcc.gov/cgb/ecfs. Generally, only one copy of an electronic submission must be filed. If multiple docket or rulemaking numbers appear in the caption of this proceeding, however, commenters must transmit one electronic copy of the comments to each docket or rulemaking number referenced in the caption. In completing the transmittal screen, commenters should include their full name, U.S. Postal Service mailing address, and the applicable docket or rulemaking number. Parties may also submit an electronic comment by Internet e-mail. To get filing instructions for e-mail comments, commenters should send an e-mail to ecfs@fcc.gov, and should include the following words in the body of the message: “get form <your e-mail address>.” A sample form and directions will be sent in reply. Commenters also may obtain a copy of the ASCII Electronic Transmittal Form (FORM-ET) at http://www.fcc.gov/e-file/email.html.

44. Parties who choose to file by paper must file an original and four copies of each filing. If more than one docket or rulemaking number appear in the caption of this proceeding, commenters must submit two additional copies for each additional docket or rulemaking number.

45. Filings can be sent by hand or messenger delivery, by commercial overnight courier, or by first-class or overnight U.S. Postal Service mail (although we continue to experience delays in receiving U.S. Postal Service mail). The Commission's contractor, Natek, Inc., will receive hand-delivered or messenger-delivered paper filings for the Commission's Secretary at 236 Massachusetts Avenue, NE., Suite 110, Washington, DC 20002. The filing hours at this location are 8 a.m. to 7 p.m. All hand deliveries must be held together with rubber bands or fasteners. Any envelopes must be disposed of before entering the building. Commercial overnight mail (other than U.S. Postal Service Express Mail and Priority Mail) must be sent to 9300 East Hampton Drive, Capitol Heights, MD 20743. All filings must be addressed to the Commission's Secretary, Office of the Secretary, Federal Communications Commission.

46. Regardless of whether parties choose to file electronically or by paper, parties should also file one copy of any documents filed in this docket with the Commission's copy contractor, Best Copy and Printing, Inc., Portals II, 445 12th Street, SW., Washington, DC 20554, telephone (202) 488-5300, facsimile (202) 488-5563, e-mail fcc@bcpiweb.com, or via its Web site at http://www.bcpiweb.com. In addition, one copy of each submission must be filed with the Chief, Pricing Policy Division, 445 12th Street, SW., Washington, DC 20554. Documents filed in this proceeding will be available for public inspection during regular business hours in the Commission's Reference Information Center, 445 12th Street, SW., Washington, DC 20554, and will be placed on the Commission's Internet site. For further information, contact Jeremy D. Marcus at (202) 418-0059.

47. Accessible formats (computer diskettes, large print, audio recording and Braille) are available to persons with disabilities by contacting the Consumer & Governmental Affairs Bureau, at (202) 418-0531, TTY (202) 418-7365, or at fcc504@fcc.gov.

48. Accordingly, it is ordered that, pursuant to the authority contained in section 1.407 of the commission's rules, 47 CFR 1.407, the National Exchange Carrier Association, Inc. Petition for Rulemaking is granted.

49. It is further ordered that, pursuant to the authority contained in sections 1, 2, 4(i), 4(j), 201-205, and 303 of the Communications Act of 1934, as amended, 47 U.S.C. 151, 152, 154(i), 154(j), 201-205, and 303, notice is hereby given of the rulemaking described above and comment is sought on those issues.

50. It is further ordered that the Commission's Consumer Information Bureau, Reference Information Center, shall send a copy of the Notice of Proposed Rulemaking, including the Initial Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of the Small Business Administration.

51. It is further ordered that, pursuant to the authority contained in sections 1, 2, 4(i), 4(j), and 201-205 of the Communications Act of 1934, as amended, and section 1.3 of the Commission's rules, 47 U.S.C. 151, 152, 154(i), 154(j), 201-205 and 47 CFR 1.3, the joint petition for expedited waiver is granted to the extent stated herein.

This is a synopsis of the Commission's Notice of Proposed Rulemaking, MB Docket No. 04-289, adopted July 30, 2004, and released August 6, 2004. The full text of this document is available for public inspection and copying during regular business hours in the FCC Reference Information Center, Portals II, 445 12th Street, SW., Room CY-A257, Washington, DC 20554. This document may also be purchased from the Commission's duplicating contractor, Best Copy and Printing, Inc., 445 12th Street, SW., Room CY-B402, Washington, DC 20554, telephone (301) 816-2820, facsimile (301) 816-0169, or via-e-mail joshir@erols.com.

Provisions of the Regulatory Flexibility Act of 1980 do not apply to this proceeding.

This document does not contain proposed information collection(s) subject to the Paperwork Reduction Act of 1995 (PRA), Public Law 104-13. In addition, therefore, it does not contain any new or modified “information collection burden for small business concerns with fewer than 25 employees,” pursuant to the Small Business Paperwork Relief Act of 2002, Public Law 107-198, see 44 U.S.C. 3506(c)(4).

Members of the public should note that from the time a Notice of Proposed Rule Making is issued until the matter is no longer subject to Commission consideration or court review, all ex parte contacts are prohibited in Commission proceedings, such as this one, which involve channel allotments. See 47 CFR 1.1204(b) for rules governing permissible ex parte contacts.

For information regarding proper filing procedures for comments, see 47 CFR 1.415 and 1.420.

For the reasons discussed in the preamble, the Federal Communications Commission proposes to amend 47 CFR part 73 as follows:

On July 21, 2004, we published a proposed rule (69 FR 43664) to remove the Eastern Distinct Population Segment (DPS) of the gray wolf ( Canis lupus ) from the List of Endangered and Threatened Wildlife established under the Endangered Species Act of 1973, as amended (16 U.S.C. 1531 et seq. ). We proposed this action because available data indicate that this DPS no longer meets the definitions of threatened or endangered under the Act. The gray wolf population is stable or increasing in Minnesota, Wisconsin, and Michigan, and exceeds its numerical recovery criteria. Completed State wolf management plans will provide adequate protection and management to the species in these three States if the gray wolf is delisted in the Eastern DPS. The proposed rule would remove this DPS from the protections of the Act by ending its threatened classification. This proposed rule would also remove the currently designated critical habitat for the gray wolf in Minnesota and Michigan and remove the current special regulations for gray wolves in Minnesota and other Midwestern States. This proposal would not change the status or special regulations currently in place for the Western or Southwestern DPSs of the gray wolf or for the red wolf ( C. rufus ).

In our July 21, 2004, proposed rule, we stated that we would hold public hearings. Consistent with that document, we are now announcing the dates and locations of those hearings.

All hearings will consist of an informational open house from 6:30 p.m. to 7 p.m., a presentation on the proposal and question and answer session from 7 p.m. to 7:30 p.m., and the official public hearings from 7:30 p.m. to 9 p.m. We will hold nine public hearings on the following dates and at the following locations:

1. Bemidji, MN, on August 31, 2004, at Bemidji State University, Beaux Arts Ballroom—Hobson Memorial Union, 1500 Birchmont Drive NE.

2. Virginia, MN, on September 1, 2004, at the Mesabi Range Community College, F100—Fine Arts Theater, 1001 Chestnut Street West.

3. Bloomington, MN, on October 6, 2004, at the Minnesota Valley National Wildlife Refuge Visitors Center, 3815 American Blvd. East.

4. Marquette, MI, on September 13, 2004, at Northern Michigan University, Explorer Room, Don Bottum Conference Center, 540 West Kaye Avenue (park in lot #8).

5. Sault Ste. Marie, MI, on September 14, 2004, at Lake Superior State University, Cisler Center, Ontario Room, 650 West Easterday Avenue (park in lots A, B, E, J, or X after 5 p.m.).

6. East Lansing, MI, on September 15, 2004, at Michigan State University, BioMedical and Physical Science Building-Auditorium, corner of Wilson and Farm Lane (parking allowed in staff or faculty spaces after 6 p.m.).

7. Madison, WI, on September 27, 2004, at the University of Wisconsin Union South, 227 North Randall Avenue.

8. Wausau, WI, on September 28, 2004, at the Westwood Conference Center, Westwood Conference Room, 1800 West Bridge Street.

9. Ashland, WI, on September 29, 2004, at the Northern Great Lakes Center, 29270 County Highway G.

Section 9 of the ESA and Federal regulation prohibits the “taking” of a species listed as endangered or threatened. Under the ESA, the term “take” means to harass, harm, pursue, hunt, shoot, wound, kill, trap, capture, or collect listed wildlife, or to attempt to engage in any such conduct. The Service may, under limited circumstances, issue permits to “incidentally take” listed species, if such taking is incidental to, and not the purpose of, otherwise lawful activities. Regulations governing permits for endangered species are promulgated in 50 CFR 17.22.

Mr. Strickler has applied to the Service for an incidental take permit pursuant to section 10(a) of the ESA. The Applicant proposes to implement an HCP for the RCW that will allow removal of RCW habitat. The Applicant's proposed timber harvest is likely to result in take, as defined in the ESA and its implementing regulations, of listed species. Authorized take would only affect the RCW; take of other federally listed species is specifically excluded from the proposed action. This permit would authorize the incidental take of one RCW group, consisting of a single male, at Mr. Strickler's property, through otherwise lawful activities, specifically the harvest of 75 acres of timber, occurring in RCW habitat. The HCP and permit would be in effect for a maximum of 5 years upon issuance.

The Applicant proposes the harvest of all mature timber at his 75-acre site. Timber will be harvested using a feller buncher, which will transport cut trees directly to a log deck, where they will be loaded onto a truck and transported to Mr. Strickler's mill. The site will undergo a prescribed burn and subsequently be replanted with loblolly pine ( Pinus taeda ). The southern boundary of the project area is approximately 2,000 feet north of State Route 612 where it joins State Route 615 in Southampton County.

The anticipated incidental take will consist of harm through permanent loss of 75 acres of foraging habitat and a cluster of cavity trees, as well as possible death of one RCW from predation or starvation due to the subsequent lack of shelter or foraging habitat. Mr. Strickler proposes to implement measures to minimize, mitigate, and monitor impacts to the RCW. Through an agreement with the Center for Conservation Biology, College of William and Mary, impacts to the lone male RCW will be minimized by removing him from the project site prior to timber harvest and placing him in a prepared cavity at an active cluster (at the Piney Grove Preserve, Sussex, Virginia) with a subadult female moved in simultaneously. Through an agreement with The Nature Conservancy, if the translocated lone male does not remain at Piney Grove, his loss will be mitigated by translocating a maximum of three subadult pairs from the designated donor population at the Carolina Sandhills National Wildlife Refuge in McBee, South Carolina to the Piney Grove Preserve.

The draft EA considers the environmental consequences of three alternatives: A no-action alternative, permit issuance (the proposed alternative), and issuance of permit with conditions (selective harvest).

The Service provides this notice pursuant to section 10(c) of the ESA. The Service will evaluate whether the issuance of a section 10(a)1)(B) ITP complies with section 7 of the ESA by conducting an intra-Service section 7 consultation. The results of the biological opinion, in combination with the evaluation of the permit application, the HCP, EA, and comments submitted thereon, will be used in the final analysis to determine whether the application meets the requirements of section 10(a) of the ESA. If the requirements are met, the Service will issue a permit to Mr. Strickler for the incidental take of one RCW group, consisting of one male, during the proposed harvest of timber on the 75-acre project site. We will make the final permit decision no sooner than 60 days from the date of this notice.

Pursuant to an order issued on June 10, 2004, by the District Court for the District of Columbia in Spirit of the Sage Council v. Norton , Civil Action No. 98-1873 (D. D.C.), the Service is enjoined from issuing new section 10(a)(1)(B) permits or related documents containing “No Surprises” assurances, as defined by the Service's “No Surprises” rule published at 63 FR 8859 (February 23, 1998), until such time as the Service adopts new permit revocation rules specifically applicable to section 10(a)(1)(B) permits in compliance with the public notice and comment requirements of the Administrative Procedures Act. This notice concerns a step in the review and processing of a section 10(a)(1)(B) permit and any subsequent permit issuance will be in accordance with the Court's order. Until such time as the June 10, 2004, order has been rescinded or the Service's authority to issue permits with “No Surprises” assurances has been otherwise reinstated, the Service will not approve any incidental take permits or related documents that contain “No Surprises” assurances.

Comments, including names and home addresses of respondents, will be available for public review during regular business hours. Individual respondents may request confidentiality. If you wish us to withhold your name and or address from public review or from disclosure under the Freedom of Information Act, you must state this prominently at the beginning of your written comment. Such requests will be honored to the extent allowed by law. We will not, however, consider anonymous comments. All submissions from organizations or businesses, and from individuals identifying themselves as representatives or officials of organizations or businesses, will be made available for public inspection in their entirety.

Author: The primary author of this document is Julia Harrison from the VAFO, Endangered Species Program.