[Federal Register Volume 61, Number 204 (Monday, October 21, 1996)]
[Proposed Rules]
[Pages 54589-54593]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-26755]


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DEPARTMENT OF AGRICULTURE

Forest Service

36 CFR Part 223

RIN 0596-AB41


Sale and Disposal of National Forest Timber; Indices To Determine 
Market-Related Contract Term Additions

AGENCY: Forest Service, USDA.

ACTION: Proposed rule; request for comments.

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SUMMARY: The Forest Service proposes to amend current regulations to 
require the use of Industry Series Producer Price Indices from the 
Bureau of Labor Statistics, rather than the currently required indices 
in the Commodity Series. Use of a different Producer Price Index series 
requires a change in procedures for determining when market-related 
contract term additions are needed. In addition to changing the index 
series, the proposed rule makes technical changes including: Applying 
the indices on a sale-by-sale basis, based on species and product, 
rather than a National Forest basis; precluding market-related contract 
term additions on contracts for sales with a primary objective of 
harvesting damaged, dead, or dying timber and contracts with provisions 
for stumpage rate adjustment; and minor changes to clarify or simplify 
procedures for applying the indices. The intended effect is to grant 
timber sale contract term additions based on more representative market 
criteria.

DATES: Comments must be received in writing by November 20, 1996.

ADDRESSES: Send written comments to Director, Timber Management Staff 
(2400), Forest Service, USDA, P.O. Box 96090, Washington, DC 20090-
6090.
    The public may inspect comments received on this proposed rule in 
the office of the Director, Timber Management Staff, Forest Service, 
USDA, Wing 3NW, Auditor's Building, 201 14th Street, S.W., Washington, 
DC 20250, between the hours of 8:30 a.m. and 4:30 p.m. Those wishing to 
inspect comments are encouraged to call ahead (202-205-0893) to 
facilitate entry into the building.

FOR FURTHER INFORMATION CONTACT: Rex Baumback, Timber Management Staff, 
Forest Service, USDA, P.O. Box 96090, Washington, DC 20090-6090, (202) 
205-0855.

SUPPLEMENTARY INFORMATION: .

Background

    On December 7, 1990, the Forest Service published a final rule (55 
FR

[[Page 54590]]

50643) to establish procedures at 36 CFR Sec. 223.52 for extending 
contract termination dates to prevent contract default or severe 
financial loss to the purchaser in response to adverse conditions in 
the timber markets. Experience has indicated that the market declines 
that would cause a market-related contract term addition generally 
coincide with substantial economic dislocation in the wood products 
industry. Such economic distress broadly affects community stability, 
the ability of the wood products industry to supply construction lumber 
and other wood products from domestic sources, and threatens the 
existence of wood manufacturing plants needed to meet future demands 
for wood products. Accordingly, the 1990 rule provides that if there is 
a drastic decline in wood product prices sufficient to trigger the 
market-related contract term addition, there would be a corollary 
substantial overriding public interest to extend the term of existing 
timber sale contracts, as required by the National Forest Management 
Act of 1976 (16 U.S.C. 472a(c)) and existing regulations at 36 CFR 
223.115(b).
    The 1990 rule requires the use of various wood product Producer 
Price Indices, prepared by the Department of Labor, Bureau of Labor 
Statistics, to determine whether a drastic reduction in wood product 
prices has occurred. Since adoption of the rule, a drastic reduction 
occurred for Douglas-fir, Dressed Index, during the first quarter of 
1991 and, most recently, in the second quarter of 1995. As a result, 
the Forest Service notified purchasers and, upon the purchasers' 
written request, added an additional year to timber sale contract terms 
for qualifying contracts.
    Appearing before the House Appropriations Subcommittee on Interior 
and Related Agencies, on April 28, 1992 (Testimony Report number, T-
RCED-92-58), the General Accounting Office (GAO) testified that the 
Forest Service's timber sale contract extension rule was inconsistent 
with the way other governmental agencies have addressed the impact of 
declining markets on timber purchasers. GAO also testified that, in 
implementing the regulation in 1991, the Forest Service used a formula 
with inappropriate data to reach a determination that prices for wood 
products from the Pacific Northwest had drastically declined. 
Specifically, GAO testified that the Forest Service used a formula 
developed with data that were not adjusted to account for seasonal 
fluctuations. GAO noted that if the Forest Service had used the Bureau 
of Labor Statistics' seasonally adjusted data, the formula would not 
have indicated a drastic price reduction and would not have triggered 
contract extensions on the west side of the Pacific Northwest.
    GAO further testified that the Bureau of Labor Statistics advises 
use of seasonally adjusted data which are designed to eliminate the 
effects of normal market fluctuations that occur at about the same 
time, and in about the same magnitude, each year, such as price 
movements resulting from normal weather patterns and regular production 
and marketing cycles. GAO recommended that the Secretary of Agriculture 
direct the Chief of the Forest Service to: (1) stop using the Bureau of 
Labor Statistics' unadjusted indices in reaching determinations that 
wood product prices have drastically declined, and (2) make eligible 
only those contracts that do not already reflect falling prices.
    The Secretary of Agriculture agreed to re-examine the use of the 
Bureau of Labor Statistics' unadjusted Producer Price Indices to 
determine whether wood product prices showed a drastic decline and 
whether to make eligible only those contracts that do not already 
reflect falling prices. Subsequently, the Forest Service concurred that 
seasonally adjusted Producer Price Indices, adjusted to a constant 
dollar base, could be used to determine whether a drastic reduction in 
wood product prices has occurred and, therefore, whether a market-
related contract term addition should be granted. However, in December 
1994, the Bureau of Labor Statistics stopped applying seasonal 
adjustments to the related Producer Price Indices, since they found 
insufficient statistical evidence to demonstrate a need to continue 
adjusting these indices.
    The Producer Price Indices currently used by the Forest Service are 
from the Commodity Series prepared by the Bureau of Labor Statistics. 
However, the Bureau of Labor Statistics has determined that the 
Industry Series, rather than the Commodity Series, should be used as 
the principal series to measure market changes. The Industry Series 
includes indices for Western Softwood, Eastern Softwood, and Hardwood 
Lumber and is more representative of the sawmill industry than the 
indices used with the Commodity Series. The Industry Series is more 
representative because the Industry Series softwood lumber indices 
include rough lumber and the Hardwood Lumber Index excludes the 
secondary industries of dimension stock and flooring.
    In order to utilize or maximize use of all resources with the least 
impact on the environment, many sales consist primarily of chipable 
material. Current market-related contract term addition procedures do 
not use an index to reflect market changes in chipable material; 
however, to fill this need, the Forest Service proposes to apply the 
Industry Series Wood Chip Index to measure market changes for the price 
of chips and to address the volatility of the wood chip market.
    A review of other readily available indices representing the same 
wood product markets shows that indices comparable to the Producer 
Price Indices do not exist. Some regional indices are available; 
however, the timing, frequency, and procedure for collection of 
information for these indices varies. Some index services or 
associations use previous month invoice prices that are provided by 
their members, while other services use current month negotiated bid 
prices or sale prices. Reliable indices, prepared nationally and 
applied consistently, are not available. Therefore, the Forest Service 
proposes to codify the use of the following Bureau of Labor Statistics 
(BLS) indices from the Industry Series:

------------------------------------------------------------------------
                                                                Industry
                   BLS producer price index                       code  
------------------------------------------------------------------------
Hardwood Lumber..............................................    2421 #1
Eastern Softwood Lumber......................................    2421 #3
Western Softwood Lumber......................................    2421 #4
Wood Chips...................................................    2421 #5
------------------------------------------------------------------------

    Each Producer Price Index is adjusted to a constant dollar base by 
dividing it by the Producer Price Index for All Commodities, Commodity 
Code 00000000. The Forest Service currently monitors the various 
indices and determines that a drastic reduction in wood product prices 
has occurred when, for 2 or more consecutive quarters after the 
contract award, the applicable adjusted price index is less than 80 
percent of the average of such adjusted index for the 4 highest of the 
8 calendar quarters immediately prior to the qualifying quarter. 
Because the Industry Series indices are less species specific, they are 
less volatile. Therefore, in order to continue to identify severe 
market declines, it is necessary to change the triggering percentage to 
85 percent when Industry Series indices are used. The indices and the 
adjustment procedures are set forth in proposed paragraphs (b) (1) and 
(2).

Other Provisions of the Proposed Rule

    Paragraph (a) of Sec. 223.52 is proposed to be revised to clarify 
the conditions and provisions for adding contract time

[[Page 54591]]

to timber sale contracts. Proposed paragraph (a)(1) makes minor non-
substantive changes to current paragraph (a) to clarify the conditions 
for granting a timber sale contract extension.
    Currently, Regional Foresters, for those Regions with more than one 
Producer Price Index, determine the index to be used on each National 
Forest in that Region. The Forest Service recognizes that applying the 
Bureau of Labor Statistics' indices on a National Forest basis may not 
reflect actual sale characteristics. Therefore, in proposed paragraph 
(a)(2), the Forest Service proposes that Forest Supervisors shall 
determine the index to be used for each sale. The selected index would 
then reflect the predominant species and product, by volume, included 
in the sale area and would be more representative of the species and 
products actually in the sale area than applying the indices on a 
National Forest level.
    Periodically, catastrophic events severely damage timber. The 
damaged timber must be harvested within a relatively short time period 
to avoid substantial losses in both quantity and quality of timber due 
to deterioration. The critical time period available for harvesting 
damaged timber and avoiding substantial deterioration varies with the 
season of the year, the species of timber, the damaging agent, and the 
location of the damaged timber. In most cases, significant 
deterioration can be avoided if the damaged timber is harvested within 
1 year of the catastrophic event. Accordingly, the proposed rule 
provides that when the primary objective of a timber sale contract is 
to harvest damaged, dead, or dying timber, a market-related contract 
term addition provision will not be included in the contract because 
such a provision could delay harvest. Therefore, in proposed paragraph 
(a)(3)(i), the Forest Service proposes not to allow market-related 
contract term addition on sales that have a primary objective of 
harvesting damaged, dead, or dying timber.
    In the past, contract lengths were relatively long (4 or more 
years). Most current timber sale contracts have a duration of 3 years 
or less, and many of the current contracts allow for stumpage rate 
adjustment, which provides a stumpage price adjustment for the timber 
sale purchaser as the timber markets change. Under current regulations, 
the market-related contract term addition provision offers a second and 
unnecessary method of addressing adverse market conditions, when 
adequate adjustment may already be provided in many contracts through 
stumpage rate adjustment. Therefore, in proposed paragraph (a)(3)(ii), 
the Forest Service proposes not to allow market-related contract term 
addition on sales with stumpage rate adjustment provisions.
    To codify the indices available for use in market-related contract 
term additions, proposed paragraph (b)(1)(i) of Sec. 223.52 lists the 
indices available for use in market-related contract term additions. 
The proposed indices use Bureau of Labor Statistics' Industry Series 
indices, since the Industry Series is now the principal series 
supported by Bureau of Labor Statistics. Species specific indices are 
not available from the Industry Series. The Eastern Softwood Lumber and 
Western Softwood Lumber Indices reflect the similarity of the markets 
in each geographic region. These indices also include rough lumber 
which was not included in the indices used previously from the 
Commodity Series. The Hardwood Lumber Index now excludes the secondary 
industries of dimension stock and flooring. The Wood Chip Index is 
added to provide a better measure of market changes for sales that 
include primarily chipable material.
    The Bureau of Labor Statistics issues preliminary indices and, when 
data is finalized, issues final indices. The final indices may indicate 
a qualifying quarter when the preliminary data does not indicate a 
qualifying quarter or vice versa. The Forest Service wishes to use the 
most current data, but does not want to redetermine whether past 
quarters are qualifying quarters. Redetermining whether past quarters 
are qualifying quarters would sometimes indicate that market-related 
contract term additions had been granted when they were not justified 
or that they had not been granted when they were justified. Therefore, 
in proposed paragraph (b)(1)(ii), the agency proposes to use the most 
current data, but not to revise the determination of qualifying 
quarters when final Producer Price Index data is available.
    The current regulations designate the Regional Forester as the 
official who determines when a drastic reduction in wood product prices 
has occurred. In practice, the Chief makes this determination; 
therefore, proposed paragraph (b)(2) names the Chief as the determining 
official.
    Paragraph (b)(2) also would be revised to provide that a drastic 
reduction in wood product prices occurs when, for 2 or more consecutive 
quarters, the applicable adjusted price index is less than 85 percent 
of the average of such adjusted index for the 4 highest of the 8 
calendar quarters immediately prior to the qualifying quarter. The 
percentage was changed from 80 percent because the indices used from 
the Industry Series are less species specific and, therefore, less 
volatile. A higher percentage better identifies drastic reductions in 
wood product prices.
    The Forest Service proposes revising paragraph (b)(2) to clarify 
that the 8 calendar quarters to be used for calculating market-related 
contract term additions are the 8 quarters immediately prior to each 
qualifying quarter. This is the method used in the examples of the 
operation of the market-related contract term addition published as the 
proposed rule on November 6, 1987 (52 FR 43020), and is the process 
that has been used since 1990 for calculating the market-related 
contract term additions.
    Paragraph (c) of Sec. 223.52 would be revised to remove the 
reference to the Regional Forester to conform to the change in 
paragraph (b)(2) specifying that the Chief of the Forest Service makes 
the determination and to make clear that contracts eligible for term 
addition are those which have been awarded but are not yet terminated.
    The current regulation requires that periodic payment dates be 
recalculated based on the revised contract termination date. Current 
contract procedures, however, require that the periodic payment dates 
be delayed by an amount of time equal to the additional contract time. 
The contract procedure delays periodic payments for more time than the 
procedure in the current rule allows. Therefore, the Forest Service 
proposes to revise paragraph (d) of Sec. 223.52 to provide a delay in 
periodic payment dates equal to the amount of additional contract time. 
This proposed change will not only make the regulation consistent with 
current contract procedures, but will also better provide the 
assistance that is needed during market declines.

Regulatory Impact

    This proposed rule has been reviewed under USDA procedures and 
Executive Order 12866 on Regulatory Planning and Review. It has been 
determined that this is not a significant rule. This rule will not have 
an annual effect of $100 million or more on the economy nor adversely 
affect productivity, competition, jobs, the environment, public health 
or safety, nor State or local governments. This rule will not interfere 
with an action taken or planned by another agency nor raise new legal 
or policy issues. In short, little or no effect on the national economy 
will result from this proposed rule change. This action consists of 
administrative changes to regulations affecting timber

[[Page 54592]]

sale contract length. The Producer Price Indices selected and revised 
procedures better reflect the cyclic nature of lumber markets and help 
the agency determine whether a drastic downturn has actually occurred 
in these particular markets. Finally, this action will not alter the 
budgetary impact of entitlements, grants, user fees, or loan programs 
or the rights and obligations of recipients of such programs. 
Accordingly, this proposed rule is not subject to OMB review under 
Executive Order 12866.
    Moreover, this proposed rule has been considered in light of the 
Regulatory Flexibility Act (5 U.S.C. 610 et seq.), and it is hereby 
certified that this action will not have a significant economic impact 
on a substantial number of small entities as defined by that Act. 
Failure to adopt these improved procedures for measuring drastic 
decline in wood product prices will subject both small purchasers and 
large purchasers to increased risk of default in those situations where 
current indices are not as valid as indicators of price decline as 
those being proposed in this rule. Modifications to timber sale 
contracts have the intended effect of allowing purchasers of timber 
sales to complete timber sales when adverse conditions have occurred in 
the timber market and when no other means of adjustment, such as 
stumpage rate adjustment, are available.

Unfunded Mandates Reform

    Pursuant to Title II of the Unfunded Mandates Reform Act of 1995, 
which the President signed into law on March 22, 1995, the Department 
has assessed the effects of this rule on State, local, and tribal 
governments and the private sector. This rule does not compel the 
expenditure of $100 million or more by any State, local, or tribal 
governments or anyone in the private sector. Therefore, a statement 
under section 202 of the Act is not required.

Environmental Impact

    This proposed rule deals with business practices related to timber 
sale contracts and, as such, has no direct effect on the amount, 
location, or manner of timber offered for purchase. Section 31.1b of 
Forest Service Handbook 1909.15 (57 FR 43180; September 18, 1992) 
excludes from documentation in an environmental assessment or impact 
statement ``rules, regulations, or policies to establish Service-wide 
administrative procedures, program processes, or instructions.'' The 
agency's preliminary assessment is that this rule falls within this 
category of actions and that no extraordinary circumstances exist which 
would require preparation of an environmental assessment or 
environmental impact statement. A final determination will be made upon 
adoption of the final rule.

Controlling Paperwork Burdens on the Public

    This proposed rule does not contain any recordkeeping or reporting 
requirements or other information collection requirements as defined in 
5 CFR 1320 and, therefore, imposes no paperwork burden on the public. 
Accordingly, the review provisions of the Paperwork Reduction Act of 
1995 (44 U.S.C. 3501, et seq.) and implementing regulations at 5 CFR 
part 1320 do not apply.

Comments Invited

    The Forest Service invites comments on this proposal to use 
Producer Price Indices from the Industry Series and to change the 
operational procedures that apply to market-related contract term 
additions on timber sales. Comments received will be considered in the 
development of the final rule, which will be published in the Federal 
Register.

List of Subjects in 36 CFR Part 223

    Administrative practice and procedure, Exports, Forests and forest 
products, Government contracts, National forests, Reporting and 
recordkeeping requirements.
    Therefore, for the reasons set forth in the preamble, it is 
proposed to amend Part 223 of Title 36 of the Code of Federal 
Regulations as follows:

PART 223--SALE AND DISPOSAL OF NATIONAL FOREST SYSTEM TIMBER

    1. The authority citation for Part 223 continues to read as 
follows:

    Authority: 90 Stat. 92958, 16 U.S.C. 472a; 98 Stat. 2213, 16 
U.S.C. 618; unless otherwise noted.

    2. Revise Sec. 223.52 to read as follows:


Sec. 223.52  Market-related contract term additions.

    (a) Contract provision. (1) Except as provided in paragraph (a)(3) 
of this section, each timber sale contract containing periodic payment 
requirements shall contain a provision allowing for the addition of 
time to the contract term, under the following conditions:
    (i) The Chief of the Forest Service has determined that adverse 
wood products market conditions have resulted in a drastic reduction in 
wood product prices applicable to the sale; and
    (ii) The purchaser makes a written request for additional time to 
perform the contract.
    (2) The contract term addition provision must also specify the 
index to be applied to each sale. The Forest Supervisor shall determine 
the index to be used for each sale based on the species or product 
characteristics, by volume, being harvested on the sale. Only one index 
may apply to a given sale. The Forest Supervisor may select only from 
the indices listed in paragraph (b) of this section.
    (3) A market-related contract term addition provision shall not be 
included in contracts if either of the following circumstances exist:
    (i) The sale has a primary objective of harvesting damaged, dead, 
or dying timber; or
    (ii) The contract has a provision for stumpage rate adjustment.
    (b) Determination of drastic wood product price reductions. (1) The 
Forest Service shall monitor and use Producer Price Indices for wood 
products, as prepared by the Department of Labor, Bureau of Labor 
Statistics (BLS), adjusted to a constant dollar base, to determine if 
market related contract term additions are warranted.
    (i) The Forest Service shall monitor and use only the following 
indices:

------------------------------------------------------------------------
                                                                Industry
                   BLS producer price index                       code  
------------------------------------------------------------------------
Hardwood Lumber..............................................     2421#1
Eastern Softwood Lumber......................................     2421#3
Western Softwood Lumber......................................     2421#4
Wood Chips...................................................     2421#5
------------------------------------------------------------------------

    (ii) When final indices are not available, preliminary indices 
shall be used; however, in such event, determination of a qualifying 
quarter will not be revised when final indices become available.
    (2) The Chief of the Forest Service shall determine that a drastic 
reduction in wood product prices has occurred when, for 2 or more 
consecutive quarters, the applicable adjusted price index is less than 
85 percent of the average of such adjusted index for the 4 highest of 
the 8 calendar quarters immediately prior to the qualifying quarter. A 
qualifying quarter is a quarter where the applicable adjusted index is 
more than 15 percent below the average of such index for the 4 highest 
of the previous 8 calendar quarters. Qualifying quarter determinations 
will be made using the Producer Price Indices for the months of March, 
June, September, and December.
    (3) A determination, made pursuant to paragraph (b)(2) of this 
section, that a drastic reduction in wood product prices has occurred 
shall constitute a finding that the substantial overriding

[[Page 54593]]

public interest justifies the contract term addition.
    (c) Granting market-related contract term additions. When the Chief 
of the Forest Service determines, pursuant to this section, that a 
drastic reduction in wood product prices has occurred, the Forest 
Service is to notify affected timber sale purchasers. For any contract 
which has been awarded and has not been terminated, the Forest Service, 
upon a purchaser's written request, will add 1 year to the contract's 
term, except as provided in paragraphs (c) (1) through (3) of this 
section. This 1-year addition includes time outside of the normal 
operating season.
    (1) For each additional consecutive quarter, in which a contract 
qualifies for a market-related contract term addition, the Forest 
Service will, upon the purchaser's written request, add an additional 3 
months during the normal operating season to the contract.
    (2) No more than twice the original contract length or 3 years, 
whichever is less, shall be added to a contract's term by market-
related contract term addition.
    (3) In no event shall a revised contract term exceed 10 years as a 
result of market-related contract term additions.
    (d) Recalculation of periodic payments. Where a contract is 
lengthened as a result of market conditions, any subsequent periodic 
payment dates shall be delayed 1 month for each month added to the 
contract's term.

    Dated: October 8, 1996.
J. Kenneth Myers,
Acting Chief.
[FR Doc. 96-26755 Filed 10-18-96; 8:45 am]
BILLING CODE 3410-11-M