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

This proposed rule has been reviewed under Executive Order 12988, Civil Justice Reform. It is not intended to have retroactive effect. This rule would not preempt any state or local laws, regulations, or policies unless they present an irreconcilable conflict with this rule. There are no administrative procedures that must be exhausted prior to any judicial challenge to the provisions of this rule.

Pursuant to requirements set forth in the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) AMS has considered the economic impact of this action on small entities and has determined that its implementation will not have a significant economic impact on a substantial number of small businesses.

The purpose of the RFA is to fit regulatory actions to the scale of businesses subject to such actions so that small businesses will not be disproportionately burdened. There are an estimated 35,000 cotton growers in the U.S. who voluntarily use the AMS cotton classing services annually, and the majority of these cotton growers are small businesses under the criteria established by the Small Business Administration (13 CFR 121.201). The increase above the 2004 crop level as stated will not significantly affect small businesses as defined in the RFA because:

(1) The fee represents a very small portion of the cost-per-unit (less than 0.4 cents per lb) currently borne by those entities utilizing the services. (The 2004 user fee for classification services was $1.65 per 500 pound bale; the fee for the 2005 crop would be increased to $1.85 per 500 pound bale; the 2005 crop is estimated at 18,750,000 bales).

(2) The fee for services will not affect competition in the marketplace; and

(3) The use of classification services is voluntary. For the 2004 crop, 22,815,000 bales were produced. Almost all of these bales were voluntarily submitted by growers for the classification service.

(4) Based on the average price paid to growers for cotton from the 2003 crop of 61.8 cents per pound, 500 pound bales of cotton are worth an average of $309 each. The proposed user fee for classification services, $1.85 per bale, is less than one percent of the value of an average bale of cotton.

In compliance with OMB regulations (5 CFR part 1320), which implement the Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq.), the information collection requirements contained in the provisions to be amended by this proposed rule have been previously approved by OMB and were assigned OMB control number 0581-AC34.

It is anticipated that the proposed changes, if adopted, would be made effective July 1, 2005, as provided by the Cotton Statistics and Estimates Act.

The user fee charged to cotton producers for High Volume Instrument (HVI) classification services under the Cotton Statistics and Estimates Act (7 U.S.C. 473a) was $1.65 per bale during the 2004 harvest season, as determined by using the formula provided in the Uniform Cotton Classing Fees Act of 1987, as amended by Public Law 102-237. The fees cover salaries, costs of equipment and supplies, and other overhead costs, including costs for administration, and supervision.

This proposed rule establishes the user fee charged to producers for HVI classification at $1.85 per bale during the 2005 harvest season.

Public Law 102-237 amended the formula in the Uniform Cotton Classing Fees Act of 1987 for establishing the producer's classification fee so that the producer's fee is based on the prevailing method of classification requested by producers during the previous year. HVI classing was the prevailing method of cotton classification requested by producers in 2004. Therefore, the 2005 producer's user fee for classification service is based on the 2004 base fee for HVI classification.

The fee was calculated by applying the formula specified in the Uniform Cotton Classing Fees Act of 1987, as amended by Pub. L. 102-237. The 2004 base fee for HVI classification exclusive of adjustments, as provided by the Act, was $2.32 per bale. An increase of 2.51 percent, or 5 cents per bale, due to the implicit price deflator of the gross domestic product added to the $2.32 would result in a 2005 base fee of $2.37 per bale. The formula in the Act provides for the use of the percentage change in the implicit price deflator of the gross national product (as indexed for the most recent 12-month period for which statistics are available). However, gross national product has been replaced by gross domestic product by the Department of Commerce as a more appropriate measure for the short-term monitoring and analysis of the U.S. economy.

The number of bales to be classed by the United States Department of Agriculture from the 2005 crop is estimated at 18,096,563 bales. The 2005 base fee was decreased 15 percent based on the estimated number of bales to be classed (1 percent for every 100,000 bales or portion thereof above the base of 12,500,000, limited to a maximum decreased adjustment of 15 percent). This percentage factor amounts to a 35 cents per bale reduction and was subtracted from the 2005 base fee of $2.37 per bale, resulting in a fee of $2.02 per bale.

However, a fee of $2.02 per bale, the projected operating reserve would be 32.45 percent. The Act specifies that the Secretary shall not establish a fee which, when combined with other sources of revenue, will result in a projected operating reserve of more than 25 percent. Accordingly, the fee of $2.02 was required to be reduced by 17 cents per bale, to $1.85 per bale, to provide an ending accumulated operating reserve for the fiscal year of not more than 25 percent of the projected cost of operating the program. This would establish the proposal 2005 season fee at $1.85 per bale.

Accordingly, under the proposed rule § 28.909, paragraph (b) would be revised to reflect the increase of the HVI classification fee from $1.65 to $1.85 per bale.

As provided for in the Uniform Cotton Classing Fees Act of 1987, as amended, a 5 cent per bale discount would continue to be applied to voluntary centralized billing and collecting agents as specified in § 28.909 (c).

Growers or their designated agents receiving classification data would continue to incur no additional fees if classification data is requested only once. The fee for each additional retrieval of classification data in § 28.910 would remain at 5 cents per bale. The fee in § 28.910 (b) for an owner receiving classification data from the National database would remain at 5 cents per bale, and the minimum charge of $5.00 for services provided per monthly billing period would remain the same. The provisions of § 28.910 (c) concerning the fee for new classification memoranda issued from the National database for the business convenience of an owner without reclassification of the cotton will remain the same at 15 cents per bale or a minimum of $5.00 per sheet.

The fee for review classification in § 28.911 would be increased from $1.65 to $1.85 per bale.

The fee for returning samples after classification in § 28.911 would remain at 40 cents per sample.

A 15-day comment period is provided for public comments. This period is appropriate because it is anticipated that the proposed changes, if adopted, would be made effective July 1, 2005, as provided by the Cotton Statistics and Estimates Act.

For the reasons set forth in the preamble, 7 CFR part 28 is proposed to be amended as follows:

The proposed policy is available on the Internet at the following address: http://www.airweb.faa.gov/rgl. If you do not have access to the Internet, you can obtain a copy of the policy by contacting the person listed under FOR FURTHER INFORMATION CONTACT.

The FAA invites your comments on this proposed policy. We will accept your comments, data, views, or arguments by letter, fax, or e-mail. Send your comments to the person indicated in FOR FURTHER INFORMATION CONTACT. Mark your comments, “Comments to Policy Statement No. ANM-115-05-14.”

Use the following format when preparing your comments:

• Organize your comments issue-by-issue.

• For each issue, state what specific change you are requesting to the proposed policy.

• Include justification, reasons, or data for each change you are requesting.

We also welcome comments in support of the proposed policy

We will consider all communications received on or before the closing date for comments. We may change the proposed policy because of the comments received.

The purpose of the proposed policy memorandum is to clarify FAA certification policy of the acceptable substantiation methods used to provide protection under § 25.562(a) when meeting the performance standards in § 25.562(c) for “front row” seats. Front row seats are those seats which are located directly aft of a partition, monument, or other commodity, including all passenger seats not considered “row-to-row.” The policy is not directed toward other seats. The FAA has determined that the proposed policy provides an acceptable means of protection for front row occupants.

We invite you to submit any relevant written data, views, or arguments regarding this proposed AD. Send your comments to an address listed under ADDRESSES. Include “Docket No. FAA-2005-21053; Directorate Identifier 2005-NM-053-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of the proposed AD. We will consider all comments submitted by the closing date and may amend the proposed AD in light of those comments.

We will post all comments we receive, without change, to http://dms.dot.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact with FAA personnel concerning this proposed AD. Using the search function of our docket Web site, anyone can find and read the comments in any of our dockets, including the name of the individual who sent the comment (or signed the comment on behalf of an association, business, labor union, etc.). You can review the DOT's complete Privacy Act Statement in the Federal Register published on April 11, 2000 (65 FR 19477-78), or you can visit http://dms.dot.gov.

You can examine the AD docket on the Internet at http://dms.dot.gov, or in person at the Docket Management Facility office between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The Docket Management Facility office (telephone (800) 647-5227) is located on the plaza level of the Nassif Building at the DOT street address stated in the ADDRESSES section. Comments will be available in the AD docket shortly after the DMS receives them.

The FAA has examined the underlying safety issues involved in recent fuel tank explosions on several large transport airplanes, including the adequacy of existing regulations, the service history of airplanes subject to those regulations, and existing maintenance practices for fuel tank systems. As a result of those findings, we issued a regulation titled “Transport Airplane Fuel Tank System Design Review, Flammability Reduction and Maintenance and Inspection Requirements” (67 FR 23086, May 7, 2001). In addition to new airworthiness standards for transport airplanes and new maintenance requirements, this rule included Special Federal Aviation Regulation No. 88 (“SFAR 88,” Amendment 21-78, and subsequent Amendments 21-82 and 21-83).

Among other actions, SFAR 88 requires certain type design (i.e., type certificate (TC) and supplemental type certificate (STC)) holders to substantiate that their fuel tank systems can prevent ignition sources in the fuel tanks. This requirement applies to type design holders for large turbine-powered transport airplanes and for subsequent modifications to those airplanes. It requires them to perform design reviews and to develop design changes and maintenance procedures if their designs do not meet the new fuel tank safety standards. As explained in the preamble to the rule, we intended to adopt airworthiness directives to mandate any changes found necessary to address unsafe conditions identified as a result of these reviews.

In evaluating these design reviews, we have established four criteria intended to define the unsafe conditions associated with fuel tank systems that require corrective actions. The percentage of operating time during which fuel tanks are exposed to flammable conditions is one of these criteria. The other three criteria address the failure types under evaluation: Single failures, single failures in combination with another latent condition(s), and in-service failure experience. For all four criteria, the evaluations included consideration of previous actions taken that may mitigate the need for further action.

The Joint Aviation Authorities (JAA) has issued a regulation that is similar to SFAR 88. (The JAA is an associated body of the European Civil Aviation Conference (ECAC) representing the civil aviation regulatory authorities of a number of European States who have agreed to co-operate in developing and implementing common safety regulatory standards and procedures.) Under this regulation, the JAA stated that all members of the ECAC that hold type certificates for transport category airplanes are required to conduct a design review against explosion risks.

We have determined that the actions identified in this AD are necessary to reduce the potential of ignition sources inside fuel tanks, which, in combination with flammable fuel vapors, could result in fuel tank explosions and consequent loss of the airplane.

In light of these findings, the Luftfahrt-Bundesamt (LBA), which is the airworthiness authority for Germany, issued German airworthiness directive D-2005-001, dated January 26, 2005, to address the unsafe condition previously described on Dornier Model 328-100 series airplanes.

The airplane manufacturer has issued Dornier Service Bulletin SB-328-00-445, dated August 23, 2004. The service bulletin describes procedures for:

• Modifying the electrical wiring of the left-hand and right-hand fuel pumps, which includes installing new supports, wet-installing plugs, and torquing and securing nuts;

• Installing insulation at the left-hand and right-hand flow control and shut-off valves, and other components of the environmental control system (i.e., cross bleed valve; and temperature control valve and cold air unit of the environmental control unit; and bleed air inlet), which includes replacing the existing flex joint covers of the bleed air ducts with new covers;

• Installing markings at fuel wiring harnesses; and

• Amending the Airworthiness Limitations Document.

Accomplishing the actions specified in the service information is intended to adequately address the unsafe condition. The LBA mandated the service information to ensure the continued airworthiness of these airplanes in Germany.

This airplane model is manufactured in Germany and is type certificated for operation in the United States under the provisions of section 21.29 of the Federal Aviation Regulations (14 CFR 21.29) and the applicable bilateral airworthiness agreement. Pursuant to this bilateral airworthiness agreement, the LBA has kept the FAA informed of the situation described above. We have examined the LBA's findings, evaluated all pertinent information, and determined that we need to issue an AD for products of this type design that are certificated for operation in the United States. Therefore, we are proposing this AD, which would require accomplishing the actions specified in the service information described previously. This proposed AD also would require revising the Airworthiness Limitations section of the Instructions for Continued Airworthiness to incorporate new inspections of the fuel tank system.

This proposed AD would affect about 6 airplanes of U.S. registry. The proposed actions would take about 70 work hours per airplane, at an average labor rate of $65 per work hour. Required parts would cost about $14,118 per airplane. Based on these figures, the estimated cost of the proposed AD for U.S. operators is $112,008, or $18,668 per airplane.

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, Section 106, describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the Agency's authority.

We are issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701, “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

We have determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed above, I certify that the proposed regulation:

1. Is not a “significant regulatory action” under Executive Order 12866;

2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and

3. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

We prepared a regulatory evaluation of the estimated costs to comply with this proposed AD. See the ADDRESSES section for a location to examine the regulatory evaluation.

Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

We invite you to submit any relevant written data, views, or arguments regarding this proposed AD. Send your comments to an address listed under ADDRESSES. Include “Docket No. FAA-2005-21054; Directorate Identifier 2005-NM-054-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of the proposed AD. We will consider all comments submitted by the closing date and may amend the proposed AD in light of those comments.

We will post all comments we receive, without change, to http://dms.dot.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact with FAA personnel concerning this proposed AD. Using the search function of our docket website, anyone can find and read the comments in any of our dockets, including the name of the individual who sent the comment (or signed the comment on behalf of an association, business, labor union, etc.). You can review the DOT's complete Privacy Act Statement in the Federal Register published on April 11, 2000 (65 FR 19477-78), or you can visit http://dms.dot.gov.

You can examine the AD docket on the Internet at http://dms.dot.gov, or in person at the Docket Management Facility office between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The Docket Management Facility office (telephone (800) 647-5227) is located on the plaza level of the Nassif Building at the DOT street address stated in the ADDRESSES section. Comments will be available in the AD docket shortly after the DMS receives them.

The FAA has examined the underlying safety issues involved in recent fuel tank explosions on several large transport airplanes, including the adequacy of existing regulations, the service history of airplanes subject to those regulations, and existing maintenance practices for fuel tank systems. As a result of those findings, we issued a regulation titled “Transport Airplane Fuel Tank System Design Review, Flammability Reduction and Maintenance and Inspection Requirements” (67 FR 23086, May 7, 2001). In addition to new airworthiness standards for transport airplanes and new maintenance requirements, this rule included Special Federal Aviation Regulation No. 88 (“SFAR 88,” Amendment 21-78, and subsequent Amendments 21-82 and 21-83).

Among other actions, SFAR 88 requires certain type design (i.e., type certificate (TC) and supplemental type certificate (STC)) holders to substantiate that their fuel tank systems can prevent ignition sources in the fuel tanks. This requirement applies to type design holders for large turbine-powered transport airplanes and for subsequent modifications to those airplanes. It requires them to perform design reviews and to develop design changes and maintenance procedures if their designs do not meet the new fuel tank safety standards. As explained in the preamble to the rule, we intended to adopt airworthiness directives to mandate any changes found necessary to address unsafe conditions identified as a result of these reviews.

In evaluating these design reviews, we have established four criteria intended to define the unsafe conditions associated with fuel tank systems that require corrective actions. The percentage of operating time during which fuel tanks are exposed to flammable conditions is one of these criteria. The other three criteria address the failure types under evaluation: Single failures, single failures in combination with another latent condition(s), and in-service failure experience. For all four criteria, the evaluations included consideration of previous actions taken that may mitigate the need for further action.

The Joint Aviation Authorities (JAA) has issued a regulation that is similar to SFAR 88. (The JAA is an associated body of the European Civil Aviation Conference (ECAC) representing the civil aviation regulatory authorities of a number of European States who have agreed to co-operate in developing and implementing common safety regulatory standards and procedures.) Under this regulation, the JAA stated that all members of the ECAC that hold type certificates for transport category airplanes are required to conduct a design review against explosion risks.

We have determined that the actions identified in this AD are necessary to reduce the potential of ignition sources inside fuel tanks, which, in combination with flammable fuel vapors, could result in fuel tank explosions and consequent loss of the airplane.

In light of these findings, the Luftfahrt-Bundesamt (LBA), which is the airworthiness authority for Germany, issued German airworthiness directives D-2005-002 (for airplanes with option 033F003 installed) and D-2005-063 (for airplanes without option 033F003 installed), both dated January 26, 2005, to address the unsafe condition previously described on Dornier Model 328-300 series airplanes.

The airplane manufacturer has issued Dornier Service Bulletin SB-328J-00-197, dated August 23, 2004 (for airplanes without option 033F003 installed); and Dornier Service Bulletin SB-328J-00-198, dated August 23, 2004 (for airplanes with option 033F003 installed).

Dornier Service Bulletin SB-328J-00-197 describes procedures for:

1. Modifying the electrical wiring of the left-hand and right-hand fuel pumps, which includes installing new supports, wet-installing plugs, and torquing and securing nuts;

2. Installing insulation at the left-hand and right-hand flow control and shut-off valves, and other components of the environmental control system (i.e., cross bleed valve, temperature control valve and cold air unit of the environmental control unit, and bleed air inlet), which includes replacing the existing flex joint covers of the bleed air ducts with new covers;

3. Installing markings at fuel wiring harnesses; and

4. Amending the Airworthiness Limitations Document (ALD).

Dornier Service Bulletin SB-328J-00-198 describes procedures similar to those described in items 1, 3, and 4 above for Dornier Service Bulletin SB-328J-00-197. Dornier Service Bulletin SB-328J-00-198 also describes procedures for replacing the wiring harness of the auxiliary fuel system with a new wiring harness and installing insulated couplings in the fuel system.

Accomplishing the actions specified in the service information is intended to adequately address the unsafe condition. The LBA mandated the service information to ensure the continued airworthiness of these airplanes in Germany.

This airplane model is manufactured in Germany and is type certificated for operation in the United States under the provisions of section 21.29 of the Federal Aviation Regulations (14 CFR 21.29) and the applicable bilateral airworthiness agreement. Pursuant to this bilateral airworthiness agreement, the LBA has kept the FAA informed of the situation described above. We have examined the LBA's findings, evaluated all pertinent information, and determined that we need to issue an AD for products of this type design that are certificated for operation in the United States. Therefore, we are proposing this AD, which would require accomplishing the actions specified in the service information described previously. This proposed AD also would require revising the Airworthiness Limitations section of the Instructions for Continued Airworthiness to incorporate new inspections of the fuel tank system.

The following table provides the estimated costs for U.S. operators to comply with this proposed AD. The average labor rate is $65 per hour.

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, Section 106, describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the Agency's authority.

We are issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701, “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

We have determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed above, I certify that the proposed regulation:

1. Is not a “significant regulatory action” under Executive Order 12866;

2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and

3. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

We prepared a regulatory evaluation of the estimated costs to comply with this proposed AD. See the ADDRESSES section for a location to examine the regulatory evaluation.

Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

1. In this Notice of Proposed Rulemaking (NOPR or proposed rule), we propose to clarify and amend the imbalance tariff provisions that have become outdated and have become unjust, unreasonable, unduly discriminatory or preferential, as applied to intermittent resources.1 At the time Order No. 888 2 was issued, intermittent resources were not a significant source of generation and typically energy from intermittent resources was sold to the host utility. In the years since the issuance of Order No. 888, intermittent resources have grown at an annual average rate of approximately 20 percent and want to avail themselves of the open access transmission tariff (OATT or tariff) for opportunities to make sales more broadly, but are hesitant to do so because of the application of imbalance provisions that were designed to apply to resources with the ability to control fuel input and thus schedule their energy with precision. These imbalance provisions were not designed to apply to intermittent resources that by nature are weather-driven. In order to remove the unjust, unreasonable, unduly discriminatory or preferential imbalance tariff provisions, while still providing an incentive to intermittent resources to schedule as accurately as possible, the Commission, pursuant to its authority under sections 205 and 206 of the Federal Power Act,3 proposes to establish a standardized schedule under the Order No. 888 pro forma OATT to address generator imbalances created by intermittent resources 4 and clarify the application of the current energy imbalance provision of the Order No. 888 pro forma tariff. Therefore, under this NOPR, intermittent resources will be assessed generator imbalances pursuant to this new schedule and will not be subject to any existing generation imbalance provisions under the OATTs that contain them.5 The existing Schedule 4 Energy Imbalance Charge would continue to apply to transmission customers only for any net hourly deviations in scheduled load as the Commission had intended in Order No. 888.

2. The adverse impact of certain pro forma OATT provisions on the ability of a wind generator to avail itself of open access transmission service came to light through discussions with participants in wholesale electricity markets, including wind generators. The Commission began exploring the issues through a conference held on December 1, 2004, in Denver, Colorado to “assess the state of wind energy in wholesale electricity markets” in order “to explore possible policy changes that would better accommodate the participation of wind energy in wholesale markets.” 6 Prior to the conference, Commission staff issued a briefing paper that discussed several issues that wind energy resources encounter in securing interconnection and transmission service at just and reasonable rates, terms and conditions.7 Among the issues explored at the December 1 conference was whether the current imbalance provisions contained in the pro forma OATT were unjust, unreasonable, unduly discriminatory or preferential for intermittent resources, and thus in need of reform. Subsequent outreach by Commission staff to industry and comments filed by various entities in this proceeding highlighted the need to revisit and reform imbalance provisions.

3. Order No. 888 defined and established certain terms and conditions for energy imbalance service to promote good scheduling practices by transmission customers. Under the energy imbalance service provision of the Order No. 888 pro forma tariff, a transmission customer submits a schedule for transmission service and load is permitted to deviate +/−1.5 percent from that schedule. The pricing for energy within and outside of this bandwidth was left for public utilities to propose on a case-by-case basis.

4. Since the issuance of Order No. 888, the Commission has approved energy imbalance service pricing provisions on a case-by-case basis. Generally, transmission providers proposed energy imbalance charges, including penalties for scheduling deviations set at multiples of the energy price. The purpose of this was to promote good scheduling practices by transmission customers.

5. Order No. 888 also distinguished energy imbalances from generator imbalances. Generator imbalance was defined as the difference between the scheduled and actual delivery of energy from the generator, as compared to the energy imbalance in the pro forma tariff that focused on deviations between scheduled energy and load fluctuations. While the Commission adopted an energy imbalance schedule for the pro forma OATT, it did not adopt a pro forma generator imbalance schedule. It explained that a generator should be able to deliver its scheduled hourly energy with precision and expressed concern that if a generator was allowed to deviate from its schedule by 1.5 percent without penalty, it would discourage good generator operating practices.8 Therefore, it concluded that the requirements for the generator to meet its schedule and any consequence for persistent failure to meet its schedule should be specified in each generator's interconnection agreement with its transmission provider or control area 9 operator. As discussed below, it also noted that the pro forma OATT contained several mechanisms to help generators match their output to their schedules.10

6. Notwithstanding the Commission's direction in Order No. 888 that generator imbalances should be addressed in a generator's interconnection agreement, several transmission providers have sought Commission approval to include in their OATTs generator imbalance service schedules that resemble the energy imbalance service schedules in their tariffs. In accepting these schedules, the Commission clarified that generator imbalance service was not an ancillary service. Thus, while energy imbalances and generator imbalances are different, some transmission providers use similar provisions to settle them. In addition to these types of generator interconnection service schedules in the OATTs, certain entities have revised their tariffs to reflect the uniqueness of wind energy; and the California Independent System Operator Corporation (California ISO) has a program in place that it claims allows wind resources to compete on a comparable basis as other generators with regard to imbalance provisions.11

7. At the time Order No. 888 was developed and issued, wind generation was not a significant energy source in the wholesale electricity market. U.S. wind capacity in 1996 was approximately 1,698 MW.12 By 2004, installed wind capacity, while still approximately less than one percent of U.S. total installed capacity, has grown to 6,740 MW, an annual growth rate of approximately 20 percent over the last eight years.13 As discussed in the Briefing Paper, wind energy, while a relatively new market entrant, is the fastest growing electricity generation technology in the world today. Increasingly attractive economics and technological advances are combining to drive wind industry development. State renewable portfolio standards, federal production tax credits (PTC) 14 and historically high natural gas prices 15 are also driving wind development. While there has been significant progress towards integrating wind resources into suppliers' and loads' portfolios, some challenges may result from the terms and conditions of transmission service required by transmission providers.

8. Recently, proponents of wind generation have been arguing that the deviation between a wind generator's hourly output and its schedule (generator imbalance) is not influenced by the threat of a penalty. Rather, they assert, such imbalances are weather-dependent. Moreover, they note, while improved forecasting could mitigate some imbalances, significant imbalances would remain that cannot be controlled as can thermal generation. Thus, they maintain that wind generators are susceptible to high imbalance charges and/or penalties that discourage the development of and opportunities for wind resources to serve load.

9. The Commission has a duty to prevent unduly discriminatory practices in transmission access. Since deviations by wind generators from their schedules are much more driven by weather than by controllable factors (compared to most other generators), the generator imbalance provisions in transmission providers' OATTs are impeding access to transmission by intermittent resources in such a manner as to be unduly discriminatory under section 206 of the Federal Power Act. A case-by-case analysis of these OATTs would be burdensome and would only serve to delay access to the transmission grid by intermittent resources. Accordingly, we are proposing a new generator imbalance service schedule applicable to intermittent resources to be included in the pro forma tariff for adoption by all transmission providers in their OATTs.16 This new schedule would effectively supersede the current OATT generator imbalance provisions for intermittent resources. In particular, we propose that the service reflect a bandwidth of +/−10 percent (with a minimum of 2 MW) and allow net hourly intermittent generator imbalances within the bandwidth to be settled at the system incremental cost 17 at the time of the imbalance. We reiterate that transmission customers are and must be allowed to change their schedule up to 20 minutes before the hour.18 We also reiterate our policy that a transmission provider may only charge the transmission customer for net hourly generator imbalances or net hourly energy imbalances for the same imbalance, but not both.19 Thus, in the situation where the transmission provider has a choice to charge a transmission customer an energy imbalance or generator imbalance, we propose that the transmission customer would be charged for the net hourly imbalance under the proposed intermittent generator imbalance schedule.

10. In proposing the generator imbalance service approach for intermittent generation resources, the Commission is mindful of its long-standing concerns regarding the maintenance of system reliability and the obligation of public utilities to conform to good utility practices and abide by NERC's reliability standards.20 When the Commission adopted order No. 888, it took a conservative approach to ensure that system reliability was maintained. For instance, in Order No. 888-A, the Commission explained that the energy imbalance service, in the pro forma OATT, was not intended to be used as a substitute for operating reserves.21 The Commission also indicated that a transmission customer may not decline the transmission provider's offer of energy imbalance service unless it demonstrates that it has acquired the services from another source and shows that the alternative arrangement for energy imbalance service is adequate and consistent with good utility practice.22 Further, the Commission denied a request to expand the energy imbalance service bandwidth for a transmission customer purchasing spinning and supplemental reserves because such reserves provide generating capacity that responds to contingency situations (e.g., loss or failure of facilities) and noted that energy supplied within an expanded bandwidth might be provided from reserve capacity that could be needed for maintaining system reliability.23 In this NOPR, we recognize that intermittent resources, unlike dispatchable generation, have a limited ability to predict and control their output. Additionally, we expect that the penetration rates of these resources for most transmission systems will be relatively small in comparison to total generation and transmission on any system. As such, small variations in output caused by these entities should be easily managed and not unduly threaten system reliability.24 The intent of the proposals in this NOPR is to not allow intermittent resources carte blanche to vary output and threaten system reliability. We fully expect that to the extent that a specific transmission system configuration may require that additional measures be taken to maintain system reliability,25 we would entertain such proposals to undertake such additional measures, on a case-by-case basis. We seek comment on what impact the proposed bandwidth of +/−10 percent with regard to intermittent generator imbalances and scheduling flexibility might have on the operation of the transmission providers' system and reliability of the system.

11. These proposed changes should encourage the development of wind resources by removing barriers that affect intermittent resources' access to the transmission grid. This will bring benefits to energy customers and support increased reliability by increasing the diversity of energy supplies.

12. The impetus for this proposed rule has been provided by the wind industry. We also recognize that run-of-river hydroelectric and solar power, as well as other emerging technologies, may be similarly situated to wind power with respect to the issues presented here. Accordingly, we request comments on whether there are other technologies that may be subject to this rule and whether the proposal will work for those technologies. We also seek comments on the Commission's proposed definition of intermittent resources as stated in footnote 1 of this NOPR.

13. In Order No. 888, the Commission concluded that six ancillary services must be included in an OATT.26 One of those ancillary services is energy imbalance service (Schedule 4 of the pro forma OATT).27 The Commission explained that energy imbalance service “is provided when the transmission provider makes up for any difference that occurs over a single hour between the scheduled and the actual delivery of energy to a load located within its control area.” 28 The Commission recognized that the amount of energy taken by load in an hour is variable and not subject to the control of either a wholesale seller or a wholesale requirements buyer.29

14. The Commission also found that the energy imbalance service should have an energy deviation band or bandwidth appropriate for load variations and a price for exceeding the bandwidth that is appropriate for excessive load variations.30 The bandwidth established by the Commission is an hourly deviation band of +/−1.5 percent (with a minimum of 2 MW) for energy imbalance.31 The Commission further explained that this bandwidth promotes good scheduling practices by transmission customers and that it is important that the implementation of each scheduled transaction not overly burden others.32

15. With respect to the hourly energy deviation band, the Commission explained that for energy imbalances within the deviation band, the transmission customer may make up the difference within 30 days (or other reasonable period generally accepted in the region) by adjusting its energy deliveries to eliminate the imbalance (i.e., return energy in kind within 30 days).33 In addition, the Commission explained that the transmission customer must compensate the transmission provider for an imbalance that falls outside the hourly deviation band and for accumulated minor imbalances that are not made up within 30 days.34

16. The Commission further stated that to help customers with the difficulty of forecasting loads far in advance of the hour, the pro forma OATT permits schedule changes up to twenty minutes before the hour at no charge.35 The Commission added that it would allow the transmission provider and the customer to negotiate and file another bandwidth more flexible to the customer, if the same bandwidth is made available on a not unduly discriminatory basis.36

17. With respect to the price of energy imbalance service, the Commission explained that the Final Rule intentionally did not provide detailed pricing requirements.37 Instead, the Commission required transmission providers to apply to the Commission for appropriate rates for energy imbalance service.38

18. While the Commission found that energy imbalance service was an ancillary service, it also recognized that differences arise between energy scheduled for delivery from the generator's control area and the amount of energy actually generated in an hour (generator imbalance).39 It concluded, however, that a generator should be able to deliver its scheduled hourly energy with precision and expressed concern that if it were to allow the generator to deviate from its schedule by 1.5 percent without penalty, as long as it returned the energy in kind at another time, it would discourage good generator operating practices.40 The Commission stated that a generator will have an interconnection agreement with its transmission provider or control area operator, and that this agreement should specify the requirements for the generator to meet its schedule, and for any consequence for persistent failure to meet its schedule.41 The Commission concluded that these arrangements should be done on an agreement-by-agreement basis, and that it preferred not to set these standards generically for all parties.42

19. In Order No. 888, the Commission decided not to designate dynamic scheduling service as an ancillary service.43 Dynamic scheduling was considered a special service that was not only used infrequently in the industry, but used advanced technology and required a great level of coordination. Thus, the Commission stated that each dynamic scheduling application has unique costs for special telemetry and control equipment, making it difficult to post a standard price for the service. Therefore, transmission providers were not required to offer this service to a transmission customer, although it was allowed to do so voluntarily.44 If the customer wanted to purchase this service from a third party, the transmission provider was directed to make a good faith effort to accommodate the necessary arrangements between the customer and the third party for metering and communication facilities.45

20. Although transmission providers have different energy imbalance charges set forth in Schedule 4 of their OATTs, typical pricing provisions provide that the parties correct energy imbalances within the deviation band through return in kind or financial settlement which requires the transmission customer to pay a charge for under-deliveries of energy equal to 100 percent of the transmission provider's system incremental cost for the hour the deviation occurred, and for energy over-deliveries the transmission customer would receive a payment equal to 100 percent of the transmission provider's decremental cost for the hour the deviation occurred.46 Outside the deviation band, utilities typically charge the transmission customer for under-delivery of energy a charge equal to the greater of $100/MWh or 110 percent of the utility's system incremental cost, and pay the transmission customer for over-delivery of energy a payment equal to 90 percent of the utility's system decremental cost.47

21. The Commission has accepted a number of modifications to the OATT to include generator imbalance provisions.48 The first case involved a filing by Niagara Mohawk Power Corp. (Niagara Mohawk) proposing a separate tariff to deal with generator imbalances.49 The Commission rejected that approach, but addressed the filing as an amendment to Niagara Mohawk's OATT and accepted generator imbalance provisions for inclusion in Niagara Mohawk's OATT. Subsequently, the Commission accepted a variety of filings submitted by public utilities to amend their OATTs to include generator imbalance provisions.

22. In the NOPR in Docket No. RM02-1-000, Standardization of Generator Interconnection Agreements and Procedures, the proposed Large Generator Interconnection Agreement (LGIA) Article 4.3.1 amendment to the OATT required the interconnection customer to make appropriate generator balancing service arrangements 50 before submitting any schedules for delivery service that identified the generating facility as the point of receipt for the scheduled delivery.51 Specifically, the interconnection customer would have to ensure that the generating facility's actual output matched its scheduled delivery, on an integrated clock basis, including ramping in and out of its schedule. Also, the interconnection customer was required to arrange for the supply of energy when there was a difference between the actual output and the scheduled delivery. The proposed Article 4.3 allowed the interconnection customer to make generator balancing service arrangements in a variety of ways.

23. On rehearing of Order No. 2003, based on objections to the balancing service requirement of Article 4.3, the Commission deleted Article 4.3 (and Article 4.3.1) from the LGIA on the basis that this requirement is more closely related to delivery service than to interconnection service.52 In Order No. 2003-A, the Commission noted that delivery service requirements are addressed elsewhere in the OATT, and therefore a balancing service requirement, and requirements related to ancillary services generally, should not appear in the LGIA.53

24. On rehearing of Order No. 2003-A, the Commission recognized that transmission providers may prefer to include generator balancing service arrangements in the pro forma LGIA. The Commission further recognized that some transmission providers may prefer to include such a provision in the interconnection agreement that it enters into with the interconnection customer, rather than in a separate agreement.54 Therefore, in Order No. 2003-B, the Commission permitted the transmission provider to include a provision for generator balancing service arrangements in individual interconnection agreements.55

25. Several industry participants believe that it is appropriate for the Commission to address imbalance penalties and the effect of imbalance penalties on intermittent resources.56 Edison Electric Institute (EEI) supports review and potential revision to existing transactions scheduling business practices and procedures in order to better accommodate wind energy, provided system reliability is maintained in a cost-effective manner.57

26. Certain entities argue that intermittent renewable resources, such as wind generators, lack the ability to control the circumstances affecting their output with the assurance required to maintain electric output schedules.58 They note that intermittent generators do not have the ability to modify their output as they rely on the weather for their energy source.59 Therefore, the commenters argue that penalties associated with generator deviations from filed schedules that were intended to prevent generators from gaming the market, do not encourage a wind generator to match its output with the schedule.60 While some industry participants seek changes to the imbalance provisions contained in public utilities' tariffs,61 others believe that wind resources should not be assessed any penalties.62

27. The Arkansas Public Service Commission (Arkansas Commission) recognizes that outside of RTOs, the pro forma tariff permits the transmission provider to impose substantial imbalance penalties which may pose a magnified burden on wind energy producers because they have trouble predicting their daily generation output.63 While the Arkansas Commission agrees a review of such charges under the pro forma tariff is appropriate and such charges should better reflect incremental costs, it opposes an exception for wind generators.64 NorthWestern Energy Corporation (NorthWestern Energy) states that it does not oppose the elimination of imbalance penalties for intermittent resources, provided that the Commission address whether the Federal Power Act's prohibition against undue preference and the Commission's policy concerning comparability would be undercut by affording preferential treatment for imbalance penalties to a generator based on fuel source.65

28. Oklahoma Municipal Power Authority (OMPA) states that it is the Commission's responsibility to ensure that non-control area and control area utilities have an equal and non-discriminatory opportunity to develop and utilize wind resources.66 Transmission Access Policy Study Group (TAPS) and OMPA argue that currently, wind generators who operate outside the purchasing utility's control area are exposed to imbalance penalties under Schedule 4 of the OATT for deviations, while control area utilities are able to treat deviations as inadvertent energy, subject to return-in-kind requirements.67 Calpine states that the Commission should re-evaluate imbalance penalties imposed by control area operators that operate outside of an Independent System Operator (ISO) or Regional Transmission Operator (RTO), whether the penalties apply to intermittent resources or to conventional resources.68

29. Several commenters claim that the imbalance penalties are arbitrary and punitive and do not measure the true costs of over-generating or under-generating.69 They assert that the penalties assessed may be significantly higher than the cost of energy itself and, therefore, are cost-prohibitive for these weather-dependent generators.70

30. Several solutions have been proposed for addressing imbalance charges and/or penalties. For example, National Grid USA (National Grid) and RNP states that the Commission should consider imbalance charges for wind resources that are cost-based.71 Zilkha advocates the elimination of under-generation penalties and supports the development of market mechanisms to address both regulation and energy imbalances resulting from under-generation.72 National Grid and NorthWestern Energy asserts that wind generators should be responsible for any actual costs incurred, such as system balancing and regulation service, to allow for integration of the wind resource.73 The Arkansas Commission also states that while eliminating an unwarranted penalty may be appropriate, imbalance charges should not be priced in a manner that subsidize the generator and harms the transmission provider because the transmission provider will likely flow the cost (an added cost of imbalance energy) through to native load customers.74 Thus, it suggests adjusting the imbalance charge to better reflect the incremental costs, which may be the transmission provider's opportunity cost.75 EEI suggests that all potential energy imbalance alternatives should explicitly consider whether and to what extent cost shifting and/or subsidization would occur.76 EEI recommends that the Commission should consider the “incremental cost plus 10%” approach that several entities already use for the entities that do not presently have energy imbalance markets.

31. According to National Grid, the proper allocation of actual imbalance costs should provide the necessary incentives for suppliers to remain in balance without resorting to additional punitive measures and cost-based imbalance charges would provide for necessary cost recovery.77 NorthWestern Energy believes that it is necessary to provide some incentive to intermittent generators to schedule accurately, if they are not charged penalties associated with generation imbalance.78

32. One request set forth by commenters is for the Commission to examine the scheduling and imbalance provisions of certain transmission providers that they believe are reasonable for intermittent generators, such as Bonneville Power Administration, PacifiCorp, or the California ISO.79

33. Wind proponents support flexible scheduling practices to allow for schedule adjustments closer to real-time.80 According to the New York Independent System Operator, Inc. (NYISO), energy imbalance penalties may be reduced with improved tools for forecasting wind flows, which would help level the playing field for intermittent resources to compete with other resources.81

34. In addition, some entities ask the Commission to consider providing incentives for wind generators to use state-of-the-art forecasting technologies.82 On the other hand, Northwestern believes that at a minimum, wind generators should be expected to install and utilize the state-of-the-art tools to forecast the wind and resulting generation levels on an hourly basis.83 It believes that improved wind generation forecasts may help to reduce imbalance penalties, especially when compared to scheduling practices if the generator makes no effort to adjust real-time schedules from the pre-schedule submitted 24 or more hours in advance.84 Moreover, it asserts that forecasts may help with the reliability concerns associated with a control area's obligation to balance resources and loads.85 Calpine argues that, although helpful as planning tools, improved wind forecasts are unlikely to directly affect imbalances that occur in real time. Calpine notes that what may be more promising as a means to reduce imbalances from intermittent resources would be to match up those resources' scheduling with the scheduling of non-intermittent resources that could act as back up. Calpine observes that intermittent resources need scheduling backstopping, especially at peak, when single and combined cycle units, with inherent cycling capability, can be matched to intermittent resources in a manner that optimizes the performance of both.86

35. EEI states it is critical that additional scheduling flexibility for wind resources be accompanied by companion requirements that large wind facilities participate in state-of-the-art modeling activities.87 According to EEI, changes to existing transactions scheduling requirements and procedures should recognize that the reliability of wind generation turbine technology has improved significantly and is becoming a reliable source of generation, and that wind energy remains a significantly less predictable source than thermal and hydroelectric generation.88

36. Several other proposals to help manage imbalances have been put forth by other commenters. Calpine supports netting arrangements as an effective means of facilitating the participation of intermittent resources in the marketplace and as an efficient means to resolve imbalances generally.89 In addition, RNP states that the Commission should consider imbalance charges for wind resources that include monthly imbalance netting and settlement at market prices.90 Zilkha states that the Commission should exempt intermittent resources from imbalance penalties until structural mechanisms are in place that allow suppliers the flexibility to net and trade imbalances over an extended period of time for an entire wind development zone.91

37. National Grid supports further development of aggregation of balancing responsibilities among wind developments and assignment or hedging of imbalance risks.92

38. Several other issues were discussed by commenters. Zilkha also suggests that the Commission should require transmission providers to undertake studies to assess the extent to which wind generation can be exempt from imbalance and other under-generation charges without adversely affecting system operations.93

39. NorthWestern Energy also believes that the intermittent nature of the wind generator creates the need for regulation service beyond the amount a control area operator has available, therefore, the control area operator must have the ability to limit the wind generator to a level necessary to maintain reliability.94

40. According to the California Public Utilities Commission (CPUC), the PIRP in place in California is a key tool in helping intermittent resources to operate competitively in the California energy market, as well as contributing to meeting the renewable portfolio standard mandated by the California Legislature in 2002. San Diego Gas & Electric Company (SDG&E) expresses support for the California ISO's existing mechanism for settling wind energy imbalances. According to SDG&E, the California ISO's mechanism allows a Scheduling Coordinators' Ten-Minute Settlement Interval for Wind Energy Imbalances to be accumulated over a month. SDG&E explains that negative imbalances incurred in some settlement intervals can be offset by positive imbalances in other settlement intervals, with only the resulting net monthly imbalance settled financially. SDG&E states that because the settlement prices in different settlement intervals vary, the monthly accumulation and settlement of net imbalances creates implicit cost and revenue shifts, although SDG&E states that these shifts tend to be averaged over many market participants. SDG&E agrees that the benefits of promoting wind energy development offset the imprecise signals introduced through the monthly settlement mechanism for imbalances.95

41. The CPUC states that the incremental cost of ancillary services attributable to wind power is low at low wind penetration levels, but the CPUC recognizes that as the wind penetration level increases, so does the cost of ancillary services. The CPUC notes that the aggregation of intermittent resources effectively addresses this problem, to the ultimate benefit of ratepayers.96

42. The information gathered in the outreach discussions, together with the filed comments, assisted in our understanding of the issues facing wind energy resources securing transmission service using a pro forma tariff under Order No. 888. As a result of our examination of energy imbalance services under Order No. 888 and our subsequent cases regarding generator imbalance services to date, we seek comments on a proposal to establish a new generator imbalance service schedule under the pro forma OATT that would apply to intermittent resources. The new generator imbalance service schedule is necessary to address the unique operating characteristics and constraints of wind generation.97 The results of our review and our proposal are discussed below.

43. As follow-up to the Commission's December 1, 2004 technical conference, Commission staff held outreach discussions with industry participants to further explore issues facing wind and other intermittent resources. Many of the outreach discussions echoed those written comments summarized above, however, the outreach discussions were beneficial in capturing some additional issues and possible solutions for Commission consideration. Generally, industry participants are supportive of the development of renewable resources, including wind-powered resources. Many states have established renewable energy portfolio standards which require the utility to maintain a certain percentage of renewable resources in its overall generation portfolio.

44. Discussions with industry participants indicated that a significant percentage of the wind resources are presently contracted for as an integrated resource and used to serve native load on the incumbent transmission provider's system. However, considerable interest was expressed in a new business model, i.e., wind resources having the opportunity to access additional customers by, for example, taking transmission service as a customer or selling its output at the busbar to customers other than the incumbent transmission provider. As an entity selling power at the busbar, the wind generator fears that it could be assessed generator imbalance charges if it did not produce the amount scheduled for delivery. As a transmission delivery service customer of the incumbent transmission provider, a wind generator could be assessed a generator imbalance charge for not producing what was scheduled for delivery. Also, in both of these situations, the wind generator would be assessed an energy imbalance charge for not taking the amount of energy scheduled for delivery to load. However, if the wind generator is an integrated resource on the transmission provider's system serving native load, energy imbalances are absorbed by the transmission provider relying on its total portfolio of generation resources.

45. According to some industry participants, the only current profitable way to operate wind generation is as an integrated resource. This is due to the intermittent nature of the resource and the potential cost of imbalance penalties that could accrue. In effect, while wind generators have expressed an interest in availing themselves of the opportunities provided by the OATT, they find that the imbalance rules/requirements present a hurdle in doing so.

46. With regard to imbalance penalties acting as a barrier for wind resource development, some industry participants support exempting wind from assessment of these penalties. However, others state that imbalance penalties were designed to promote prudent behavior and, even though a wind generator cannot control its fuel source, they believe that the elimination of imbalance penalties may lead to cost-shifts, leaning on the system, bad generator scheduling practices and gaming.

47. Some entities believe that a separate generator imbalance service similar to the energy imbalance service (Schedule 4) should be added as a service schedule under the pro forma OATT, although they noted that there are entities that currently have a generator imbalance service under their OATTs, e.g., PacifiCorp. Certain entites that are developing large wind projects may have successfully negotiated favorable tariff changes with transmission providers, including imbalance penalty provisions that are workable for intermittent resources.

48. Several industry participants believe that the integration of wind into transmission systems, including providing balancing services, will have a physical impact on grid operations and an economic impact on existing customers. However, others allege that most vertically integrated utilities simply use their own generation facilities to provide these services to their customers. Some fear that the costs will rise as increasing amounts of wind are integrated into a system, while others claim that the specific operating characteristics of a system, such as the size of the system and fuel mix, affect their ability to integrate wind.

49. Certain wind interests suggest widening the bandwidth for imbalance deviations to 5 or 10 percent, allowing schedule changes closer to the delivery times, and using an index price/market price/cost of replacement energy to financially settle energy imbalances. Some entities do not want to widen the bandwidths for wind because they believe the current bandwidth ensures scheduling accuracy, discourages gaming and helps maintain reliability.

50. Although many entities believe that dynamic scheduling could be a useful tool for managing imbalances, they have mixed reactions regarding its cost and applicability. One entity stated that economies of scale allow dynamic scheduling to be cost-effective at 10 MW or more.

51. Commission staff also heard that alternatives to the administratively prescribed $100/MWh adder penalty would improve the transparency and fairness of imbalance charges. Alternatives to the adder penalty include having imbalance penalties based either on system incremental costs or market indices.

52. Some transmission owners also discussed how to demonstrate the costs of adding wind to the system so that wind could pay its share of the system integration costs. In addition, the issue of increased reserve requirements and how to account for the additional cost associated with such increase was discussed.

53. The development of renewable sources of energy, including wind resources, brings benefits to energy customers by providing environmental benefits and supports increased reliability by increasing the diversity of energy supplies. Wind energy can satisfy certain federal and state-mandated programs for the development of renewable energy. On balance, however, we also recognize that there are additional costs incurred in integrating wind energy into the system and that each control area, based on its unique characteristics, will be able to accommodate different amounts of wind resources.

54. As a remedy to the issues we have heard, we propose to establish a new generator imbalance service schedule under the pro forma OATT that would apply only to intermittent resources.98 In the case where a transmission provider's OATT currently includes a generator imbalance charge provision that is more lenient than the charge set forth in Schedule XYZ, we propose that the transmission provider would assess the lesser charge.99 Moreover, in recognition that some transmission providers assess generator imbalance charges through interconnection agreements rather than OATT provisions, we are soliciting comment on whether to require that, prospectively, any generator imbalance provisions in future interconnection agreements with intermittent generators conform to the provisions in Schedule XYZ.

55. We are proposing not to modify any aspect of the existing energy imbalance service under Schedule 4 of the pro forma OATT, however, we are seeking comment on whether and how we should amend Schedule 4. We seek comment on whether our proposal to create a new and standard intermittent generator imbalance service schedule will help intermittent resources reduce their exposure to imbalance charges and/or penalties.

56. As noted previously, in Order No. 888, the Commission concluded that a generator should be able to deliver its scheduled hourly energy with precision, and declined to establish generic standards as part of the pro forma OATT. Instead, it noted that a generator would have an interconnection agreement with its transmission provider or control area operator, and that this agreement should specify the requirements for the generator to meet its schedule, and stipulate any consequence for persistent failure to meet that schedule.100 The Commission also expressed concern that if it were to allow a generator to deviate from its schedule by more than 1.5 percent without a generator imbalance penalty, even if the energy is returned in kind at another time, it would discourage good generator operating practices.

57. The current treatment of generator imbalances with respect to intermittent resources appears to be unduly discriminatory under section 206 of the Federal Power Act. The Commission allows utilities to charge penalties to deter conduct that could threaten system reliability or service to other customers and provide incentives to conform to good utility practices. A properly designed penalty should also have minimal impacts on market participation. However, penalties should be avoidable by customer actions, and should not limit market participation. Thermal generators are subjected to generator imbalance provisions that are tailored to their abilities and give them an unfair and unduly discriminatory advantage over intermittent resources, which have much less control over their output. On the other hand, intermittent resources are faced with generator imbalance provisions that fail to recognize their unique needs and prevent them from competing on an equal basis with thermal generators. As noted above, penalties must be avoidable by customer actions, and should not limit market participation. Indeed, intermittent resources face charges that they cannot reasonably avoid, while thermal resources, which can control their generation schedules with much more precision, can generally avoid these charges. At this time, the Commission is concerned that existing generator imbalance provisions are unduly discriminatory against wind generators. Accordingly, the Commission is proposing to add a new Generator Imbalance Service, Schedule XYZ, under the pro forma OATT to address generator imbalances for intermittent resources.101

58. A major feature of the intermittent generator imbalance service will be the use of a wider deviation bandwidth, which would serve a similar function as the deviation bandwidth for energy imbalance service (Schedule 4). We recognize the necessity of maintaining a deviation bandwidth from the perspective of the transmission provider, but also recognize that some flexibility is needed with respect to intermittent resources and that applying a narrow 1.5 percent bandwidth to intermittent resources would be unduly discriminatory. Specifically, we are proposing an intermittent generator imbalance bandwidth of ±10 percent for the amount scheduled to be generated for each generating hour (with a minimum of 2 megawatts). The intermittent generator imbalance service schedule will include the 2 MW minimum bandwidth in order to meet the needs of small generators. Thus, an intermittent generator of less than 20 MW will have a higher percentage bandwidth, for example, a 2 MW minimum bandwidth for an intermittent generator with a capacity of 10 MW is in effect a deviation bandwidth of 20 percent.

59. The Commission proposes that net hourly deviations within the ±10 percent bandwidth will be priced at the transmission provider's system incremental cost at the time of the deviation. Net hourly deviations outside the stated bandwidth will be priced at the transmission provider's system incremental cost ±10 percent. For example, if an intermittent generator generates in excess of 110 percent of its schedule, it will be paid at 90 percent of the transmission provider's system decremental cost. If the intermittent generator produces less than 90 percent of its schedule, it will be charged 110 percent of the transmission provider's system incremental cost for the difference.102 While intermittent generators may be unable to change output in real time to meet schedules, with reasonable forecasting and changes to schedules up to 20 minutes before the hour, these generators should be able to limit the charges for exceeding the 10 percent bandwidth on a net hourly basis. We note that the proposed pricing structure may create an incentive to underschedule in an effort to reduce exposure to being charged 110 percent of the transmission provider's system incremental cost. The Commission is soliciting comment on alternative pricing structures.

60. In addition, the Commission is seeking comment regarding the merits of providing an evaluation that would identify systematic and/or significant deviations or biases in actual production as compared to the submitted schedule. Aggregation and netting of hourly schedule deviations over a 12 or 24 month time period could provide a reasonable time period for this evaluation. Any deviation would then be compared to a to-be-established bandwidth. We seek comments on evaluation methods and bandwidths to achieve this objective.

61. The Commission seeks comment on this proposed bandwidth and the applicable pricing mechanisms. Particularly, the Commission is interested in comments addressing whether a different bandwidth is better suited for application to generation deviations for intermittent resources. The Commission is also interested in comments regarding the appropriate levels to price deviations inside the bandwidth and deviations that exceed the bandwidth. In addition, some wind resources have requested that there should be no bandwidth for imbalances incurred by intermittent resources. We believe that “no bandwidth” means that the transmission customer would be charged a fixed charge (e.g., 100 percent of system incremental cost or 90/110 percent of the system incremental cost) regardless of the size of the generator imbalance. Therefore, the Commission seeks comment on whether not having a bandwidth is appropriate for intermittent resources and, in the absence of a bandwidth, what are the appropriate levels to price deviations.

62. Under Order No. 888, all transmission customers must submit a schedule one day in advance. Order No. 888-A recognizes that transmission customers can reduce their costs by making schedule changes up to 20 minutes before the hour at no charge. It has been asserted that technological improvements since the issuance of Order No. 888 allow these schedules to be adjusted and acted on very close to real time at no additional cost to the transmission customer.

63. Due to the nature of the intermittent resource, being able to schedule as close to the start of the operating hour as possible provides for the highest degree of accuracy.103 Market Participants have expressed concerns that not all transmission providers allow for schedule changes within the timeframe currently allowed under the pro forma tariff (i.e., 20 minutes before the hour). In addition, of those transmission providers that do conform to the pro forma scheduling provisions, it is claimed that some calculate deviations based on the difference between the amount generated and the amount scheduled in the Day-Ahead timeframe. This would appear to be inconsistent with the original intent of the Commission to allow for schedule changes up to 20 minutes before the hour in order to minimize exposure to imbalances.

64. We believe that the flexibility to modify a schedule up to 20 minutes before the hour, as the pro forma tariff currently allows, will be a valuable tool to assist intermittent generators in minimizing exposure to the costs associated with imbalances. In addition, by allowing intermittent generators to modify their schedules closer to real-time based on more accurate forecast information, we believe that the transmission provider will have more accurate operating information and be better equipped to operate the system in a reliable and efficient manner. Therefore, we reiterate that our intent in Order No. 888 was that transmission providers must allow transmission customers to modify schedules up to 20 minutes before the hour and that any net hourly imbalance calculation will be determined from the last accepted schedule. We seek comment on whether this scheduling flexibility, with other changes proposed above, will help encourage wind generators to schedule as accurately as possible and while avoiding generator imbalance charges outside the +/−10 percent bandwidth. We seek comment on whether allowing schedule changes up to 20 minutes before the hour and making a schedule financially binding will prevent or create a hardship in instances where the Commission has already accepted proposals based on existing regional variations.

65. As noted above, several entities have proposed additional ways to reduce imbalances, and thus reduce or eliminate charges and/or penalties. These include matching up intermittent resources scheduling with the scheduling of non-intermittent resources that could act as a back up; netting arrangements; settling arrangements; trading arrangements; aggregation of balancing responsibility among wind developments; assignment or hedging of imbalance risks; and dynamic scheduling. We seek comment on how these terms and mechanisms or arrangements would reduce generator imbalances, as well as seek sample proposals of such mechanisms or arrangements that currently exist. We also seek comment on any other proposal not listed above that would reduce generator imbalances.

66. OMPA, TAPS and AWEA allege that under many tariffs today, non-control area utilities are subject to energy imbalance penalty charges for deviations that control area utilities may treat as inadvertent energy subject to return-in-kind requirements, making it prohibitive for transmission dependent utilities that are not control areas to participate in wind generation.104 TAPS argues that a transmission dependent utility (OMPA) and a control area operator (Oklahoma Gas & Electric Company (OG&E)), demonstrate the highly discriminatory impacts of the imbalance penalties. It asks the Commission to promptly address the disparate and punitive treatment of energy imbalance under Schedule 4 of the Open Access Transmission Tariff.

67. TAPS asserts that not only is OG&E exempt from paying energy imbalance penalties, but it receives the imbalance charges levied upon OMPA furthering the competitive disadvantage. TAPS argues that transmission dependent utilities should not have to wait for introduction of real-time RTO energy markets in order to escape discriminatory treatment of imbalances. OMPA suggests that regardless of whether a customer is inside a control area or outside, if the tariff were applied equally, both customers would face the same costs.

68. We believe that this issue is beyond the scope of this proceeding, and therefore, it will be addressed at a later time.

69. The Commission is proposing to permit public utilities to justify variations from the terms of the final Schedule XYZ using the approach taken in Order No. 2003. In Order No. 2003, the Commission modified the approach taken in Order No. 888,105 which allowed two types of variations. First, transmission providers may seek variations to the pro forma OATT based on regional reliability requirements.106 Second, transmission providers may argue that proposed changes to any OATT provision are “consistent with or superior to” the terms of the pro forma OATT.107 Additionally, since Order No. 2003 allows RTOs and ISOs greater flexibility in complying with its provisions,108 we are proposing to that they may seek an “independent entity variation” from the pricing and non-pricing provisions of the pro forma Schedule XYZ. The Commission intends to apply all three of these variation standards to the proposed variations from Schedule XYZ the Commission finally adopts in this proceeding.

70. As noted above, the Commission has previously accepted proposals by transmission providers to amend their OATTs to specifically include a generator imbalance schedule. In doing so, the Commission permitted the transmission provider to collect the generator imbalance charge from the transmission customer. Specifically, the Commission concluded that there was nothing inherently unreasonable about holding the transmission customer responsible for ensuring that the amount of energy scheduled for its transaction is delivered to the transmission provider.109 We note that the pro forma OATT currently does not contain a provision that would permit the transmission provider to collect the generator imbalance charge proposed herein from the generator.

71. Accordingly, the Commission is soliciting comments on how best to implement this new generator imbalance service schedule. Specifically, should the transmission provider collect generator imbalance charges from the transmission customer with the transmission customer recovering these charges through a separate agreement with the generator, or should the transmission provider collect generator imbalance charges from the generator pursuant to an arrangement in its interconnection agreement pursuant to Order No. 2003-B? If the transmission provider collects payment from the generator, how should the pro forma agreement between the transmission provider and the generator be structured?

72. Office of Management and Budget (OMB) regulations require OMB to approve certain information collection requirements imposed by agency rule.110 Comments are solicited on the Commission's need for this information, whether the information will have practical utility, the accuracy of provided burden estimates, ways to enhance the quality, utility and clarity of the information to be collected, and any suggested methods for minimizing respondents' burden, including the use of automated information techniques.

73. Public Reporting Burden:

74. Information Collection Costs: The Commission seeks comments on the costs to comply with these requirements. It has projected the annualized cost for all respondents to be: Annualized Capital/Startup Costs-Staffing requirements to review and prepare an intermittent resource imbalance service schedule = $71,400. (238 respondents × $150 hourly rate × 2 hours per respondent).

75. The OMB regulations require OMB to approve certain information collection requirements imposed by agency rule.111 Accordingly, pursuant to OMB regulations, the Commission is providing notice of its proposed information collections to OMB.

Title: FERC-516, Electric Rate Schedule Filings.

Action: Proposed Information Collection.

OMB Control No.: 1902-0096.

The applicant shall not be penalized for failure to respond to this collection of information unless the collection of information displays a valid OMB control number.

Respondents: Business or other for profit.

Frequency of Responses: One-time implementation.

Necessity of Information: The proposed rule would revise the requirements contained in 18 CFR part 35. The Commission is seeking to create a new service schedule under the pro forma OATT to address generator imbalance energy for intermittent resources. In particular, the Commission will propose that public utilities add a new service schedule for under their OATTs which provides for generator imbalance service for intermittent resources. The new service schedule establishes a deviation bandwidth and stipulates pricing of intermittent resource imbalance energy inside and outside the bandwidth. The proposed rule would require that each public utility that owns, operates, or controls transmission facilities participate in one-time filings incorporating the new service schedule into their own open access transmission tariffs.

Internal Review: The Commission has assured itself, by means of internal review, that there is specific, objective support for the burden estimates associated with the information collection requirements. The Commission's Office of Market, Tariffs and Rates will use the data included in filings under section 205 of the Federal Power to adopt provisions for imbalance services for intermittent resources. These information requirements conform to the Commission's plan for efficient information collection, communication, and management within the electric power industry. Interested persons may obtain information on the reporting requirements by contacting: Federal Energy Regulatory Commission, the difference between forward market schedules and metered output 888 First Street, NE., Washington, DC 20426, Attention: Michael Miller, Office of the Executive Director, phone: (202) 502-8415, fax: (202) 273-0873, e-mail: michael.miller@ferc.gov. Comments on the proposed requirements of the subject rule may also be sent to the Office of Information and Regulatory Affairs, Office of Management and Budget, Washington, DC 20503, Attention: Desk Officer for the Federal Energy Regulatory Commission, phone: (202) 395-4650.

76. The Commission is required to prepare an Environmental Assessment or an Environmental Impact Statement for any action that may have a significant adverse effect on the human environment.112 The Commission has categorically excluded certain actions from this requirement as not having a significant effect on the human environment. Included in the exclusion are rules that are clarifying, corrective, or procedural, or that do not substantially change the effect of the regulations being amended.113 The exclusion also includes information gathering, analysis, and dissemination.114 The rules proposed in this NOPR would update and clarify the application of a new generator imbalance service schedule to the Commission's pro forma to intermittent resources. Therefore, this NOPR falls within the categorical exemptions provided in the Commission's Regulations, and as a result neither an environmental impact statement nor an environmental assessment is required. Additionally, we note that this proposed rule will help the development and interconnection of wind plants, eliminating the airborne and other emissions that would result from constructing fossil fuel generating plants instead.

77. The Regulatory Flexibility Act of 1980 (RFA) 115 generally requires a description and analysis of final rules that will have significant economic impact on a substantial number of small entities.

78. The Commission does not believe that this proposed rule would have such an impact on small entities. Most filing companies subject to the Commission's jurisdiction do not fall within the RFA's definition of a small entity.116 Further, the filing requirements contain standard generator interconnection procedures and agreement for interconnecting generators larger than 20 MW, which exceeds the threshold of the Small Business Size Standard of NAICS. Therefore, the Commission certifies that this rule will not have a significant economic impact on a substantial number of small entities.

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget for review 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 June 27, 2005.

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 may 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 service to provide information.

The collection of information in this proposed regulation is in §§ 48.4082-1(d)(2), 48.4082-1(d)(4), 48.4082-1(d)(6) and 48.4101-1(h)(3). This collection of information is necessary to obtain a tax benefit. The likely recordkeepers are terminal operators and enterers.

Estimated total annual reporting and/or recordkeeping burden: 1,400 hours.

Estimated average annual burden hours per recordkeeper: 7 hours.

Estimated number of respondents and/or recordkeepers: 200.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid 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.

Temporary regulations in the Rules and Regulations section of this issue of the Federal Register amend Manufacturers and Retailers Excise Taxes Regulations (26 CFR part 48) under sections 4082 and 4101. The temporary regulations set forth requirements regarding the mechanical dye injection systems for diesel fuel and kerosene and are required by the American Jobs Creation Act of 2004. The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations.

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 flexibility 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. It is hereby certified that the collection of information in these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that the time required to maintain the required records and report to the IRS is minimal and will not have a significant impact on those small entities. 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 rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. All comments will be available for public inspection and copying.

A public hearing has been scheduled for July 19, 2005, at 10 a.m. in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Ave., NW., Washington, DC. All visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area at the Constitution Avenue entrance 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 written comments and an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight copies (8) copies) by June 27, 2005. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of 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 author of these regulations is William Blodgett, Office of Associate Chief Counsel (Passthroughs and Special Industries), IRS. However, other personnel from the IRS and Treasury Department participated in their development.

Accordingly, 26 CFR part 48 is proposed to be amended as follows:

(d) [The text of this proposed paragraph (d) is the same as the text of § 48.4082-1T(d) published elsewhere in this issue of the Federal Register].

(e) * * *

(e)(2) [The text of this proposed paragraph (e)(2) is the same as the text of § 48.4082-1T(e)(2) published elsewhere in this issue of the Federal Register].

Par. 3. Section 48.4101-1 is amended by revising paragraph (h)(3)(iv) to read as follows:

On October 26, 2001, the President signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act), Public Law 107-56. Title III of the USA PATRIOT Act amends the anti-money laundering provisions of the Bank Secrecy Act (BSA), codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5314, 5316-5332, to promote the prevention, detection, and prosecution of international money laundering and the financing of terrorism. Regulations implementing the BSA appear at 31 CFR part 103. The authority of the Secretary of the Treasury (“the Secretary”) to administer the BSA and its implementing regulations has been delegated to the Director of FinCEN.1

Section 311 of the USA PATRIOT Act (“section 311”) added section 5318A to the BSA, granting the Secretary the authority, upon finding that reasonable grounds exist for concluding that a foreign jurisdiction, institution, class of transactions, or type of account is of “primary money laundering concern,” to require domestic financial institutions and financial agencies to take certain “special measures” against the primary money laundering concern. Section 311 identifies factors for the Secretary to consider and Federal agencies to consult before the Secretary may conclude that a jurisdiction, institution, class of transactions, or type of account is of primary money laundering concern. The statute also provides similar procedures, including factors and consultation requirements, for selecting the specific special measures to be imposed against the primary money laundering concern.

Taken as a whole, section 311 provides the Secretary with a range of options that can be adapted to target specific money laundering concerns most effectively. These options give the Secretary the authority to bring additional pressure on those jurisdictions and institutions that pose money laundering threats. Through the imposition of various special measures, the Secretary can gain more information about the concerned jurisdictions, institutions, transactions, and accounts; can more effectively monitor the respective jurisdictions, institutions, transactions, and accounts; and/or can protect U.S. financial institutions from involvement with jurisdictions, institutions, transactions, or accounts that pose a money laundering concern.

Before making a finding that reasonable grounds exist for concluding that a foreign financial institution is of primary money laundering concern, the Secretary is required by the Bank Secrecy Act to consult with both the Secretary of State and the Attorney General. The Secretary also is required by section 311 to consider “such information as the Secretary determines to be relevant, including the following potentially relevant factors:”

• The extent to which such financial institution is used to facilitate or promote money laundering in or through the jurisdiction;

• The extent to which such financial institution is used for legitimate business purposes in the jurisdiction; and

• The extent to which the finding that the institution is of primary money laundering concern is sufficient to ensure, with respect to transactions involving the institution operating in the jurisdiction, that the purposes of the BSA continue to be fulfilled, and to guard against international money laundering and other financial crimes.

If the Secretary determines that a foreign financial institution is of primary money laundering concern, the Secretary must determine the appropriate special measure(s) to address the specific money laundering risks. Section 311 provides a range of special measures that can be imposed individually, jointly, in any combination, and in any sequence.2 The Secretary's imposition of special measures requires additional consultations to be made and factors to be considered. The statute requires the Secretary to consult with appropriate Federal agencies and other interested parties 3 and to consider the following specific factors:

• Whether similar action has been or is being taken by other nations or multilateral groups;

• Whether the imposition of any particular special measure would create a significant competitive disadvantage, including any undue cost or burden associated with compliance, for financial institutions organized or licensed in the United States;

• The extent to which the action or the timing of the action would have a significant adverse systemic impact on the international payment, clearance, and settlement system, or on legitimate business activities involving the particular institution; and

• The effect of the action on United States national security and foreign policy.4

In this rulemaking, FinCEN proposes the imposition of the fifth special measure (31 U.S.C. 5318A(b)(5)) against Multibanka, a commercial bank in Latvia. The fifth special measure prohibits or conditions the opening or maintaining of correspondent or payable-through accounts for the designated institution by U.S. financial institutions. This special measure may be imposed only through the issuance of a regulation.

Multibanka is headquartered in Riga, the capital of the Republic of Latvia. Multibanka is the oldest commercial bank in Latvia and is among the smaller of Latvia's 23 banks, reported to have approximately $269 million in assets and 150 employees. Its predecessor entity, created in 1988, was the Latvian branch of a Soviet bank that was nationalized in 1991. The resulting entity became the Foreign Operations Department of the Bank of Latvia. Three years later, in April 1994, the Department of Foreign Operations was privatized and became Multibanka. In 1995, Multibanka merged with joint stock company LNT Skonto Banka, increasing its assets and resources. Multibanka has four foreign offices in Russia, Ukraine, and Belarus; five domestic branches; and one leasing subsidiary, Multilizings.

Multibanka offers confidential banking services and numbered accounts for non-Latvian customers. Reports substantiate that a significant portion of its business involves wiring money out of the country on behalf of its accountholders.

The bank has been suspected of being used by Russian and other shell companies to facilitate financial crime. A common way for criminals to disguise illegal proceeds is to establish shell companies in countries known for lax enforcement of anti-money laundering laws. The criminals use the shell companies to conceal the true ownership of the accounts and assets, which is ideal for the laundering of funds. One reported scheme works in the following way: Suspect shell companies move money into their accounts at Multibanka. The money is designated as payment for goods and services to other shell companies or individuals, but is deposited into the originating company's account with Multibanka. Multibanka later transfers the funds to destinations outside Latvia upon the instructions of the originating shell companies. These transactions are suspected of being used to facilitate illegal transfers of money out of other countries and tax evasion. Due to concerns about transactions flowing through Multibanka involving suspected shell corporations, some U.S. financial institutions have already terminated correspondent relationships with Multibanka.

FinCEN also has reason to believe that certain criminals use accounts at Multibanka to facilitate financial fraud schemes. Specifically, one individual involved in financial fraud reported having success in carrying out large-sum transactions through his account at Multibanka. FinCEN is also aware that an individual arrested in 2004 for his involvement in an access device fraud ring used an account at Multibanka to launder proceeds of his criminal activities.

Latvia's role as a regional financial center, the number of commercial banks with respect to its size, and those banks' sizeable non-resident deposit base continue to pose significant money laundering risks. Latvian authorities recently have sought tighter legislative controls, regulations, and “best practices” designed to fight financial crime. Despite Latvia's recent efforts and amended laws, however, money laundering in Latvia remains a concern. Latvia's geographical position, situated by the Baltic Sea and bordering Russia, Estonia, Belarus, and Lithuania, make it an attractive transit country for both legitimate and illegitimate trade. Sources of laundered money in these countries include counterfeiting, corruption, arms trafficking, contraband smuggling, and other crimes. It is believed that most of Latvia's narcotics trafficking is conducted by organized crime groups that began with cigarette and alcohol smuggling and then progressed to narcotics.

Of particular concern is that many of Latvia's institutions do not appear to serve the Latvian community, but instead serve suspect foreign private shell companies. As previously discussed, criminals frequently launder money through the use of shell companies. Similarly, a large number of foreign depositors or a large percentage of assets in foreign funds may indicate that a bank is being used to launder money or evade taxes. Latvia's 23 banks held approximately $5 billion in nonresident deposits at the end of 2004, mainly from Russia and other parts of the former Soviet Union. These deposits accounted for more than half of all the money held in Latvian banks.

Despite growing efforts by the Latvian government for reform, material weaknesses in the implementation and enforcement of its anti-money laundering laws exist. To date there have been no forfeitures of illicit proceeds based on money laundering. In addition, suspicious activity reporting thresholds remain high, at nearly 40,000 LATS (about $80,000 dollars) for most transactions, which fails to capture significant activity below this threshold. Furthermore, since 2004, only two money laundering cases have been tried in Latvian courts, with both cases ending in acquittals.

Latvia has a general reputation for permissive bank secrecy laws and lax enforcement, as evidenced by multiple non-Latvian Web sites that offer to establish offshore accounts with Latvian banks in general, and Multibanka, in particular. The sites claim that Latvian banks offer secure and confidential banking, especially through online banking services. FinCEN also has reason to believe that certain Latvian financial institutions are used by online criminal groups, frequently referred to as “carding” groups, to launder the proceeds of their illegal activities. Such groups consist of computer hackers and other criminals that use the Internet as a means of perpetrating credit card fraud, identity theft, and related financial crimes. One of the primary concerns of carding group members is their ability to convert the funds obtained through fraud into cash. Anonymity is another major consideration for online criminals. Reports substantiate that in order to support these two needs, a significant number of carders have turned to Latvian financial institutions for the safe and quasi-anonymous cashing out of their illegal proceeds. FinCEN has additional reason to believe that certain Latvian financial institutions allow non-citizens to open accounts over the Internet, and offer anonymous ATM cards with high or no withdrawal limits.

Latvia has taken steps to address money laundering risks and corruption. In February 2004, a new anti-money laundering law removed some barriers that impeded the prosecution of money laundering. The law expanded the categories of financial institutions covered by reporting requirements to include auditors, lawyers, and high-value dealers, as well as credit institutions. The law also recognizes terrorism as a predicate offense for money laundering.

Recognizing the existence of widespread official corruption, the Latvian government, in January 2002, established the Anti-Corruption Bureau (ACB), an independent agency to combat public corruption by investigating and prosecuting Latvian officials involved in unlawful activities. In 2004, the ACB reviewed over 700 cases of suspected public corruption. Although this initiative is encouraging, FinCEN considers the high levels of corruption in Latvia's Government and security forces an impediment both to its international information-sharing efforts and to the fair enforcement of Latvia's anti-money laundering laws.

According to the International Narcotics Strategy Control Report (INSCR) published in March 2005 by the U.S. Department of State, Latvia's banking system is vulnerable to the laundering of narcotics proceeds. The report designates Latvia a jurisdiction of “primary concern.” “Jurisdictions of Primary Concern” in INSCR are jurisdictions that are identified as “major money laundering countries,” that is, countries “whose financial institutions engage in currency transactions involving significant amounts of proceeds from international narcotics trafficking.”

Based on a review and analysis of relevant information, consultations with relevant Federal agencies and departments, and after consideration of the factors enumerated in section 311, the Secretary, through his delegate, the Director of FinCEN, has determined that reasonable grounds exist for concluding that Multibanka is a financial institution of primary money laundering concern based on a number of factors, including:

FinCEN has determined, based upon a variety of sources, that Multibanka is being used to facilitate or promote money laundering and other financial crimes. The proceeds of illicit activity have been transferred by shell companies with no apparent legitimate business purpose to or through correspondent accounts held by Multibanka at U.S. financial institutions. As already described above, many shell companies are suspected of moving money illegally or laundering illegal proceeds through their accounts at Multibanka, followed immediately by orders that Multibanka transfer the funds out of the country. These shell companies repeatedly used accounts at Multibanka to engage in a pattern of behavior indicative of money laundering. For example, in a one-month period during 2004, one U.S. bank received over 2,000 payment instructions involving $68 million associated with eight suspected shell companies with accounts at Multibanka.

As stated above, FinCEN has determined that certain individuals view Multibanka as an excellent bank for conducting financial fraud schemes and to launder the proceeds of their criminal activity. In fact, one individual involved in such schemes reported that he successfully moved large sums through his Multibanka account.

It is difficult to determine the extent to which Multibanka is used for legitimate purposes. As already stated, inordinately high percentages of foreign assets or depositors and the use of a bank by shell companies are both indicators of possible money laundering activities. A significant portion of Multibanka's business is with shell companies, many from the former Soviet Bloc countries. FinCEN has reason to believe that the bank has a reputation for operating as an offshore bank that primarily services foreign shell companies. Multibanka is an important banking resource for such offshore companies, allegedly allowing them to access the international financial system to pursue illicit financial activities. FinCEN believes that any legitimate use of Multibanka is significantly outweighed by its use to promote or facilitate money laundering and other financial crimes. Nevertheless, FinCEN specifically solicits comments on the impact of the proposed special measure upon any legitimate transactions conducted with Multibanka involving, in particular, U.S. persons or entities, foreign persons, entities, and governments, and multilateral organizations doing legitimate business with persons, entities, or the government of the jurisdiction or operating in the jurisdiction.

As detailed above, FinCEN has reasonable grounds to conclude that Multibanka is being used to promote or facilitate international money laundering. Currently, there are no protective measures that specifically target Multibanka. Thus, finding Multibanka to be a financial institution of primary money laundering concern and prohibiting the maintenance of correspondent accounts for that institution are necessary steps to prevent suspect accountholders at Multibanka from accessing the U.S. financial system to facilitate money laundering or to engage in any other criminal purpose. The proposed special measure would not only prohibit U.S. financial institutions from maintaining direct correspondent relationships with Multibanka, but also would require them to take reasonable steps to prevent indirect use of correspondent services by Multibanka through intermediary financial institutions. The finding of primary money laundering concern and the imposition of the special measure also will bring criminal conduct occurring at or through Multibanka to the attention of the international financial community and, it is hoped, further limit the bank's ability to be used for money laundering or for other criminal purposes.

As a result of the finding that Multibanka is a financial institution of primary money laundering concern, and based upon the additional consultations and the consideration of relevant factors, the Secretary, through his delegate, the Director of FinCEN, has determined that reasonable grounds exist for the imposition of the special measure authorized by 31 U.S.C. 5318A(b)(5).5 That special measure authorizes the prohibition of opening or maintaining correspondent accounts 6 by any domestic financial institution or agency for or on behalf of a targeted financial institution. A discussion of the additional section 311 factors relevant to imposing this particular special measure follows.

Other countries and multilateral groups have not, as yet, taken action similar to that proposed in this rulemaking to prohibit domestic financial institutions and agencies from opening or maintaining a correspondent account for or on behalf of Multibanka, and to require those domestic financial institutions and agencies to screen their correspondents for nested correspondent accounts held by Multibanka. FinCEN encourages other countries to take similar action based on the findings contained in this rulemaking. In the absence of similar action by other countries, it is even more imperative that the fifth special measure be imposed in order to prevent access by Multibanka to the U.S. financial system.

The fifth special measure sought to be imposed by this rulemaking would prohibit covered financial institutions from opening and maintaining correspondent accounts for, or on behalf of, Multibanka. As a corollary to this measure, covered financial institutions also would be required to take reasonable steps to apply special due diligence, as set forth below, to all of their correspondent accounts to help ensure that no such account is being used indirectly to provide services to Multibanka. FinCEN does not expect the burden associated with these requirements to be significant, given its understanding that few U.S. banks currently maintain correspondent accounts for Multibanka. There is a minimal burden involved in transmitting a one-time notice to all correspondent accountholders concerning the prohibition on indirectly providing services to Multibanka. In addition, all U.S. financial institutions currently apply some degree of due diligence to the transactions or accounts subject to sanctions administered by the Office of Foreign Assets Control (OFAC) of the Department of the Treasury. As explained in more detail in the section-by-section analysis below, financial institutions should be able to easily adapt their current screening procedures for OFAC sanctions to comply with this special measure. Thus, the special due diligence that would be required by this rulemaking is not expected to impose a significant additional burden upon U.S. financial institutions.

This proposed rulemaking targets Multibanka specifically; it does not target a class of financial transactions (such as wire transfers) or a particular jurisdiction. Multibanka is not a major participant in the international payment system and is not relied upon by the international banking community for clearance or settlement services. Thus, the imposition of the fifth special measure against Multibanka will not have a significant adverse systemic impact on the international payment, clearance, and settlement system. In light of the reasons for imposing this special measure, FinCEN does not believe that it will impose an undue burden on legitimate business activities, and notes that the presence of approximately 15 larger banks in Latvia will alleviate the burden on legitimate business activities within that jurisdiction.

The exclusion from the U.S. financial system of banks that serve as conduits for significant money laundering activity and other financial crimes enhances national security by making it more difficult for money launderers and other criminals to access the substantial resources of the U.S. financial system. In addition, the imposition of the fifth special measure against Multibanka would complement the U.S. Government's overall foreign policy strategy of making entry into the U.S. financial system more difficult for high-risk financial institutions located in jurisdictions that have lax anti-money laundering controls. More generally, the imposition of the fifth special measure would complement diplomatic actions undertaken by both the Latvian and United States Governments to expose and disrupt international money laundering and other financial crimes.

Therefore, after conducting the required consultations and weighing the relevant factors, FinCEN has determined that reasonable grounds exist for concluding that Multibanka is a financial institution of primary money laundering concern and for imposing the special measure authorized by 31 U.S.C. 5318A(b)(5).

The proposed rule would prohibit covered financial institutions from establishing, maintaining, administering, or managing in the United States any correspondent account for, or on behalf of, Multibanka. As a corollary to this prohibition, covered financial institutions would be required to apply special due diligence to their correspondent accounts to guard against their indirect use by Multibanka. At a minimum, that special due diligence must include two elements. First, a covered financial institution must notify its correspondent accountholders that they may not provide Multibanka with access to the correspondent account maintained at the covered financial institution. Second, a covered financial institution must take reasonable steps to identify any indirect use of its correspondent accounts by Multibanka, to the extent that such indirect use can be determined from transactional records maintained by the covered financial institution in the normal course of business. A covered financial institution must take a risk-based approach when deciding what, if any, other due diligence measures it should adopt to guard against the indirect use of its correspondent accounts by Multibanka, based on risk factors such as the type of services it offers and geographic locations of its correspondents.

Section 103.191(a)(1) defines the term “correspondent account” by reference to the definition contained in 31 CFR 103.175(d)(1)(ii). Section 103.175(d)(1)(ii) defines a correspondent account to mean an account established to receive deposits from, or make payments or other disbursements on behalf of, a foreign bank, or to handle other financial transactions related to the foreign bank.

In the case of a U.S. depository institution, this broad definition would include most types of banking relationships between a U.S. depository institution and a foreign bank, including payable-through accounts.

In the case of securities broker-dealers, futures commission merchants, introducing brokers, and investment companies that are open-end companies (mutual funds), a correspondent account would include any account that permits the foreign bank to engage in (1) trading in securities and commodity futures or options, (2) funds transfers, or (3) other types of financial transactions.

FinCEN is using the same definition for purposes of the proposed rule as that established in the final rule implementing sections 313 and 319(b) of the USA PATRIOT Act,7 except that the term is being expanded to cover such accounts maintained by mutual funds, futures commission merchants, and introducing brokers.

Section 103.191(a)(2) of the proposed rule defines covered financial institution to mean all of the following: Any insured bank (as defined in section 3(h) of the Federal Deposit Insurance Act (12 U.S.C. 1813(h)); a commercial bank or trust company; a private banker; an agency or branch of a foreign bank in the United States; a credit union; a thrift institution; a corporation acting under section 25A of the Federal Reserve Act (12 U.S.C. 611 et seq.); a broker or dealer registered or required to register with the SEC under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.); a futures commission merchant or an introducing broker registered, or required to register, with the CFTC under the Commodity Exchange Act (7 U.S.C. 1 et seq.); and an investment company (as defined in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3)) that is an open-end company (as defined in section 5 of the Investment Company Act of 1940 (15 U.S.C. 80a-5)) that is registered, or required to register, with the SEC under section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8).

Section 103.191(a)(3) of the proposed rule defines Multibanka to include all branches, offices, and subsidiaries of Multibanka operating in Latvia or in any other jurisdiction. Multilizings, and any of its branches, is included in the definition. FinCEN will provide information regarding the existence or establishment of any other subsidiaries as it becomes available. Nevertheless, covered financial institutions should take commercially reasonable measures to determine whether a customer is a subsidiary of Multibanka.

For purposes of complying with the proposed rule's prohibition on the opening or maintaining of correspondent accounts for, or on behalf of, Multibanka, FinCEN expects that a covered financial institution will take such steps that a reasonable and prudent financial institution would take to protect itself from loan fraud or other fraud or loss based on misidentification of a person's status.

Section 103.191(b)(1) of the proposed rule prohibits all covered financial institutions from establishing, maintaining, administering, or managing a correspondent account in the United States for, or on behalf of, Multibanka. The prohibition would require all covered financial institutions to review their account records to ensure that they maintain no accounts directly for, or on behalf of, Multibanka.

As a corollary to the prohibition on maintaining correspondent accounts directly for Multibanka, section 103.191(b)(2) requires a covered financial institution to apply special due diligence to its correspondent accounts that is reasonably designed to guard against their indirect use by Multibanka. At a minimum, that special due diligence must include notifying correspondent accountholders that they may not provide Multibanka with access to the correspondent account maintained at the covered financial institution. For example, a covered financial institution may satisfy this requirement by transmitting the following notice to all of its correspondent accountholders:

The purpose of the notice requirement is to help ensure cooperation from correspondent accountholders in denying Multibanka access to the U.S. financial system, as well as to increase awareness within the international financial community of the risks and deficiencies of Multibanka. However, FinCEN does not require or expect a covered financial institution to obtain a certification from its correspondent accountholders that indirect access will not be provided in order to comply with this notice requirement. Instead, methods of compliance with the notice requirement could include, for example, transmitting a one-time notice by mail, fax, or e-mail to a covered financial institution's correspondent account customers informing them that they may not provide Multibanka with access to the covered financial institution's correspondent account, or including such information in the next regularly occurring transmittal from the covered financial institution to its correspondent accountholders. FinCEN specifically solicits comments on the appropriate form, scope, and timing of the notice that would be required under the rule.

A covered financial institution also would be required under this rulemaking to take reasonable steps to identify any indirect use of its correspondent accounts by Multibanka, to the extent that such indirect use can be determined from transactional records maintained by the covered financial institution in the normal course of business. For example, a covered financial institution would be expected to apply an appropriate screening mechanism to be able to identify a funds transfer order that on its face listed Multibanka as the originator's or beneficiary's financial institution, or otherwise referenced Multibanka. An appropriate screening mechanism could be the mechanism used by a covered financial institution to comply with sanctions programs administered by OFAC. FinCEN specifically solicits comments on the requirement under the proposed rule that a covered financial institution take reasonable steps to screen its correspondent accounts in order to identify any indirect use of such accounts by Multibanka.

Notifying its correspondent accountholders and taking reasonable steps to identify any indirect use of its correspondent accounts by Multibanka in the manner discussed above are the minimum due diligence requirements under the proposed rule. Beyond these minimum steps, a covered financial institution should adopt a risk-based approach for determining what, if any, other due diligence measures it should implement to guard against the indirect use of its correspondents accounts by Multibanka, based on risk factors such as the type of services it offers and the geographic locations of its correspondent accountholders.

A covered financial institution that obtains knowledge that a correspondent account is being used by a foreign bank to provide indirect access to Multibanka must take all appropriate steps to block such indirect access, including, where necessary, terminating the correspondent account. A covered financial institution may afford the foreign bank a reasonable opportunity to take corrective action prior to terminating the correspondent account. Should the foreign bank refuse to comply, or if the covered financial institution cannot obtain adequate assurances that the account will not be available to Multibanka, the covered financial institution must terminate the account within a commercially reasonable time. This means that the covered financial institution should not permit the foreign bank to establish any new positions or execute any transactions through the account, other than those necessary to close the account. A covered financial institution may reestablish an account closed under the proposed rule if it determines that the account will not be used to provide banking services indirectly to Multibanka. FinCEN specifically solicits comment on the requirement under the proposed rule that a covered financial institution block indirect access to Multibanka once such indirect access is identified.

Section 103.191(b)(3) of the proposed rule clarifies that the rule does not impose any reporting requirement upon any covered financial institution that is not otherwise required by applicable law or regulation. A covered financial institution must, however, document its compliance with the requirement that it notify its correspondent accountholders that they may not provide Multibanka with access to the correspondent account maintained at the covered financial institution.

FinCEN invites comments on all aspects of the proposal to prohibit the opening or maintaining of correspondent accounts for or on behalf of Multibanka, and specifically invites comments on the following matters:

1. The appropriate form, scope, and timing of the notice to correspondent accountholders that would be required under the rule;

2. The appropriate scope of the proposed requirement for a covered financial institution to take reasonable steps to identify any indirect use of its correspondent accounts by Multibanka;

3. The appropriate steps a covered financial institution should take once it identifies an indirect use of one of its correspondent accounts by Multibanka; and

4. The impact of the proposed special measure upon any legitimate transactions conducted with Multibanka by U.S. persons and entities, foreign persons, entities, and governments, and multilateral organizations doing legitimate business with persons, entities, or Latvia, or operating a legitimate business in Latvia.

It is hereby certified that this proposed rule will not have a significant economic impact on a substantial number of small entities. FinCEN understands that Multibanka maintains correspondent accounts with few institutions in the United States. Thus, the prohibition on maintaining such accounts will not have a significant impact on a substantial number of small entities. In addition, all U.S. persons, including U.S. financial institutions, should currently exercise some degree of due diligence in order to comply with U.S. sanctions programs administered by OFAC, which can easily be modified to monitor for the direct and indirect use of correspondent accounts by Multibanka. Thus, the special due diligence that would be required by this rulemaking—i.e., the one-time transmittal of notice to correspondent accountholders, and the screening of transactions to identify any indirect use of correspondent accounts—is not expected to impose a significant additional economic burden upon small U.S. financial institutions. FinCEN invites comments from members of the public who believe there will be a significant economic impact on small entities.

The collection of information contained in this proposed rule is being submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be sent (preferably by fax (202-395-6974)) to Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Office of Management and Budget, Paperwork Reduction Project (1506), Washington, DC 20503 (or by e-mail to Alexander_T._Hunt@omb.eop.gov), with a copy to FinCEN by mail or e-mail at the addresses previously specified. Comments on the collection of information should be received by May 26, 2005. In accordance with the requirements of the Paperwork Reduction Act of 1995, 44 U.S.C. 3506(c)(2)(A), and its implementing regulations, 5 CFR 1320, the following information concerning the collection of information as required by 31 CFR 103.191 is presented to assist those persons wishing to comment on the information collection.

The collection of information in this proposed rule is in 31 CFR 103.191(b)(2)(i) and 31 CFR 103.191(b)(3)(i). The disclosure requirement in 31 CFR 103.191(b)(2)(i) is intended to ensure cooperation from correspondent accountholders in denying Multibanka access to the U.S. financial system, as well as to increase awareness within the international financial community of the risks and deficiencies of Multibanka. The information required to be maintained by 31 CFR 103.191(b)(3)(i) will be used by Federal agencies and certain self-regulatory organizations to verify compliance by covered financial institutions with the provisions of 31 CFR 103.191. The class of financial institutions affected by the disclosure requirement is identical to the class of financial institutions affected by the recordkeeping requirement. The collection of information is mandatory.

Description of Affected Financial Institutions: Banks, broker-dealers in securities, futures commission merchants and introducing brokers, and mutual funds maintaining correspondent accounts.

Estimate Number of Affected Financial Institutions: 5,000.

Estimated Average Annual Burden Hours Per Affected Financial Institution: The estimated average burden associated with the collection of information in this proposed rule is one hour per affected financial institution.

Estimated Total Annual Burden: 5,000 hours.

FinCEN specifically invites comments on: (a) Whether the proposed collection of information is necessary for the proper performance of the mission of FinCEN, including whether the information shall have practical utility; (b) the accuracy of FinCEN's estimate of the burden of the proposed collection of information; (c) ways to enhance the quality, utility, and clarity of the information required to be maintained; (d) ways to minimize the burden of the required collection of information, including through the use of automated collection techniques or other forms of information technology; and (e) estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to maintain the information.

This proposed rule is not a significant regulatory action for purposes of Executive Order 12866, “Regulatory Planning and Review.”

For the reasons set forth in the preamble, part 103 of title 31 of the Code of Federal Regulations is proposed to be amended as follows:

On October 26, 2001, the President signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act), Public Law 107-56. Title III of the USA PATRIOT Act amends the anti-money laundering provisions of the Bank Secrecy Act (BSA), codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5314, 5316-5332, to promote the prevention, detection, and prosecution of international money laundering and the financing of terrorism. Regulations implementing the BSA appear at 31 CFR Part 103. The authority of the Secretary of the Treasury (“the Secretary”) to administer the BSA and its implementing regulations has been delegated to the Director of FinCEN.1

Section 311 of the USA PATRIOT Act (“section 311”) added section 5318A to the BSA, granting the Secretary the authority, upon finding that reasonable grounds exist for concluding that a foreign jurisdiction, institution, class of transactions, or type of account is of “primary money laundering concern,” to require domestic financial institutions and financial agencies to take certain “special measures” against the primary money laundering concern. Section 311 identifies factors for the Secretary to consider and federal agencies to consult before the Secretary may conclude that a jurisdiction, institution, class of transactions, or type of account is of primary money laundering concern. The statute also provides similar procedures, including factors and consultation requirements, for selecting the specific special measures to be imposed against the primary money laundering concern.

Taken as a whole, section 311 provides the Secretary with a range of options that can be adapted to target specific money laundering concerns most effectively. These options give the Secretary the authority to bring additional pressure on those jurisdictions and institutions that pose money laundering threats. Through the imposition of various special measures, the Secretary can gain more information about the concerned jurisdictions, institutions, transactions, and accounts; can more effectively monitor the respective jurisdictions, institutions, transactions, and accounts; and/or can protect U.S. financial institutions from involvement with jurisdictions, institutions, transactions, or accounts that pose a money laundering concern.

Before making a finding that reasonable grounds exist for concluding that a foreign financial institution is of primary money laundering concern, the Secretary is required by the Bank Secrecy Act to consult with both the Secretary of State and the Attorney General. The Secretary also is required by section 311 to consider “such information as the Secretary determines to be relevant, including the following potentially relevant factors:”

• The extent to which such financial institution is used to facilitate or promote money laundering in or through the jurisdiction;

• The extent to which such financial institution is used for legitimate business purposes in the jurisdiction; and

• The extent to which the finding that the institution is of primary money laundering concern is sufficient to ensure, with respect to transactions involving the institution operating in the jurisdiction, that the purposes of the BSA continue to be fulfilled, and to guard against international money laundering and other financial crimes.

If the Secretary determines that a foreign financial institution is of primary money laundering concern, the Secretary must determine the appropriate special measure(s) to address the specific money laundering risks. Section 311 provides a range of special measures that can be imposed individually, jointly, in any combination, and in any sequence.2 The Secretary's imposition of special measures requires additional consultations to be made and factors to be considered. The statute requires the Secretary to consult with appropriate federal agencies and other interested parties 3 and to consider the following specific factors:

• Whether similar action has been or is being taken by other nations or multilateral groups;

• Whether the imposition of any particular special measure would create a significant competitive disadvantage, including any undue cost or burden associated with compliance, for financial institutions organized or licensed in the United States;

• The extent to which the action or the timing of the action would have a significant adverse systemic impact on the international payment, clearance, and settlement system, or on legitimate business activities involving the particular institution; and

• The effect of the action on United States national security and foreign policy.4

In this rulemaking, FinCEN proposes the imposition of the fifth special measure (31 U.S.C. 5318A(b)(5)) against VEF, a commercial bank in Latvia. The fifth special measure prohibits or conditions the opening or maintaining of correspondent or payable-through accounts for the designated institution by U.S. financial institutions. This special measure may be imposed only through the issuance of a regulation.

VEF is headquartered in Riga, the capital of the Republic of Latvia. VEF is one of the smallest of Latvia's 23 banks, reported to have approximately $80 million in assets and 87 employees. It has one subsidiary, Veiksmes līzings, which offers financial leasing and factoring services. In addition to its headquarters in Riga, VEF has one branch in Riga, and one representative office in the Czech Republic. VEF offers corporate and private banking services, issues a variety of credit cards for non-Latvians, and provides currency exchange through Internet banking services, i.e. virtual currencies. In addition, according to VEF's financial statements, it maintains 34 correspondent accounts with countries worldwide, including at least one account in the United States.

VEF offers confidential banking services for non-Latvian customers. In fact, VEF's Web site advertises, “VEF Banka guarantees keeping in secret customer information (information about customer's operations, account balance and other bank operations). It guarantees not revealing this information to third person except the cases, when the customer has agreed that the information can be revealed or when it is demanded by the legislation of the Republic of Latvia.” Another section of VEF's Web site lists documents (from countries frequently associated with money laundering activities) that are required to open a VEF corporate bank account. According to the bank's financial statements, a large portion of the bank's deposits comes from private companies. Less than 20 percent of these deposits are from individuals or companies located in Latvia. A large number of foreign depositors or a large percentage of assets in foreign funds are both indicators that a bank may be used to launder money. Additionally, approximately 75 percent of the bank's fee income and commissions are generated from payment cards and money transfers, both incoming and outgoing, from correspondent banks.

The bank's dealings with foreign shell companies, provision of confidential banking services, and lack of controls and procedures adequate to the risks involved, make VEF vulnerable to money laundering and other financial crimes. As a result of the significant number of credit and debit transactions involving entities that appear to be shell corporations banking at VEF, some U.S. financial institutions have already closed correspondent relationships with VEF.

Latvia's role as a regional financial center, the number of commercial banks with respect to its size, and those banks' sizeable non-resident deposit base continue to pose significant money laundering risks. Latvian authorities recently have sought tighter legislative controls, regulations, and “best practices” designed to fight financial crime. Despite Latvia's recent efforts and amended laws, however, money laundering in Latvia remains a concern. Latvia's geographical position, situated by the Baltic Sea and bordering Russia, Estonia, Belarus, and Lithuania, make it an attractive transit country for both legitimate and illegitimate trade. Sources of laundered money in these countries include counterfeiting, corruption, arms trafficking, contraband smuggling, and other crimes. It is believed that most of Latvia's narcotics trafficking is conducted by organized crime groups that began with cigarette and alcohol smuggling and then progressed to narcotics.

Of particular concern is that many of Latvia's institutions do not appear to serve the Latvian community, but instead serve suspect foreign private shell companies. A common way for criminals to disguise illegal proceeds is to establish shell companies in countries known for lax enforcement of anti-money laundering laws. The criminals use the shell companies to conceal the true ownership of the accounts and assets, which is ideal for the laundering of funds. Similarly, as mentioned above, a disproportionate amount of foreign depositors or assets may indicate that a bank is being used to launder money or evade taxes. Latvia's 23 banks held approximately $5 billion in nonresident deposits at the end of 2004, mainly from Russia and other parts of the former Soviet Union. These deposits accounted for more than half of all the money held in Latvian banks.

Despite growing efforts by the Latvian government for reform, material weaknesses in the implementation and enforcement of its anti-money laundering laws exist. To date there have been no forfeitures of illicit proceeds based on money laundering. In addition, suspicious activity reporting thresholds remain high, at nearly 40,000 LATS (about $80,000 dollars) for most transactions, which fails to capture significant activity below this threshold. Furthermore, since 2004, only two money laundering cases have been tried in Latvian courts, with both cases ending in acquittals.

Latvia has a general reputation for permissive bank secrecy laws and lax enforcement, as evidenced by multiple non-Latvian web sites that offer to establish offshore accounts with Latvian banks in general, and VEF, in particular. The sites claim that Latvian banks offer secure and confidential banking, especially through online banking services. FinCEN also has reason to believe that certain Latvian financial institutions are used by online criminal groups, frequently referred to as “carding” groups, to launder the proceeds of their illegal activities. Such groups consist of computer hackers and other criminals that use the Internet as a means of perpetrating credit card fraud, identity theft, and related financial crimes. One of the primary concerns of carding group members is their ability to convert the funds obtained through fraud into cash. Anonymity is another major consideration for online criminals. Reports substantiate that in order to support these two needs, a significant number of carders have turned to Latvian financial institutions for the safe and quasi-anonymous cashing out of their illegal proceeds. FinCEN has additional reason to believe that certain Latvian financial institutions allow non-citizens to open accounts over the Internet, and offer anonymous ATM cards with high or no withdrawal limits.

Latvia has taken steps to address money laundering risks and corruption. In February 2004, a new anti-money laundering law removed some barriers that impeded the prosecution of money laundering. The law expanded the categories of financial institutions covered by reporting requirements to include auditors, lawyers, and high-value dealers, as well as credit institutions. The law also recognizes terrorism as a predicate offense for money laundering.

Recognizing the existence of widespread official corruption, the Latvian government, in January 2002, established the Anti-Corruption Bureau (ACB), an independent agency to combat public corruption by investigating and prosecuting Latvian officials involved in unlawful activities. In 2004, the ACB reviewed over 700 cases of suspected public corruption. Although this initiative is encouraging, FinCEN considers the high levels of corruption in Latvia's government and security forces an impediment both to its international information-sharing efforts and to the fair enforcement of Latvia's anti-money laundering laws.

According to the International Narcotics Strategy Control Report (INSCR) published in March 2005 by the U.S. Department of State, Latvia's banking system is vulnerable to the laundering of narcotics proceeds. The report designates Latvia a jurisdiction of “primary concern.” “Jurisdictions of Primary Concern” in INSCR are jurisdictions that are identified as “major money laundering countries,” that is, countries “whose financial institutions engage in currency transactions involving significant amounts of proceeds from international narcotics trafficking.”

Based on a review and analysis of relevant information, consultations with relevant federal agencies and departments, and after consideration of the factors enumerated in section 311, the Secretary, through his delegate, the Director of FinCEN, has determined that reasonable grounds exist for concluding that VEF is a financial institution of primary money laundering concern based on a number of factors, including:

FinCEN has determined, based upon a variety of sources, that VEF is being used to facilitate or promote money laundering and other financial crimes. Proceeds of illicit activity have been transferred by shell companies with no apparent legitimate business purpose to or through correspondent accounts held by VEF at U.S. financial institutions. As already stated, criminals frequently use shell companies to launder the proceeds of their crimes. A significant number of companies, organized in various countries including the United States, have used accounts at VEF to move millions of U.S. dollars around the world. In a four-month period, VEF initiated or accepted on behalf of a single shell corporation over 300 wire transfers totaling more than $26 million, involving such countries as the United Arab Emirates, Kuwait, Russia, India, and China. In addition, for a two-year period, VEF transferred over $200 million on behalf of two highly suspect corporate accountholders, which is a substantial amount of wire activity for VEF's size.

Many of the private shell companies holding accounts at VEF lack proper documentation of ownership, annual reports, and the reason for the business transactions, while other companies had no listed telephone numbers. Due to concerns about transactions by such companies through accounts at VEF, some U.S. financial institutions have already terminated their correspondent relationships with VEF.

Several accountholders at VEF have repeatedly engaged in a pattern of activity indicative of money laundering. In fact, several VEF accountholders are linked to an international Internet crime organization that has been indicted in federal court for electronic theft of personal identifying information, credit card and debit card fraud, and the production and sale of false identification documents. The defendants and their co-conspirators commonly sent and received payment for illicit merchandise and services via money transfers or digital currency services such as “E-Gold” or “Web Money” transfers. As discussed below, Web Money purportedly holds an account at VEF.

One reason that Internet financial crime groups are interested in opening accounts at VEF is that the “Visa Electron” card associated with a VEF account has no limit on the amount of money that can be withdrawn from an ATM. The ability to make limitless ATM withdrawals is an essential component to the execution of large financial fraud schemes typically associated with carding networks. In addition, the U.S. government has reason to believe that individuals who wish to obtain a Web Money Card will be issued a card linked to a sub-account from Web Money Card's main account at VEF. Criminals who have applied for, obtained, and used Web Money Cards claim that VEF requires a notarized copy of a photo identification document to open an account. The legitimacy of these documents and the notary stamp, however, are reportedly never verified by VEF. Given the level of sophistication of many of these criminals, obtaining high-quality fraudulent identification documents, including a fraudulent notary's stamp, is not a difficult task. Through Web Money's accounts at VEF, these online criminal groups have used VEF to launder their illicit proceeds.

It is difficult to determine the extent to which VEF is used for legitimate purposes. As already stated, inordinately high percentages of foreign assets or depositors and the use of a bank by shell companies are both indicators of possible money laundering activities. A significant portion of VEF's business is with shell companies. As already stated, the bank has a reputation for servicing foreign shell companies as evidenced by the many Web sites advertising bank account opening services for such entities. VEF is an important banking resource for such companies who use VEF to access the international financial system to pursue illicit financial activities. FinCEN believes that any legitimate use of VEF is significantly outweighed by its use to promote or facilitate money laundering and other financial crimes. Nevertheless, FinCEN specifically solicits comments on the impact of the proposed special measure upon any legitimate transactions conducted with VEF involving, in particular, U.S. persons or entities, foreign persons, entities, and governments, and multilateral organizations doing legitimate business with persons, entities, or the government of the jurisdiction or operating in the jurisdiction.

As detailed above, FinCEN has reasonable grounds to conclude that VEF is being used to promote or facilitate international money laundering. Currently, there are no protective measures that specifically target VEF. Thus, finding VEF to be a financial institution of primary money laundering concern and prohibiting the maintenance of correspondent accounts for that institution are necessary steps to prevent suspect accountholders at VEF from accessing the U.S. financial system to facilitate money laundering or to engage in any other criminal purpose. The proposed special measure would not only prohibit U.S. financial institutions from maintaining direct correspondent relationships with VEF, but also would require them to take reasonable steps to prevent indirect use of correspondent services by VEF through intermediary financial institutions. The finding of primary money laundering concern and the imposition of the special measure also will bring criminal conduct occurring at or through VEF to the attention of the international financial community and, it is hoped, further limit the bank's ability to be used for money laundering or for other criminal purposes.

As a result of the finding that VEF is a financial institution of primary money laundering concern, and based upon the additional consultations and the consideration of relevant factors, the Secretary, through his delegate, the Director of FinCEN, has determined that reasonable grounds exist for the imposition of the special measure authorized by 31 U.S.C. 5318A(b)(5).5 That special measure authorizes the prohibition of opening or maintaining correspondent accounts 6 by any domestic financial institution or agency for or on behalf of a targeted financial institution. A discussion of the additional section 311 factors relevant to imposing this particular special measure follows.

Other countries and multilateral groups have not, as yet, taken action similar to that proposed in this rulemaking to prohibit domestic financial institutions and agencies from opening or maintaining a correspondent account for or on behalf of VEF, and to require those domestic financial institutions and agencies to screen their correspondents for nested correspondent accounts held by VEF. FinCEN encourages other countries to take similar action based on the findings contained in this rulemaking. In the absence of similar action by other countries, it is even more imperative that the fifth special measure be imposed in order to prevent access by VEF to the U.S. financial system.

The fifth special measure sought to be imposed by this rulemaking would prohibit covered financial institutions from opening and maintaining correspondent accounts for, or on behalf of, VEF. As a corollary to this measure, covered financial institutions also would be required to take reasonable steps to apply special due diligence, as set forth below, to all of their correspondent accounts to help ensure that no such account is being used indirectly to provide services to VEF. FinCEN does not expect the burden associated with these requirements to be significant, given its understanding that few U.S. banks currently maintain correspondent accounts for VEF. There is a minimal burden involved in transmitting a one-time notice to all correspondent accountholders concerning the prohibition on indirectly providing services to VEF. In addition, all U.S. financial institutions currently apply some degree of due diligence to the transactions or accounts subject to sanctions administered by the Office of Foreign Assets Control (OFAC) of the Department of the Treasury. As explained in more detail in the section-by-section analysis below, financial institutions should be able to easily adapt their current screening procedures for OFAC sanctions to comply with this special measure. Thus, the special due diligence that would be required by this rulemaking is not expected to impose a significant additional burden upon U.S. financial institutions.

This proposed rulemaking targets VEF specifically; it does not target a class of financial transactions (such as wire transfers) or a particular jurisdiction. VEF is not a major participant in the international payment system and is not relied upon by the international banking community for clearance or settlement services. Thus, the imposition of the fifth special measure against VEF will not have a significant adverse systemic impact on the international payment, clearance, and settlement system. In light of the reasons for imposing this special measure, FinCEN does not believe that it will impose an undue burden on legitimate business activities, and notes that the presence of approximately 15 larger banks in Latvia will alleviate the burden on legitimate business activities within that jurisdiction.

The exclusion from the U.S. financial system of banks that serve as conduits for significant money laundering activity and other financial crimes enhances national security by making it more difficult for money launderers and other criminals to access the substantial resources of the U.S. financial system. In addition, the imposition of the fifth special measure against VEF would complement the U.S. Government's overall foreign policy strategy of making entry into the U.S. financial system more difficult for high-risk financial institutions located in jurisdictions that have lax anti-money laundering controls. More generally, the imposition of the fifth special measure would complement diplomatic actions undertaken by both the Latvian and U.S. Governments to expose and disrupt international money laundering and other financial crimes.

Therefore, after conducting the required consultations and weighing the relevant factors, FinCEN has determined that reasonable grounds exist for concluding that VEF is a financial institution of primary money laundering concern and for imposing the special measure authorized by 31 U.S.C. 5318A(b)(5).

The proposed rule would prohibit covered financial institutions from establishing, maintaining, administering, or managing in the United States any correspondent account for, or on behalf of, VEF. As a corollary to this prohibition, covered financial institutions would be required to apply special due diligence to their correspondent accounts to guard against their indirect use by VEF. At a minimum, that special due diligence must include two elements. First, a covered financial institution must notify its correspondent accountholders that they may not provide VEF with access to the correspondent account maintained at the covered financial institution. Second, a covered financial institution must take reasonable steps to identify any indirect use of its correspondent accounts by VEF, to the extent that such indirect use can be determined from transactional records maintained by the covered financial institution in the normal course of business. A covered financial institution must take a risk-based approach when deciding what, if any, other due diligence measures it should adopt to guard against the indirect use of its correspondent accounts by VEF, based on risk factors such as the type of services it offers and geographic locations of its correspondents.

Section 103.192(a)(1) defines the term “correspondent account” by reference to the definition contained in 31 CFR 103.175(d)(1)(ii). Section 103.175(d)(1)(ii) defines a correspondent account to mean an account established to receive deposits from, or make payments or other disbursements on behalf of, a foreign bank, or to handle other financial transactions related to the foreign bank.

In the case of a U.S. depository institution, this broad definition would include most types of banking relationships between a U.S. depository institution and a foreign bank, including payable-through accounts.

In the case of securities broker-dealers, futures commission merchants, introducing brokers, and investment companies that are open-end companies (mutual funds), a correspondent account would include any account that permits the foreign bank to engage in (1) trading in securities and commodity futures or options, (2) funds transfers, or (3) other types of financial transactions.

FinCEN is using the same definition for purposes of the proposed rule as that established in the final rule implementing sections 313 and 319(b) of the USA PATRIOT Act,7 except that the term is being expanded to cover such accounts maintained by mutual funds, futures commission merchants, and introducing brokers.

Section 103.192(a)(2) of the proposed rule defines covered financial institution to mean all of the following: any insured bank (as defined in section 3(h) of the Federal Deposit Insurance Act (12 U.S.C. 1813(h)); a commercial bank or trust company; a private banker; an agency or branch of a foreign bank in the United States; a credit union; a thrift institution; a corporation acting under section 25A of the Federal Reserve Act (12 U.S.C. 611 et seq.); a broker or dealer registered or required to register with the SEC under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.); a futures commission merchant or an introducing broker registered, or required to register, with the CFTC under the Commodity Exchange Act (7 U.S.C. 1 et seq.); and an investment company (as defined in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3)) that is an open-end company (as defined in section 5 of the Investment Company Act of 1940 (15 U.S.C. 80a-5)) that is registered, or required to register, with the SEC under Section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8).

Section 103.192(a)(3) of the proposed rule defines VEF to include all branches, offices, and subsidiaries of VEF operating in Latvia or in any other jurisdiction. Veiksmes lizings, and any of its branches, is included in the definition. FinCEN will provide information regarding the existence or establishment of any other subsidiaries as it becomes available. Nevertheless, covered financial institutions should take commercially reasonable measures to determine whether a customer is a subsidiary of VEF.

For purposes of complying with the proposed rule's prohibition on the opening or maintaining of correspondent accounts for, or on behalf of, VEF, FinCEN expects that a covered financial institution will take such steps that a reasonable and prudent financial institution would take to protect itself from loan fraud or other fraud or loss based on misidentification of a person's status.

Section 103.192(b)(1) of the proposed rule prohibits all covered financial institutions from establishing, maintaining, administering, or managing a correspondent account in the United States for, or on behalf of, VEF. The prohibition would require all covered financial institutions to review their account records to ensure that they maintain no accounts directly for, or on behalf of, VEF.

As a corollary to the prohibition on maintaining correspondent accounts directly for VEF, section 103.192(b)(2) requires a covered financial institution to apply special due diligence to its correspondent accounts that is reasonably designed to guard against their indirect use by VEF. At a minimum, that special due diligence must include notifying correspondent accountholders that they may not provide VEF with access to the correspondent account maintained at the covered financial institution. For example, a covered financial institution may satisfy this requirement by transmitting the following notice to all of its correspondent accountholders:

The purpose of the notice requirement is to help ensure cooperation from correspondent accountholders in denying VEF access to the U.S. financial system, as well as to increase awareness within the international financial community of the risks and deficiencies of VEF. However, FinCEN does not require or expect a covered financial institution to obtain a certification from its correspondent accountholders that indirect access will not be provided in order to comply with this notice requirement. Instead, methods of compliance with the notice requirement could include, for example, transmitting a one-time notice by mail, fax, or e-mail to a covered financial institution's correspondent account customers informing them that they may not provide VEF with access to the covered financial institution's correspondent account, or including such information in the next regularly occurring transmittal from the covered financial institution to its correspondent accountholders. FinCEN specifically solicits comments on the appropriate form, scope, and timing of the notice that would be required under the rule.

A covered financial institution also would be required under this rulemaking to take reasonable steps to identify any indirect use of its correspondent accounts by VEF, to the extent that such indirect use can be determined from transactional records maintained by the covered financial institution in the normal course of business. For example, a covered financial institution would be expected to apply an appropriate screening mechanism to be able to identify a funds transfer order that on its face listed VEF as the originator's or beneficiary's financial institution, or otherwise referenced VEF. An appropriate screening mechanism could be the mechanism used by a covered financial institution to comply with sanctions programs administered by OFAC. FinCEN specifically solicits comments on the requirement under the proposed rule that a covered financial institution take reasonable steps to screen its correspondent accounts in order to identify any indirect use of such accounts by VEF.

Notifying its correspondent accountholders and taking reasonable steps to identify any indirect use of its correspondent accounts by VEF in the manner discussed above are the minimum due diligence requirements under the proposed rule. Beyond these minimum steps, a covered financial institution should adopt a risk-based approach for determining what, if any, other due diligence measures it should implement to guard against the indirect use of its correspondents accounts by VEF, based on risk factors such as the type of services it offers and the geographic locations of its correspondent accountholders.

A covered financial institution that obtains knowledge that a correspondent account is being used by a foreign bank to provide indirect access to VEF must take all appropriate steps to block such indirect access, including, where necessary, terminating the correspondent account. A covered financial institution may afford the foreign bank a reasonable opportunity to take corrective action prior to terminating the correspondent account. Should the foreign bank refuse to comply, or if the covered financial institution cannot obtain adequate assurances that the account will not be available to VEF, the covered financial institution must terminate the account within a commercially reasonable time. This means that the covered financial institution should not permit the foreign bank to establish any new positions or execute any transactions through the account, other than those necessary to close the account. A covered financial institution may reestablish an account closed under the proposed rule if it determines that the account will not be used to provide banking services indirectly to VEF. FinCEN specifically solicits comment on the requirement under the proposed rule that a covered financial institution block indirect access to VEF once such indirect access is identified.

Section 103.192(b)(3) of the proposed rule clarifies that the rule does not impose any reporting requirement upon any covered financial institution that is not otherwise required by applicable law or regulation. A covered financial institution must, however, document its compliance with the requirement that it notify its correspondent accountholders that they may not provide VEF with access to the correspondent account maintained at the covered financial institution.

FinCEN invites comments on all aspects of the proposal to prohibit the opening or maintaining of correspondent accounts for or on behalf of VEF, and specifically invites comments on the following matters:

1. The appropriate form, scope, and timing of the notice to correspondent accountholders that would be required under the rule;

2. The appropriate scope of the proposed requirement for a covered financial institution to take reasonable steps to identify any indirect use of its correspondent accounts by VEF;

3. The appropriate steps a covered financial institution should take once it identifies an indirect use of one of its correspondent accounts by VEF; and

4. The impact of the proposed special measure upon any legitimate transactions conducted with VEF by U.S. persons and entities, foreign persons, entities, and governments, and multilateral organizations doing legitimate business with persons, entities, or Latvia, or operating a legitimate business in Latvia.

It is hereby certified that this proposed rule will not have a significant economic impact on a substantial number of small entities. FinCEN understands that VEF maintains a correspondent account at one large bank in the United States. Thus, the prohibition on maintaining such accounts will not have a significant impact on a substantial number of small entities. In addition, all U.S. persons, including U.S. financial institutions, should currently exercise some degree of due diligence in order to comply with U.S. sanctions programs administered by OFAC, which can easily be modified to monitor for the direct and indirect use of correspondent accounts by VEF. Thus, the special due diligence that would be required by this rulemaking—i.e., the one-time transmittal of notice to correspondent accountholders, and the screening of transactions to identify any indirect use of correspondent accounts—is not expected to impose a significant additional economic burden upon small U.S. financial institutions. FinCEN invites comments from members of the public who believe there will be a significant economic impact on small entities.

The collection of information contained in this proposed rule is being submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be sent (preferably by fax (202-395-6974)) to Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Office of Management and Budget, Paperwork Reduction Project (1506), Washington, DC 20503 (or by e-mail to Alexander_T._Hunt@omb.eop.gov), with a copy to FinCEN by mail or e-mail at the addresses previously specified. Comments on the collection of information should be received by May 26, 2005. In accordance with the requirements of the Paperwork Reduction Act of 1995, 44 U.S.C. 3506(c)(2)(A), and its implementing regulations, 5 CFR 1320, the following information concerning the collection of information as required by 31 CFR 103.192 is presented to assist those persons wishing to comment on the information collection.

The collection of information in this proposed rule is in 31 CFR 103.192(b)(2)(i) and 31 CFR 103.192(b)(3)(i). The disclosure requirement in 31 CFR 103.192(b)(2)(i) is intended to ensure cooperation from correspondent accountholders in denying VEF access to the U.S. financial system, as well as to increase awareness within the international financial community of the risks and deficiencies of VEF. The information required to be maintained by 31 CFR 103.192(b)(3)(i) will be used by federal agencies and certain self-regulatory organizations to verify compliance by covered financial institutions with the provisions of 31 CFR 103.192. The class of financial institutions affected by the disclosure requirement is identical to the class of financial institutions affected by the recordkeeping requirement. The collection of information is mandatory.

Description of Affected Financial Institutions: Banks, broker-dealers in securities, futures commission merchants and introducing brokers, and mutual funds maintaining correspondent accounts.

Estimate Number of Affected Financial Institutions: 5,000.

Estimated Average Annual Burden Hours Per Affected Financial Institution: The estimated average burden associated with the collection of information in this proposed rule is one hour per affected financial institution.

Estimated Total Annual Burden: 5,000 hours.

FinCEN specifically invites comments on: (a) Whether the proposed collection of information is necessary for the proper performance of the mission of FinCEN, including whether the information shall have practical utility; (b) the accuracy of FinCEN's estimate of the burden of the proposed collection of information; (c) ways to enhance the quality, utility, and clarity of the information required to be maintained; (d) ways to minimize the burden of the required collection of information, including through the use of automated collection techniques or other forms of information technology; and (e) estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to maintain the information.

This proposed rule is not a significant regulatory action for purposes of Executive Order 12866, “Regulatory Planning and Review.”

For the reasons set forth in the preamble, part 103 of title 31 of the Code of Federal Regulations is proposed to be amended as follows:

We encourage you to participate in this rulemaking by submitting comments and related material. If you do so, please include your name and address, identify the docket number for this rulemaking (CGD 07-05-019), indicate the specific section of this document to which each comment applies, and give the reason for each comment. Please submit all comments and related material in an unbound format, no larger than 8 by 11 inches, suitable for copying. If you would like to know they reached us, please enclose a stamped, self-addressed postcard or envelope. We will consider all comments and material received during the comment period. We may change this proposed rule in view of them.

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

The Offshore Super Series will sponsor an offshore powerboat race on the near-shore waters of Fort Myers Beach, Florida. The annual event is proposed for the second consecutive Saturday and Sunday in June from 10 a.m. to 5 p.m. The event will host approximately 50 participant vessels that travel up to speeds of 130 mph, and approximately 300 spectator craft. The proposed regulation is needed to provide for the safety of life on the Navigable waters of the United States during the Annual Offshore Super Series Boat Race in the vicinity of the near-shore waters off Fort Myers Beach, Florida. The anticipated concentration of spectator and participant vessels associated with the event poses a safety concern, which is addressed in this proposed special local regulation.

The proposed regulation would include a regulated area around the racecourse that would prohibit all non-participant vessels and persons from entering the proposed regulated area annually from 10 a.m. to 5 p.m. on the second consecutive Saturday and Sunday of June. The proposed regulation would only permit anchoring of spectator vessels seaward of a designated spectator line. All spectator craft would be required to remain seaward of a designated spectator line. Although the proposed regulation allows continuous entry and exit to Matanzas Pass Channel for the duration of the event, the northern portion of the regulated area is in very close proximity to the channel entrance. In order to avoid incursions into the northern portion of the regulated area by vessels avoiding collision due to traffic congestion in the channel, the proposed rule would require vessels entering and exiting Matanzas Pass to proceed cautiously and take early action to avoid close-quarters situations until finally past and clear of the regulated area. This proposed regulation is intended to provide for the safety of life on the navigable waters of the United States for event participants and for mariners traveling in the vicinity of the near-shore waters of Fort Myers Beach, Florida.

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

We expect the economic impact of this proposed rule to be so minimal that a full Regulatory Evaluation under the regulatory policies and procedures of DHS is unnecessary. The proposed regulation would be in effect for only a limited time in an area where vessel traffic is limited and vessels will still be allowed to entry and exit Matanzas Pass Channel.

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

The Coast Guard certifies under 5 U.S.C. 605(b) that this proposed rule would not have a significant economic impact on a substantial number of small entities. This proposed rule may affect the following entities, some of which may be small entities: the owners and operators of vessels intending to transit near to shore at Fort Myers Beach, FL in the vicinity of Matanzas Pass annually from 10 a.m. to 5 p.m. on the second consecutive Saturday and Sunday in June. This proposed rule would not have a significant economic impact on a substantial number of small entities since it would only be in effect for a limited time in an area where vessel traffic is limited and vessels will still be allowed to enter and exit Matanzas Pass Channel.

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

Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121), we want to assist small entities in understanding this proposed rule so that they can better evaluate its effects on them and participate in the rulemaking. If the rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact the person identified in the FOR FURTHER INFORMATION CONTACT. The Coast Guard will not retaliate against small entities that question or complain about this rule or any policy or action of the Coast Guard.

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

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

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

This proposed rule would not effect a taking of private property or otherwise have taking implications under Executive Order 12630, Governmental Actions and Interference with Constitutionally Protected Property Rights.

This proposed rule meets applicable standards in sections 3(a) and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize litigation, eliminate ambiguity, and reduce burden.

We have analyzed this proposed rule under Executive Order 13045, Protection of Children from Environmental Health Risks and Safety Risks. This rule is not an economically significant rule and would not create an environmental risk to health or risk to safety that might disproportionately affect children.

This proposed rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it would not have a substantial direct effect on one or more Indian tribes, 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.

We have analyzed this proposed rule under Executive Order 13211, Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use. We have determined that it is not a “significant energy action” under that order because it is not a “significant regulatory action” under Executive Order 12866 and is not likely to have a significant adverse effect on the supply, distribution, or use of energy. The Administrator of the Office of Information and Regulatory Affairs has not designated it as a significant energy action. Therefore, it does not require a Statement of Energy Effects under Executive Order 13211.

The National Technology Transfer and Advancement Act (NTTAA) (15 U.S.C. 272 note) directs agencies to use voluntary consensus standards in their regulatory activities unless the agency provides Congress, through the Office of Management and Budget, with an explanation of why using these standards would be inconsistent with applicable law or otherwise impractical. Voluntary consensus standards are technical standards (e.g., specifications of materials, performance, design, or operation; test methods; sampling procedures; and related management systems practices) that are developed or adopted by voluntary consensus standards bodies.

This proposed rule does not use technical standards. Therefore, we did not consider the use of voluntary consensus standards.

We have analyzed this proposed rule under Commandant Instruction M16475.lD, which guides the Coast Guard in complying with the National Environmental Policy Act of 1969 (NEPA) (42 U.S.C. 4321-4370f), and have concluded that there are no factors in this case that would limit the use of a categorical exclusion under section 2.B.2 of the Instruction. Therefore, this rule is categorically excluded, under figure 2-1, paragraph (34)(h), of the Instruction, from further environmental documentation. As a special local regulation issued in conjunction with a boat race, this proposed rule satisfies the requirements of paragraph (34)(h). Under figure 2-1, paragraph (34)(h), of the Instruction, an “Environmental Analysis Check List” and a “Categorical Exclusion Determination” are not required for this rule. Comments on this section will be considered before we make the final decision on whether to categorically exclude this rule from further environmental review.

For the reasons discussed in the preamble, the Coast Guard proposes to amend 33 CFR part 100 as follows:

We encourage you to participate in this rulemaking by submitting comments and related material. If you do so, please include your name and address, identify the docket number for this rulemaking [CGD08-05-019], indicate the specific section of this document to which each comment applies, and give the reason for each comment. Please submit all comments and related material in an unbound format, no larger than 81/2 by 11 inches, suitable for copying. If you would like to know they reached us, please enclose a stamped, self-addressed postcard or envelope. We will consider all comments and material received during the comment period. We may change this proposed rule in view of them.

We do not plan to hold a public meeting. However, you may submit a request for a meeting by writing to Commander, Eighth Coast Guard District (m) at the address under ADDRESSES explaining why one would be beneficial. If we determine that a public meeting would aid this rulemaking, we will hold one at a time and place announced by a later notice in the Federal Register.

The Coast Guard proposes the establishment of a safety zone around the Thunder Horse Semi-Submersible facility, a petroleum and gas production facility in the Gulf of Mexico in Mississippi Canyon 778 (MC 778), located at position 28°11′26″ N, 88°29′44″ W.

This proposed safety zone is in the deepwater area of the Gulf of Mexico. For the purposes of this regulation it is considered to be in waters of 304.8 meters (1,000 feet) or greater depth extending to the limits of the Exclusive Economic Zone (EEZ) contiguous to the territorial sea of the United States and extending to a distance up to 200 nautical miles from the baseline from which the breadth of the sea is measured. Navigation in the area of the proposed safety zone consists of large commercial shipping vessels, fishing vessels, cruise ships, tugs with tows and the occasional recreational vessel. The deepwater area of the Gulf of Mexico also includes an extensive system of fairways. The fairway nearest the proposed safety zone is the South Pass (Mississippi River) Safety Fairway—South Pass to Sea Safety Fairway. Significant amounts of vessel traffic occur in or near the various fairways in the deepwater area.

British Petroleum America Inc., hereafter referred to as BP, has requested that the Coast Guard establish a safety zone in the Gulf of Mexico around the Thunder Horse Semi-Submersible facility.

The request for the safety zone was made due to the high level of shipping activity around the facility and the associated safety concerns for both the onboard personnel and the environment. Information provided by BP to the Coast Guard indicates that the location, production levels, and personnel levels on board the facility make it highly likely that any allision with the facility or its mooring system would result in a catastrophic event.

The Coast Guard has evaluated BP's information and concerns against Eighth Coast Guard District criteria developed to determine if an Outer Continental Shelf facility qualifies for a safety zone. Several factors were considered to determine the necessity of a safety zone for the Thunder Horse Semi-Submersible facility: (1) The facility is located approximately 50 nautical miles south of the “South Pass (Mississippi River) Safety Fairway—South Pass to Sea Safety Fairway”; (2) the facility will have a high daily production capacity of petroleum oil and gas per day; (3) the facility will be manned; and (4) the facility will be of the semi-submersible type.

We conclude that the risk of allision to the facility and the potential for loss of life and damage to the environment resulting from such an accident warrants the establishment of this proposed safety zone. The proposed rule would significantly reduce the threat of allisions, oil spills and natural gas releases and increase the safety of life, property, and the environment in the Gulf of Mexico. This proposed regulation is issued pursuant to 14 U.S.C. 85 and 43 U.S.C. 1333 as set out in the authority citation for 33 CFR part 147.

The proposed safety zone would encompass the area within 500 meters (1640.4 feet) from each point on the Thunder Horse's structure outer edge. No vessel would be allowed to enter or remain in this proposed safety zone except the following: An attending vessel; a vessel under 100 feet in length overall not engaged in towing; or a vessel authorized by the Eighth Coast Guard District Commander.

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

We expect the economic impact of this proposed rule to be so minimal that a full regulatory evaluation under the regulatory policies and procedures of DHS is unnecessary. The impacts on routine navigation are expected to be minimal because the proposed safety zone will not overlap any of the safety fairways within the Gulf of Mexico.

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

The Coast Guard certifies under 5 U.S.C. 605(b) that this proposed rule would not have a significant economic impact on a substantial number of small entities. Since the Thunder Horse Semi-Submersible will be located far offshore, few privately owned fishing vessels and recreational boats/yachts operate in the area and alternate routes are available for those vessels. Use of an alternate route may cause a vessel to incur a delay of 4 to 10 minutes in arriving at their destinations depending on how fast the vessel is traveling. Therefore, the Coast Guard expects the impact of this proposed rule on small entities to be minimal.

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

Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121), we want to assist small entities in understanding this proposed rule so that they can better evaluate its effects on them and participate in the rulemaking. If the rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact LT Kevin Lynn, Project Manager for Eighth Coast Guard District Commander, Hale Boggs Federal Bldg., 500 Poydras Street, New Orleans, LA 70130, telephone (504) 589-6271.

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

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

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

This proposed rule will not effect a taking of private property or otherwise have taking implications under Executive Order 12630, Governmental Actions and Interference with Constitutionally Protected Property Rights.

This proposed rule meets applicable standards in sections 3(a) and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize litigation, eliminate ambiguity, and reduce burden.

We have analyzed this proposed rule under Executive Order 13045, Protection of Children from Environmental Health Risks and Safety Risks. This rule is not an economically significant rule and does not create an environmental risk to health or risk to safety that may disproportionately affect children.

This proposed rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it would not have a substantial direct effect on one or more Indian tribes, 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.

We have analyzed this proposed rule under Executive Order 13211, Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use. We have determined that it is not a “significant energy action” under that Order because it is not a “significant regulatory action” under Executive Order 12866 and is not likely to have a significant adverse effect on the supply, distribution, or use of energy. The Administrator of the Office of Information and Regulatory Affairs has not designated it as a significant energy action. Therefore, it does not require a Statement of Energy Effects under Executive Order 13211.

The National Technology Transfer and Advancement Act (NTTAA) (15 U.S.C. 272 note) directs agencies to use voluntary consensus standards in their regulatory activities unless the agency provides Congress, through the Office of Management and Budget, with an explanation of why using these standards would be inconsistent with applicable law or otherwise impractical. Voluntary consensus standards are technical standards (e.g., specifications of materials, performance, design, or operation; test methods; sampling procedures; and related management systems practices) that are developed or adopted by voluntary consensus standards bodies.

This proposed rule does not use technical standards. Therefore, we did not consider the use of voluntary consensus standards.

We have analyzed this proposed rule under Commandant Instruction M16475.1D, which guides the Coast Guard in complying with the National Environmental Policy Act of 1969 (NEPA) (42 U.S.C. 4321-4370f), and have concluded that there are no factors in this case that would limit the use of categorical exclusion under section 2.B.2 of the Instruction. Therefore, this rule is categorically excluded, under figure 2-1 paragraph (34)(g), of the instruction, from further environmental documentation because this rule is not expected to result in any significant environmental impact as described in NEPA.

A draft “Environmental Analysis Check List” and a draft “Categorical Exclusion Determination” are available in the docket where indicated under ADDRESSES. Comments on this section will be considered before we make the final decision on whether the rule should be categorically excluded from further environmental review.

For the reasons discussed in the preamble, the Coast Guard proposes to amend 33 CFR part 147 as follows:

On January 30, 2004, the Pennsylvania Department of Environmental Protection (PA DEP) submitted a revision to its State Implementation Plan (SIP) for the enhanced I/M program that applies to vehicles registered in the Pittsburgh and Philadelphia I/M Regions. On April 29, 2004, PA DEP submitted a technical amendment to the January 30, 2004 SIP revision (hereafter referred to as the January 2004 SIP revision).

The Clean Air Act (CAA) as amended in 1990 requires States to adopt an enhanced motor vehicle emissions inspection and maintenance (or I/M) program in selected areas. An I/M program is required based upon an area's air quality (i.e., whether areas violate national ambient air quality standards), the population of its metropolitan centers and whether or not the State lies within the Ozone Transport Region established by the CAA. EPA set forth regulatory requirements to guide States in adoption of I/M programs in November 1992, subsequently revising those regulations on several occasions. These regulatory requirements, hereafter referred to as EPA's I/M requirements rule, are codified at 40 CFR part 51, subpart S.

Pennsylvania adopted several iterations of enhanced I/M during the 1990s, culminating in the publication of a final I/M regulation in the September 27, 1997 edition of the Pennsylvania Bulletin (Vol. 27, No. 39), codified in Chapter 177 of the PA Code. Pennsylvania chose to adopt an I/M test network utilizing decentralized, privatized stations for operation of the program and submitted that program to EPA for SIP approval.

Through a series of rulemakings, EPA subsequently approved the Commonwealth's I/M program as part of the Pennsylvania SIP, culminating in a final rule granting full SIP approval published in the June 17, 1999 edition of the Federal Register (64 FR 32411). That prior I/M SIP approval action is hereafter referred to as EPA's June 1999 SIP approval, or simply as the June 1999 SIP approval. Pennsylvania subsequently made a minor modification to the approved SIP in July of 2003 to revise its Acceleration Simulation Mode (or ASM) testing methodology and test standards that apply to the Philadelphia area program. EPA approved that revision on August 15, 2003 (68 FR 48803).

The Clean Air Act as amended in 1990 requires States to incorporate checks of light-duty motor vehicle on-board diagnostic (OBD) systems into their I/M programs. These OBD checks are to be performed on vehicles equipped with second generation OBD systems (referred to as OBD-II). Such OBD-II-equipped vehicles were first introduced beginning in the 1994 model year, but were not available in every new light-duty vehicle until the 1996 model year. Since engines in these newer vehicles are largely electronically controlled, with their operation overseen by a computerized control unit, the operation of the engine and its supporting systems is monitored by the OBD-II software. The vehicle's OBD-II computer detects malfunctions in the operation of critical systems and components as they occur and stores information related to any such problem in its memory, while simultaneously triggering a dashboard warning light to alert the driver of a problem. Such OBD-monitored malfunctions may impact the level of air pollution emitted by the vehicle, therefore Congress required under the Clean Air Act that OBD checks be a mandatory part of I/M programs. An added benefit from OBD checks is that diagnostic information garnered from OBD checks provides for more accurate diagnosis of emission-related malfunctions than could otherwise be obtained from tailpipe emissions testing or visual inspection of the vehicles's emissions system components.

In November 1992, when EPA originally adopted its I/M requirements rule, Federal OBD-II certification standards had not yet been developed. EPA amended its 1992 I/M requirements rule in August 1996 to establish testing standards for I/M checks of OBD-II-equipped vehicles. On May 4, 1998 and again on April 5, 2001, EPA amended its I/M requirements rule specifically to address requirements for OBD checks to be performed as part of I/M programs. In order for the Commonwealth to implement these new OBD test requirements as part of its SIP's I/M program, Pennsylvania needed to amend its regulations and to submit those amendments to EPA as SIP revisions. The Commonwealth submitted two SIP revisions to EPA to incorporate OBD testing into its I/M program dated December 1, 2003 and January 30, 2004, respectively. These revisions address different geographic regions in Pennsylvania that are subject to I/M programs under the Clean Air Act. Together these SIP revisions amend the Commonwealth's prior approved I/M SIP, which EPA approved on June 17, 1999 (64 FR 32411).

EPA is proposing rulemaking action herein only upon the January 30, 2004 SIP revision. EPA is taking separate, simultaneous rulemaking action on the Commonwealth's December 1, 2003 I/M SIP revision. Please refer to that separate EPA rulemaking action for details on EPA's Federal approval of changes to the Pennsylvania I/M program that are not related to the emissions inspection testing performed in the Pittsburgh and Philadelphia areas.

On January 30, 2004, Pennsylvania submitted a revision to its enhanced I/M SIP approved by EPA on June 17, 1999 (64 FR 32411). The Commonwealth submitted a technical correction to the January 30, 2004 SIP revision on April 29, 2004. Hereafter, the corrected version is referred to as the January 2004 SIP revision. This January 2004 SIP revision serves several purposes. It serves to update the Commonwealth's emissions testing program to comply with recent changes to Federal requirements regarding incorporation of on-board diagnostic checks to enhanced I/M program areas. This SIP revision also amends the Commonwealth's prior approved SIP to alter the I/M test regimen for the Philadelphia and Pittsburgh Regions. The I/M program continues to apply on an annual basis to most 1975 and newer model year, gasoline-powered vehicles having a gross vehicle weight rating of 9,000 pounds or less that are registered in a I/M region, as defined by Pennsylvania regulation. However, pre-1996 vehicles that reach twenty-five model years in age will be required to undergo only a gas cap test and a visual inspection of certain emission control devices. Pre-1996 vehicles that are then 25 years old will no longer undergo tailpipe emissions testing.

The Philadelphia I/M Region is defined by Pennsylvania to encompass the Counties of Bucks, Chester, Delaware, Montgomery and Philadelphia. The Pittsburgh Region is comprised of Allegheny, Beaver, Washington and Westmoreland Counties. Emissions testing in both areas consists of an annual on-board diagnostic system check for 1996 and newer OBD-II-equipped vehicles and a gas cap leakage test (in order to verify a gas cap's ability to prevent evaporative hydrocarbon vapor from escaping).

Additionally, subject 1975 to 1995 vehicles (and heavy duty 1996 and newer subject vehicles) receive a gas cap leakage test and also undergo a visual anti-tampering inspection of emissions-related components. The anti-tampering inspection entails visual inspection of the following components, to ensure such components have not been removed or rendered inoperable: catalytic converter, exhaust gas recirculation (EGR) system, positive crankcase ventilation (PCV) valve, air pump, evaporative control system components and fuel tank inlet restrictor.

The type of tailpipe testing required in both the Philadelphia and Pittsburgh Regions is based upon vehicle weight and type and model year of the vehicle. Different testing regimen apply in the Philadelphia area (due to the severity of the air quality problem there) and the Pittsburgh area. The only notable change to the testing regimen from that of the prior Pennsylvania I/M SIP approved by EPA in June 1999 is, as was noted above, that pre-1996 vehicles that reach twenty-five model years in age will be required to undergo only a gas cap test and a visual inspection of certain emission control devices—but will not need to undergo tailpipe exhaust emissions testing in any form. By 2021, tailpipe exhaust emissions testing for all pre-1996 model year vehicles will be dropped altogether, in lieu of a gas cap check and a visual inspection only. Please refer to the technical support document prepared by EPA for this rulemaking action for a detailed description of the test regimen as it applies to specific vehicles (dependent on vehicle age, vehicle weight, vehicle type and the calender year of testing).

The Commonwealth's January 2004 SIP submission to EPA also includes additional supporting materials—including a new demonstration of compliance of the revised I/M programs for the Pittsburgh and Philadelphia Regions to Federal I/M performance-based standards. The Commonwealth has used MOBILE emission factor modeling to show that the program in each of these Regions meets Federal performance-based goals, as evaluated in calender year 2005 and 2007.

The Commonwealth's January 2004 SIP revision does not address minor administrative changes made by Pennsylvania that make minor changes and updates to I/M programs regardless of which geographic region such programs apply. However, the Commonwealth's revised I/M regulation contained in the January 2004 SIP revision is reflective of these administrative changes. The Commonwealth provided supporting materials and their argument for these changes as part of its December 1, 2003 I/M SIP revision. That SIP revision also addresses changes to I/M testing performed in regions outside of Philadelphia and Pittsburgh and changes to the safety inspection program in non-I/M Regions of Pennsylvania. EPA is taking separate, simultaneous rulemaking action upon the December 1, 2003 SIP revision to address those program-wide, administrative changes as they apply to all I/M-subject Regions of the Commonwealth. Please refer to EPA's proposed rulemaking for the December 1, 2003 SIP for a discussion on these minor changes. Comments related to these provisions should be directed to the docket for the December 1, 2003 SIP rulemaking action (regardless of the geographic area of concern).

Certain language adopted by Pennsylvania as part of its I/M regulation, codified at 67 PA Code Chapter 177, has been redacted by Pennsylvania from the I/M SIP revisions. Specifically, this language is omitted from both the December 2003 and the January 2004 SIP revisions as submitted to EPA. This State regulatory language provides Pennsylvania the potential to phase-down/phase-out of I/M testing of pre-1996 subject vehicles at a point in time when pre-1996 vehicles make up a preset proportion of a given region's total, I/M-subject fleet. Since this language is excluded from the SIP revisions, it is not before EPA for consideration for inclusion to the Pennsylvania SIP.

The Commonwealth has also excluded regulatory language from both the December 2003 and January 2004 SIP submissions to EPA that would set the minimum repair expenditure for failing vehicles in need of I/M-related repairs (or waiver limit) at $150 for the first two years after commencement of a new I/M program. That language is, therefore, not under consideration by EPA as a revision to the Pennsylvania SIP.

EPA is proposing to approve Pennsylvania's I/M SIP revision submitted on January 30, 2004, as amended by Pennsylvania via a technical correction on April 29, 2004. This SIP revision incorporates changes being made by Pennsylvania to its I/M program applicable in the Philadelphia and Pittsburgh I/M Regions as described herein.

For more information regarding EPA's detailed review of the Commonwealth's January 30, 2004 I/M SIP revision, please refer to the Technical Support Document (TSD) prepared by EPA in support of this rulemaking action. The TSD is part of the docket for this action and is available at the EPA office listed in the ADDRESSES portion of this proposed rulemaking. EPA is soliciting public comments on the issues discussed in this document. These comments will be considered before taking final action. Interested parties may participate in the Federal rulemaking procedure by submitting either electronic or written comments.

Under Executive Order 12866 (58 FR 51735, October 4, 1993), this proposed action is not a “significant regulatory action” and therefore is not subject to review by the Office of Management and Budget. For this reason, this action is also not subject to Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355 (May 22, 2001)). This action merely proposes to approve State law as meeting Federal requirements and imposes no additional requirements beyond those imposed by State law. Accordingly, the Administrator certifies that this proposed rule will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). Because this rule proposes to approve pre-existing requirements under State law and does not impose any additional enforceable duty beyond that required by State law, it does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4). This proposed rule also does not have a substantial direct effect on one or more Indian tribes, 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 by Executive Order 13175 (65 FR 67249, November 9, 2000), nor will it 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, as specified in Executive Order 13132 (64 FR 43255, August 10, 1999), because it merely proposes to approve a State rule implementing a Federal standard and does not alter the relationship or the distribution of power and responsibilities established in the Clean Air Act. This proposed rule also is not subject to Executive Order 13045 (62 FR 19885, April 23, 1997), because it is not economically significant.

In reviewing SIP submissions, EPA's role is to approve State choices, provided that they meet the criteria of the Clean Air Act. In this context, in the absence of a prior existing requirement for the State to use voluntary consensus standards (VCS), EPA has no authority to disapprove a SIP submission for failure to use VCS. It would thus be inconsistent with applicable law for EPA, when it reviews a SIP submission, to use VCS in place of a SIP submission that otherwise satisfies the provisions of the Clean Air Act. Thus, the requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) do not apply. As required by section 3 of Executive Order 12988 (61 FR 4729, February 7, 1996), in issuing this proposed rule, EPA has taken the necessary steps to eliminate drafting errors and ambiguity, minimize potential litigation and provide a clear legal standard for affected conduct. EPA has complied with Executive Order 12630 (53 FR 8859, March 15, 1988) by examining the takings implications of the rule in accordance with the “Attorney General's Supplemental Guidelines for the Evaluation of Risk and Avoidance of Unanticipated Takings” issued under the executive order.

This proposed rule to approve a revision to Pennsylvania's motor vehicle inspection and maintenance Program for the Pittsburgh and Philadelphia Regions does not impose an information collection burden under the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.).

I. Background

The Clean Air Act (CAA) as amended in 1990 requires states to adopt an enhanced motor vehicle emissions inspection and maintenance program for selected areas. An I/M program is required based upon an area's air quality (i.e., whether areas violate national ambient air quality standards), the population of its metropolitan centers and whether or not the state lies within the Ozone Transport Region established by the CAA. EPA set forth regulatory requirements to guide states in adoption of I/M programs in November 1992, subsequently revising those regulations on several occasions. These regulatory requirements, hereafter referred to as EPA's I/M requirements rule, are codified at 40 CFR Part 51, Subpart S.

Pennsylvania adopted several iterations of enhanced I/M during the 1990s, culminating in the publication of a final I/M regulation in the September 27, 1997 edition of the Pennsylvania Bulletin (Vol. 27, No. 39), codified in Chapter 177 of the Pa Code. Pennsylvania submitted its adopted program to EPA as a SIP revision. That program utilized a decentralized I/M testing network comprised of privately owned stations for operation of the program.

Through a series of rulemakings, EPA subsequently approved the Commonwealth's I/M program as part of the Pennsylvania SIP, culminating in a final rule granting full SIP approval published in the June 17, 1999 edition of the Federal Register (64 FR 32411). That prior I/M SIP approval action is hereafter referred to as EPA's June 1999 SIP approval, or simply as the June 1999 SIP approval. Pennsylvania subsequently made a minor modification to the approved SIP in July of 2003 to revise its Acceleration Simulation Mode (or ASM) testing methodology and test standards that apply to the Philadelphia area program. EPA approved that revision on August 15, 2003 (68 FR 48803).

The Clean Air Act as amended in 1990 requires states to incorporate checks of light-duty motor vehicle on-board diagnostic (OBD) systems as part of their I/M programs. These OBD checks are to be performed on vehicles having second generation OBD systems, referred to as OBD-II. Vehicles equipped with OBD-II systems were first introduced beginning in the 1994 model year, but not every car sold was fully compliant with OBD-II standards for light-duty vehicles until the 1996 model year. Since engines in these newer vehicles are largely electronically controlled (with their operation overseen by computerized control unit) the operation of the engine and its supporting systems can be monitored with proper software. The vehicle's OBD-II computer can detect malfunctions in the operation of critical systems and components, storing information related to any malfunction in its memory and simultaneously triggering a dashboard warning light to alert the driver of a problem. OBD-monitored malfunctions may impact air pollution emissions from the vehicle, therefore, Congress required OBD checks as a mandatory element of I/M programs under the Clean Air Act. An additional benefit of OBD testing is that diagnostic information provided by these systems provides for more accurate diagnosis of emission-related malfunctions than can otherwise be obtained from tailpipe emissions testing or from visual inspection of the vehicle emissions system.

When EPA originally adopted its I/M requirements rule in 1992, Federal OBD-II certification standards had not yet been developed. EPA later amended its I/M requirements rule in August 1996 to establish testing standards for I/M checks of OBD-II-equipped vehicles. On May 4, 1998 and again on April 5, 2001, EPA amended its I/M requirements rule specifically to address requirements for OBD checks to be performed as part of I/M programs. In order for the Commonwealth to implement these new OBD test requirements as part of its SIP's I/M program, Pennsylvania needed to amend its regulations and to submit those amendments to EPA as SIP revisions. The Commonwealth submitted two SIP revisions to EPA to incorporate OBD testing into its I/M program—one on December 1, 2003 and one on January 30, 2004. EPA is proposing rulemaking action here only upon the December 1, 2003 SIP revision. EPA is proposing a rulemaking action on the January 30, 2004 SIP revision in a separate rulemaking action. Together these SIP revisions amend the Commonwealth's prior approved I/M SIP, which EPA approved on June 17, 1999 (64 FR 32411).

On December 1, 2003, Pennsylvania submitted a revision to its enhanced I/M SIP approved by EPA on June 17, 1999 (64 FR 32411). The Commonwealth submitted a technical correction to the December 1, 2003 SIP revision on April 29, 2004. Hereafter, the corrected version is referred to as the December 2003 SIP revision. This December 2003 SIP revision serves several purposes. First, the SIP revision updates the Commonwealth's emissions testing program to comply with recent changes to Federal requirements regarding incorporation of on-board diagnostic checks to enhanced I/M program areas. Second, the SIP revision amends the prior approved SIP to alter the I/M program design to be implemented in sixteen counties where enhanced I/M had been required under prior versions of state regulation and the approved SIP.

The Commonwealth's December 2003 SIP revision revises the emissions testing regimen that will apply to sixteen previously subject counties now designated as the South Central and Northern I/M Regions. Emissions testing will continue to apply to most 1975 and newer model year, gasoline powered vehicles having a gross vehicle weight rating of 9,000 pounds or less that are registered in an I/M region. Those vehicles that are exempted or excluded from testing include current model year vehicles and any otherwise subject vehicle which has traveled less than 5,000 miles in the previous year. Emissions testing continues to be required on an annual basis, in coordination with a Pennsylvania safety inspection.

Pennsylvania's December 2003 SIP revision contains modifications to the emissions testing regulations at Chapter 177 of Title 67 of the Pennsylvania Code and public notice from the Department of Transportation that certifies that I/M testing implementation is to be phased in beginning December 1, 2003. The revised emission regulation establishes differing emissions testing regimen for each subject I/M Region. The South Central I/M Region is defined to encompass the Counties of Berks, Cumberland, Dauphin, Lancaster, Lebanon, Lehigh, Northampton and York. Emissions testing there consists of an annual on-board diagnostic system check for 1996 and newer OBD-II-equipped vehicles and a gas cap leakage test (in order to verify a gas cap's ability to prevent evaporative hydrocarbon vapor from escaping). Additionally, the subject 1975 to 1995 vehicles receive a gas cap leakage test and will also undergo a visual anti-tampering inspection of emissions-related components. The Commonwealth applies the same anti-tampering inspection in all emissions and safety program counties, entailing visual inspection of the following components to ensure such components have not been removed or rendered inoperable: Catalytic converter, exhaust gas recirculation (EGR) system, positive crankcase ventilation (PCV) valve, air pump, evaporative control system components, and fuel tank inlet restrictor.

The SIP revision defines the Northern I/M Region to include the Counties of Blair, Cambria, Centre, Erie, Lackawanna, Luzerne, Lycoming and Mercer. Emissions testing there consists of visual anti-tampering inspection of 1975 and newer vehicles, as described above, and a gas cap leakage test of those same vehicles. Testing in the Northern Region program varies from that of the South Central Region in that the Commonwealth does not require OBD I/M checks as part of the Northern Region.

The December 1, 2003 SIP revision also contains amendments to the Commonwealth's motor vehicle safety inspection program, which is codified at Chapter 175 of Title 67 of the Pennsylvania Code. Under this revised safety inspection program, vehicles registered in counties not subject to emissions testing under Pennsylvania I/M regulation (at Chapter 177 of Title 67) must undergo a visual anti-tampering inspection as part of the safety inspection. This safety program visual inspection applies in forty-two of the Commonwealth's sixty-seven counties. The result is that Pennsylvania now requires an annual visual anti-tampering inspection on a statewide basis for 1975 to 1995 vehicles through either the applicable I/M or safety inspection program. In the Non-I/M areas subject to the safety inspection program, anti-tampering inspection applies on a broader basis to include vehicles older than 1975 and newer than 1995. Addition of the anti-tampering inspection in Non-I/M areas as part of the safety inspection program applies to the following Counties: Adams, Armstrong, Bedford, Bradford, Butler, Cameron, Carbon, Clarion, Clearfield, Clinton, Columbia, Crawford, Elk, Fayette, Forest, Franklin, Fulton, Greene, Huntington, Indiana, Jefferson, Juniata, Lawrence, McKean, Mifflin, Monroe, Montour, Northumberland, Perry, Pike, Potter, Schuylkill, Snyder, Somerset, Sullivan, Susquehanna, Tioga, Union, Venango, Warren, Wayne and Wyoming.

The December 2003 SIP includes additional materials, including revised emissions benefits modeling supporting the changes in the emissions and safety inspection programs, new test equipment specifications for OBD inspection equipment, new inspection procedures for visual anti-tampering program, stand alone test equipment specifications for OBD and visual testing, supplements to Pennsylvania's contract for management of the I/M program, sample vehicle inspection reports and other miscellaneous support documents.

The Commonwealth's December 2003 SIP revision does not address changes to the I/M programs in the Pittsburgh and Philadelphia Regions, except in cases where updates to the Commonwealth's regulations affect all I/M-subject regions. Pennsylvania has submitted separate SIP revisions to EPA to address changes specific to the Pittsburgh and Philadelphia I/M programs. Those SIP revisions are the subject of a separate rulemaking(s).

Finally, Pennsylvania's December 2003 SIP revision submittal to EPA does not include regulatory language adopted as part of Pennsylvania regulation that would phase-down/phase-out I/M testing of pre-1996 subject vehicles at a point in time when pre-1996 vehicles make up less than a certain portion of the region's total I/M subject fleet. The Commonwealth has also not included in its December 2003 SIP revision submittal to EPA the language in its regulation that would set the minimum repair expenditure for failing vehicles in need of I/M-related repairs (or waiver limit) at $150 for the first two years after commencement of a new I/M program. Neither of these state regulatory provisions was submitted as part of the SIP and therefore these provisions are not under consideration by EPA as a revision to the Pennsylvania SIP.

EPA is proposing to approve Pennsylvania's I/M SIP revision submitted on December 1, 2003, as amended by a technical correction on April 29, 2004. This SIP revision incorporates changes being made by Pennsylvania to its I/M program in general and specifically with regard to the program testing regimen in the South Central and Northern I/M Regions as described herein.

EPA is also proposing to approve Pennsylvania's visual anti-tampering inspection (under the safety inspection program in the Non-I/M Regions) as a SIP strengthening air quality control measure, not as an enhanced I/M program pursuant to EPA's I/M requirement rule (at 40 CFR 51, Subpart S). While anti-tampering testing is not required in the Non-I/M Region counties of Pennsylvania, Pennsylvania has voluntarily undertaken this measure to bolster emissions reductions towards meeting the goals of the other areas of the Commonwealth that are subject to I/M program testing. The Non-I/M Region anti-tampering inspection program was not undertaken in support of any currently existing air quality rate of progress, attainment or maintenance plan. However, the Non-I/M program for the affected fourty-two counties does provide a minor benefit toward the I/M performance standard demonstration for the sixteen counties comprising the South Central and Northern Regions. EPA therefore proposes to incorporate the safety inspection program for Non-I/M Regions into the SIP as a SIP strengthening measure, in that it does reduce ozone-related pollution and that it may provide benefit to neighboring areas that violate the National Ambient Air Quality Standards (NAAQS) for ozone. For more information regarding EPA's detailed review of the Commonwealth's December 30, 2003 I/M SIP revision, please refer to the Technical Support Document (TSD) prepared by EPA in support of this rulemaking action. The TSD is part of the docket for this action, and is available at the EPA office listed in the ADDRESSES portion of this proposed rulemaking. EPA is soliciting public comments on the issues discussed in this document. These comments will be considered before taking final action. Interested parties may participate in the Federal rulemaking procedure by submitting either electronic or written comments.

Under Executive Order 12866 (58 FR 51735, October 4, 1993), this proposed action is not a “significant regulatory action” and therefore is not subject to review by the Office of Management and Budget. For this reason, this action is also not subject to Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355 (May 22, 2001)). This action merely proposes to approve state law as meeting Federal requirements and imposes no additional requirements beyond those imposed by state law. Accordingly, the Administrator certifies that this proposed rule will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). Because this rule proposes to approve pre-existing requirements under state law and does not impose any additional enforceable duty beyond that required by state law, it does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4). This proposed rule also does not have a substantial direct effect on one or more Indian tribes, 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 by Executive Order 13175 (65 FR 67249, November 9, 2000), nor will it 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, as specified in Executive Order 13132 (64 FR 43255, August 10, 1999), because it merely proposes to approve a state rule implementing a Federal standard and does not alter the relationship or the distribution of power and responsibilities established in the Clean Air Act. This proposed rule also is not subject to Executive Order 13045 (62 FR 19885, April 23, 1997), because it is not economically significant.

In reviewing SIP submissions, EPA's role is to approve state choices, provided that they meet the criteria of the Clean Air Act. In this context, in the absence of a prior existing requirement for the state to use voluntary consensus standards (VCS), EPA has no authority to disapprove a SIP submission for failure to use VCS. It would thus be inconsistent with applicable law for EPA, when it reviews a SIP submission, to use VCS in place of a SIP submission that otherwise satisfies the provisions of the Clean Air Act. Thus, the requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) do not apply. As required by section 3 of Executive Order 12988 (61 FR 4729, February 7, 1996), in issuing this proposed rule, EPA has taken the necessary steps to eliminate drafting errors and ambiguity, minimize potential litigation and provide a clear legal standard for affected conduct. EPA has complied with Executive Order 12630 (53 FR 8859, March 15, 1988) by examining the takings implications of the rule in accordance with the “Attorney General's Supplemental Guidelines for the Evaluation of Risk and Avoidance of Unanticipated Takings” issued under the executive order. This proposed rule to approve a revision to Pennsylvania's prior SIP-approved I/M program does not impose an information collection burden under the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.).

For further information on the SIP revision to clarify exceptions to visible emissions requirements, please see the information provided in the direct final action, with the same title, that is located in the “Rules and Regulations” section of this Federal Register publication. Please note that if EPA receives adverse comment on an amendment, paragraph, or section of this rule and if that provision may be severed from the remainder of the rule, EPA may adopt as final those provisions of the rule that are not the subject of an adverse comment.