On February 29, 2000, the Office of Personnel Management (OPM) published an interim rule (65 FR 10673) to abolish the Franklin, Pennsylvania, nonappropriated fund (NAF) Federal Wage System (FWS) wage area and redefine Franklin and Blair Counties, PA. The Franklin wage area consists of one survey county, Franklin County, and one area of application county, Blair County, PA. Under section 5343 of title 5, United States Code, OPM is responsible for defining FWS wage areas. For this purpose, we follow the regulatory criteria in section 532.219(b) of title 5, Code of Federal Regulations.

OPM may establish NAF wage areas when a minimum of 26 NAF wage employees have duty stations in the survey area, a local activity has the capability to host annual local wage surveys, and a minimum of 1,800 private enterprise employees are within the survey area in establishments within survey specifications. Although Franklin County, PA, has approximately 26 NAF FWS employees, the wage area's host activity, Letterkenny Army Depot, has downsized its operation. This leaves the Department of Defense without an activity in the survey area with the capability to conduct annual local wage surveys in the wage area. Therefore, Blair and Franklin Counties, PA, will become part of the Cumberland, PA, NAF wage area. The Cumberland wage area will consist of one survey county, Cumberland County, PA, and two area of application counties, Blair and Franklin Counties, PA.

The Federal Prevailing Rate Advisory Committee, the national labor-management committee responsible for advising OPM on matters concerning the pay of FWS employees, has reviewed and concurred by consensus with this change. FWS employees in Franklin and Blair Counties, PA, transferred to the Cumberland, PA, NAF wage area schedule on the first day of the first applicable pay period beginning on or after March 16, 2000. The interim rule had a 30-day public comment period, during which OPM did not receive any comments.

I certify that this regulation will not have a significant economic impact on a substantial number of small entities because it will affect only Federal agencies and employees.

On February 29, 2000, the Office of Personnel Management (OPM) published an interim rule (65 FR 10674) to abolish the Lebanon, Pennsylvania, nonappropriated fund (NAF) Federal Wage System (FWS) wage area, redefine Lebanon County, PA, and remove Columbia County, PA, as part of an NAF wage area. The Lebanon wage area consists of one survey county, Lebanon County, and one area of application county, Columbia County. Under section 5343 of title 5, United States Code, OPM is responsible for defining FWS wage areas. For this purpose, we follow the regulatory criteria in section 532.219(b) of title 5, Code of Federal Regulations.

OPM may establish NAF wage areas when a minimum of 26 NAF wage employees work in the survey area, a local activity has the capability to host annual local wage surveys, and a minimum of 1,800 private enterprise employees are within the survey area in establishments within survey specifications. Lebanon County, PA, has approximately 22 NAF FWS employees, and the wage area's host activity, Fort Indiantown Gap, has downsized its operation. This leaves the Department of Defense without an activity in the survey area with the capability to conduct annual local wage surveys in the wage area. Columbia County, PA, is not a part of an NAF wage area because NAF employees no longer have duty stations in the county. Therefore, the York, PA, NAF wage area will consist of one survey county, York County, PA, and one area of application county, Lebanon County, PA.

The Federal Prevailing Rate Advisory Committee, the national labor-management committee responsible for advising OPM on matters concerning the pay of FWS employees, has reviewed and concurred by consensus with this change. FWS employees in Lebanon County, PA, transferred to the York, PA, NAF wage area schedule on the first day of the first applicable pay period beginning on or after March 2, 2000. The interim rule had a 30-day public comment period, during which OPM did not receive any comments.

I certify that this regulation will not have a significant economic impact on a substantial number of small entities because it will affect only Federal agencies and employees.

This final rule is issued under Marketing Order No. 929 [7 CFR Part 929], as amended, regulating the handling of cranberries grown in Massachusetts, Rhode Island, Connecticut, New Jersey, Wisconsin, Michigan, Minnesota, Oregon, Washington, and Long Island in the State of New York. The order is effective under the Agricultural Marketing Agreement Act of 1937, as amended [7 U.S.C. 601-674], hereinafter referred to as the “Act.”

The final rule is effective on July 12, 2000, and the volume regulation will apply to the 2000-2001 crop year which begins on September 1, 2000, and ends on August 31, 2001.

Cranberry growers and handlers/processors located in the 10-State production area will be affected by this action. The 10-State production area covers cranberries grown in Massachusetts, Rhode Island, Connecticut, New Jersey, Wisconsin, Michigan, Minnesota, Oregon, Washington, and Long Island in the State of New York.

The Committee recommended volume control this year in order to address the serious oversupply situation being experienced by the industry. For the 1999 crop year, industry reports show that continued low grower prices will accompany record high production and inventories. Many cranberry growers are experiencing difficulties dealing with these extreme market conditions.

The Committee determined the best method of volume control would be the producer allotment program which provides for an annual marketable quantity and allotment percentage.

The use of volume control is not the only avenue that could be used to address the oversupply situation being experienced by the industry. The industry is also looking into methods of increasing demand by developing new markets, both domestic and foreign, by developing new products and by increasing promotional efforts.

Marketable quantity is defined as the number of pounds of cranberries needed to meet total market demand and to provide for an adequate carryover into the next season. The marketable quantity for the 2000-2001 crop year has been established at 5.468 million barrels. This figure is subject to some change based on final calculations of sales histories. This is approximately equal to the expected demand for fruit for processing.

The allotment percentage equals the marketable quantity divided by the total of all growers' sales histories. Total growers' sales histories were set by the Committee at 6.432 million barrels. Using the formula established under the order (5.468 million barrels divided by 6.432 million barrels), the annual allotment percentage is 85 percent.

Sales of fresh and organically-grown fruit are exempt from the volume regulation. In addition, other modifications have been made to implement volume regulation.

A grower's annual allotment is the result of multiplying the individual grower's sales history by the 85% allotment percentage.

The Committee is responsible for calculating each grower's sales history on an annual basis. A new grower with no sales history will be issued allotment based on the State average yield per acre or total estimated commercial sales, whichever is greater. For the 2000-2001 crop, the State average yield is defined as the average State yield for the year 1997 or the average of the best four years out of the last six years, whichever is greater.

For growers with existing cranberry acreage, sales history for growers with six or more years of sales history is established by computing an average of the highest four of the most recent six years of sales. For growers with five years of sales history, the average of the best four out of the last five years is used. For growers with four years or less of commercial sales history, the sales history is calculated by using the best single sales year. The sales history of newly planted acreage belonging to existing growers which has no commercial sales history (including those with four years or less of sales history) is calculated the same way as the sales history of a new grower with no sales history. If growers with existing acreage also have newer acreage with four years of sales history or less, and such grower can provide the Committee with credible information which would allow the Committee to segregate the sales history of the newer acreage, then that acreage will be treated in the same way as acreage of a grower with four years or less of sales history.

If growers are dissatisfied with their sales history calculation as determined by the Committee, they can appeal to the appeals subcommittee appointed by the Committee. If growers are not satisfied with the decision by the appeals subcommittee, two other levels of appeal are available—the full Committee and the Secretary. All decisions by the Secretary will be final.

The appeals subcommittee is in the process of developing specific criteria to follow in making its decisions.

Appeals should be filed with David N. Farrimond, General Manager, Cranberry Marketing Committee, 266 Main Street, Wareham, Massachusetts 02571; Telephone: (800) 253-0862; or Fax (508) 291-1511.

The Department of Agriculture (Department) is issuing this rule in conformance with Executive Order 12866.

This final rule has been reviewed under Executive Order 12988, Civil Justice Reform. Under the marketing order provisions now in effect, a marketable quantity and allotment percentage may be established for cranberries during any crop year. This rule establishes a marketable quantity and allotment percentage for cranberries for the 2000-2001 crop year beginning September 1, 2000, through August 31, 2001. This rule will not preempt any State or local laws, regulations, or policies, unless they present an irreconcilable conflict with this rule.

The Act provides that administrative proceedings must be exhausted before parties may file suit in court. Under section 608c(15)(A) of the Act, any handler subject to an order may file with the Secretary a petition stating that the order, any provision of the order, or any obligation imposed in connection with the order is not in accordance with law and request a modification of the order or to be exempted therefrom. A handler is afforded the opportunity for a hearing on the petition. After the hearing the Secretary would rule on the petition. The Act provides that the district court of the United States in any district in which the handler is an inhabitant, or has his or her principal place of business, has jurisdiction to review the Secretary's ruling on the petition, provided an action is filed not later than 20 days after date of the entry of the ruling.

As discussed in detail later in this document, the U.S. cranberry industry is experiencing an oversupply situation. Recent increases in acreage and yields have resulted in greater supplies, while demand has remained fairly constant. The result has been building inventories and reduced grower returns.

The Committee has been considering ways to cope with this oversupply situation in recent years. On March 30, 2000, the Committee recommended using volume controls (in the form of producer allotments) for the 2000-2001 crop year. Based on the Committee's recommendation and other available information, a proposed rule was issued and published in the May 30, 2000, Federal Register [65 FR 34411]. That rule proposed three alternative levels of volume regulation. The Committee met again on June 6, 2000, and revised its initial recommendation in several respects.

This final rule establishes a marketable quantity and allotment percentage for the 2000-2001 crop year. This action also revises procedures for calculating growers' sales histories, exempts fresh and organically-grown cranberries from volume regulation, defines State average yield per acre, increases the barrels per acre for determining a commercial crop, revises the Committee review procedures for re-determination of sales histories, and suspends the date by which the Committee notifies growers of their annual allotment. These actions are based primarily upon the recommendations made by the Committee and comments received in response to the May 30, 2000, proposed rule. The volume regulation will be effective September 1, 2000, through August 31, 2001.

Section 929.49 of the order currently provides that if the Secretary finds from the recommendation of the Committee or from other available information, that limiting the quantity of cranberries purchased from or handled on behalf of growers during a crop year would tend to effectuate the declared policy of the Act, the Secretary shall determine and establish a marketable quantity for that year. In addition, the Secretary would establish an allotment percentage which shall equal the marketable quantity divided by the total of all growers' sales histories. The allotment percentage would be applied to each grower's individual sales history to derive each grower's annual allotment. Handlers cannot handle cranberries unless they are covered by a grower's annual allotment.

Section 929.48 of the order provides for computing growers' sales histories to be used in calculating marketable quantities and allotment percentages under § 929.49. Sales history is defined in section 929.13 as the number of barrels of cranberries established for a grower by the Committee. The Committee has been updating growers' sales histories each season. The Committee accomplishes this by using information submitted by the grower on a production and eligibility report filed with the Committee. The order sets forth that a grower's sales history is established by computing an average of the best four years' sales out of the last six years' sales for those growers with existing acreage. For growers with four years or less of commercial sales history, the sales history has been calculated by averaging all available years of such grower's sales. A new sales history for acreage with no sales history is calculated by using the State average yield per acre or the total estimated commercial sales, whichever is greater. This is done for new growers, as well as those that also have acreage with sales history.

Section 929.46 of the order requires the Committee to develop a marketing policy each year prior to May 1. In its marketing policy, the Committee projects expected supply and market conditions for the upcoming season, including an estimate of the marketable quantity (defined as the number of pounds of cranberries needed to meet total market demand and to provide for an adequate carryover into the next season).

At a March 30, 2000 meeting, the Committee estimated the 2000-2001 domestic production of cranberries at 5.89 million barrels. Carryover as of September 1, 2000, was estimated at 4.6 million barrels. Foreign production (primarily Canada) was projected at 800,000 barrels. Allowing for shrinkage of 2 percent for carryover and 4 percent for domestic and foreign production, the total adjusted available supply of cranberries was projected at 10,930,000 barrels.

Based in large part on historical sales figures, the Committee estimated utilization of processing fruit at 5.4 million barrels and of fresh fruit at 280,000 barrels.

A summary of the marketing policy follows:

The Committee determined that the marketable quantity for the 2000-2001 crop year should be established at 5.4 million barrels. This was equal to the expected demand for processing fruit. Fresh fruit sales were not included because (as discussed later in this document) fresh fruit would not be covered by the allotment percentage. Using a marketable quantity equal to processed fruit demand should result in a more stable level of inventories. Supplies in inventory could easily cover any unexpected increases in market demand.

Section 929.49(b) of the order provides that the marketable quantity be apportioned among growers by applying the allotment percentage to each grower's sales history. The allotment percentage equals the marketable quantity divided by the total of all grower's sales histories. No handler can purchase or handle cranberries on behalf of any grower not within the grower's annual allotment.

Total growers' sales histories were set at 6.35 million barrels. Using the formula established under the order in § 929.49 (5.4 million barrels divided by 6.35 million barrels), the annual allotment percentage was 85 percent.

The Committee has been discussing the possible use of volume regulation for over a year. In its deliberations, concerns were voiced about the potential inequities that could result from the current process used to calculate sales histories. Because sales histories are based on an average of past years' sales, newer growers could be restricted to a greater extent than more established growers. This is because a cranberry bog does not reach full capacity until several years after being planted. Using an average of early years' sales (which are low) would likely result in a sales history below future sales potential. A more established grower, on the other hand, would have a sales history more reflective of his or her production capacity.

The Committee's March 30, 2000, recommendation concerning the definition of “commercial crop” (explained later in this document) was intended to mitigate potential inequities. Based upon information received from cranberry growers and handlers subsequent to the March 30 meeting, the Department believed a further modification might be needed to lessen the differential impact a volume regulation could have on individual cranberry growers. For this reason, the Department proposed that a sales history for each existing grower be calculated using the best single sales year in the past six years. For a grower with less than six years of sales, the sales history would be the highest year of sales available. This type of change is contemplated under § 929.48(a)(2) of the order, which provides that the number and identity of the years used to compute sales histories may be altered by regulation. The Department did not propose a change in the way sales histories are computed for brand new acreage (acreage without any history of sales).

The Department's proposal would have changed the way most growers' sales histories were computed. If this change were adopted, each affected grower's sales history would be recalculated. The Committee staff reported that this would have resulted in a new industry total sales history of 7.6 million barrels (about 20% above the 6.35 million barrels used by the Committee). Retaining the 5.4 million barrel marketable quantity recommended by the Committee would require an allotment percentage of 71 percent. To retain the 85% allotment percentage recommended by the Committee, the marketable quantity would need to be increased to 6.46 million barrels (almost 20% above the 5.4 million barrels of expected demand for processing fruit as calculated by the Committee). In the May 30 proposed rule, the Department solicited comments on the Committee's original recommendation of marketable quantity and allotment percentage, as well as on two alternatives proposed by the Department. To summarize, the three options proposed in the May 30 rule were as follows (the marketable quantity and total sales histories figures are all in million barrel units):

The proposed rule solicited comments on these three options or appropriate modifications of them. Comments were due on June 14, 2000.

During the comment period, the Committee met again on June 6, 2000. The primary reason the meeting was held was to consider the various options contained in the proposed rule.

The Committee discussed the two options proposed by USDA. In order to lessen the differential impact a volume regulation would have on individual growers, the sales history calculation was proposed to be modified by USDA so that each existing grower would use the best single sales year in the past six years. A grower with less than six years of sales would use the highest year of sales available. The computation for all growers with brand new acreage was not modified from the Committee's first recommendation (using the State average yield or the total estimated commercial sales, whichever is greater). Using the revised calculation, total sales histories would be increased to 7.6 million barrels. The Committee believed that this calculation artificially inflates the total sales histories. For example, the new total exceeds the record-high 1999 production of 6.39 million barrels by 19 percent, and it exceeds the projected 2000 production (5.89 million barrels) by almost 30 percent.

The Committee also believes that the revised calculation favors production regions with more variability in yield from year to year over those with more consistent production. A Committee member at the June 6, 2000, meeting stated that the standard deviation of yields in Massachusetts is less than 15 barrels per acre, compared with more than 30 barrels per acre in Oregon. Using the best year out of the last six would benefit those States with higher variation, introducing more inequities rather than diminishing them. The proposed change would also favor growers who have planted new acreage over growers who have a more consistent record of production.

Discussion at the June 6 meeting also indicated that the proposed change would favor growers who have planted new acreage in recent years over growers who have a more consistent record of production. (No concerns were expressed about the method used for computing sales histories for new acreage with no sales history.) The Committee concluded that the proposed change in the calculation of sales histories would give undue advantages to growers who have expanded acreage considerably in recent years, and would penalize growers who maintained a consistent production base. This would, again, introduce additional inequities.

Under USDA's option 1, the marketable quantity would remain at 5.4 million barrels, as recommended by the Committee on March 30, 2000. Using the higher sales history figure of 7.6 million barrels would reduce the allotment percentage to 71 percent (5.4 million barrels divided by 7.6 million barrels). This would increase the restricted percentage from 15 to 29 percent. The consensus of the Committee was that volume regulation should not be more restrictive than an 85 percent producer allotment. Although a 15 percent restriction may not have a great immediate impact on grower returns because of the expected large crop and carryover inventories, the Committee believes that an 85 percent allotment percentage would be a good place to start for the industry to address the oversupply situation. The Committee recognizes that the market cannot be stabilized (under the marketing order) in a single year.

More importantly, many growers have been anticipating an allotment percentage not less than 85 percent and have been modifying their cultural practices accordingly. Any dramatic increase in the restricted percentage would likely be met with great opposition from the grower community. The Committee therefore concluded that an allotment percentage of 71 percent was unacceptable and rejected USDA's option 1.

Under its second option, USDA again used the higher sales history figure of 7.6 million barrels. To retain the 85% allotment percentage recommended by the Committee on March 30, the marketable quantity was raised from the 5.4 million barrels recommended by the Committee to 6.46 million barrels, an increase of almost 20 percent. The Committee believed that raising the marketable quantity to 6.46 million barrels would result in adding more fruit to the oversupply, further destabilizing the industry and lowering prices. The Committee therefore did not support USDA's option 2.

Concerns were expressed at the June 6 meeting involving growers with 4 years or less of sales histories. It was expressed that these growers could be impacted more greatly by a volume regulation than other growers because of the way the sales histories would be computed. This is because, as previously discussed, yields are increasing on younger acreage. Using an average of past years' sales, as the order provides, would result in a sales history lower than that acreage's future production capacity. To mitigate this problem, the Committee recommended adopting, in part, the change in sales history calculation proposed by USDA. Specifically, it voted to recommend, for a grower with four years or less of sales history, the best year of sales available as that grower's sales history.

Concern was also expressed that the sales history for a grower with only acreage that is 4 years old or younger (who would use the highest year as his or her sales history), would be calculated differently than the sales history for a grower with a combination of both older and younger acreage. For the more established grower, all sales off all acreage is combined, regardless of the age of the acreage. Then the average of the best four years of sales out of the last six years is used as that grower's sales history. Thus, the more established grower would not get the same adjustment for new acreage that the grower with all new acreage does. It was discussed at the meeting that the Committee does not collect information that would allow such an adjustment. Growers' sales are not segregated by the age of individual bogs, so based on the information available, an adjustment for acreage with 4 years of sales or less cannot be made. Such information could be collected by the Committee in the future.

The Committee ultimately recommended a fourth option. The Committee recommended that growers with only acreage that is 4 years old or less use the best single sales year to calculate a sales history. Growers with 5 years of sales history would use an average of their highest 4 years of sales. Growers with 6 or more years would use an average of their highest 4 years of sales of the most recent six years. New acreage for both brand new and existing growers would continue to receive a sales history using the State average yield or the total estimated commercial sales from that acreage, whichever is greater.

The Committee's recommended change in the calculation of sales histories revised the total industry sales history to 6.432 million barrels. The Committee recommended a small increase in its marketable quantity (from 5.4 to 5.468 million barrels) to retain an allotment percentage of 85 percent. The vote on this recommendation was unanimous. A summary of the various options under consideration follows (again, the marketable quantity and sales history figures are in million barrel units):

This rule implements the Committee's June 6, 2000, recommendation, with a change, by adding a new § 929.149 to the order's rules and regulations pertaining to determination of sales history. This section is modified from what appeared in the May 30, 2000, proposed rule by providing that a sales history for each grower with 5 years of sales history shall be computed by using an average of the highest four years of such grower's sales history. For a grower with six or more years of sales history, the sales history shall be computed using an average of the highest four of the most recent six years of sales. For a grower with four years or less of commercial sales history, the sales history will be computed using the highest year (the same as in the proposed rule). Sales histories for new acreage with no previous sales will be computed using the State average yield or estimated production, whichever is greater (again, the same as in the proposed rule). This rule clarifies the regulatory language pertaining to sales history for new acreage. As discussed in the proposal (65 FR 34414), sales histories for newly planted acreage by existing growers are computed in the same way as for newly planted acreage by new growers without any sales history. Finally, under this rule, if an established grower has newer acreage with four years of sales history or less, and such grower can provide the Committee with credible information which would allow the Committee to segregate the sales history of the newer acreage, then that acreage will be treated in the same manner as acreage of a grower with four years or less of sales history.

This change in the way sales histories are calculated was made by the Department based on the concerns and comments regarding fairness and equity which were raised during this rulemaking. This change will likely result in a slight increase in the marketable quantity recommended by the Committee to maintain the allotment percentage at 85 percent. The Department believes that this change is needed to most equitably allocate allotment among growers, consistent with the requirements of the Act. Additionally, it is apparent that the industry will not support any restricted percentage greater than 15 percent. Although the level of restriction imposed under this rule will not likely resolve the surplus situation facing the cranberry industry in a single year, we conclude that this rule is the best course of action given the economic crisis facing the industry.

This rule also adds a new § 929.250 to set a marketable quantity of 5.468 million barrels and an allotment percentage of 85 percent. The marketable quantity is within the range proposed in the May 30 rule, and the allotment percentage is equal to that under two of the three options contained in that proposed rule. The additional change to accommodate established growers with new acreage having four years of sales history or less will result in a change in marketable quantity, but not enough to undermine this regulation. This conclusion is based on the Department's belief that sales histories of growers in this category would be increased by a relatively small amount.

The Committee unanimously recommended on March 30, 2000, that the number of barrels that defines a commercial crop under the marketing order be increased from 15 to 50 barrels per acre. Calculations of sales histories are based on “commercial” cranberry sales. Currently, section 929.107 defines a commercial crop as acreage that has a sufficient density of growing vines to produce at least 15 barrels per acre without replanting or renovation. This rule increases the 15 barrels per acre to 50 barrels per acre. Acreage producing less than 50 barrels per acre will not be considered to produce a commercial crop. This increase brings the order more in line with current growing conditions.

This action will assist growers who harvested cranberries for the first time in 1999. These growers will qualify for a new sales history determination if they produced less than 50 barrels per acre.

A full commercial cranberry crop is usually not harvested until 3 or 4 years after being planted. Production is usually limited during the first year, with increases in subsequent years until full capacity is reached. Under the current rule, if a grower harvested a bog for the first time in 1999, and achieved a yield of 25 barrels per acre, such grower's sales history would be calculated by using the determination for a grower with four years or less of production. This would be the actual production for that year. Therefore, in this example, for the 2000-2001 crop year the grower's sales history would be 25 barrels multiplied by the number of acres such grower harvested. The 25 barrels would be used in the calculation since it is greater than the 15 barrels per acre used to define commercial cranberry acreage.

Under this rule change, such grower's first year of sales harvested from that acreage will not count since it is less than 50 barrels per acre. Therefore, the grower will be eligible to receive the determination for growers with no sales history on such acreage (which is the State average yield or the grower's estimated commercial sales, whichever is greater). This should benefit growers who had very low yields per acre for their first year of production.

This rule revises § 929.107 of the order's rules and regulations, consistent with the proposed rule published on May 30, 2000.

As previously discussed, a new sales history for a grower with no sales history is calculated by using the State average yield per acre or the total estimated commercial sales, whichever is greater. Existing growers who have newly planted acreage will also use this calculation for their new acreage.

The Committee recommended that for the 2000-2001 crop year, the State average yield be defined as the average State yields for the year 1997 or the average of the best four years out of the last six years, whichever is greater. This calculation is similar to that used to compute sales history for more established growers (an average of the best four years out of the last six years), and would average out seasonal variations in yields. However, if estimated commercial sales are greater than what is computed above, the Committee will use the commercial sales estimated by the grower.

To take into account the differences among the States, the Committee recommended calculating the average yield for each State using the best four of the last six years, and comparing it to the average yield for that State in 1997. The higher of the two figures for each State will be used to calculate new sales histories for new growers.

A new § 929.148 is added to the order's rules and regulations to set forth the calculation of the State average yield. This is consistent with the proposed rule published on May 30, 2000.

The Committee also recommended on March 30, 2000, that fresh and organically-grown cranberries be exempt from volume regulation during the upcoming season. This exemption is authorized under § 929.58 of the order, which provides that the Committee may relieve from any or all requirements cranberries in such minimum quantities as the Committee, with the approval of the Secretary, may prescribe.

Fresh fruit accounts for about 4.7 percent of the total production. The Committee estimated that about 280,000 barrels will be sold fresh this year, compared to 260,000 barrels sold last season.

Under current growing and marketing practices, there is a distinction between cranberries for fresh market and those for processing markets. Cranberries intended for fresh fruit outlets are grown and harvested differently. Fresh cranberries are dry picked (in most cases) while cranberries used for processing are water picked. When cranberries are water picked, the bog is flooded and the cranberries that rise to the top are harvested. Dry picking is a more labor intensive and expensive form of harvesting. Cranberry bogs are designated as “fresh fruit” bogs and are grown and harvested accordingly to produce fruit that is of the quality needed for fresh fruit. Only the lower quality fruit from a fresh bog goes to processing outlets. Yields of fresh fruit growers are typically reduced from those of processed growers. Productions costs are higher, although a premium price over fruit delivered for processing is anticipated.

Fresh cranberry sales constitute less than 5 percent of the cranberry market. All fresh cranberries can be marketed and do not compete with processing cranberries. Fresh cranberries are seasonal (due to their limited shelf life) and are not part of the growing industry inventories.

The Committee concluded that fresh supplies do not contribute significantly to the current cranberry surplus. Thus, the Committee recommended that such cranberries be exempt from the volume regulation implemented by this rule.

Organically-grown cranberries comprise an even smaller portion of the total crop than fresh cranberries do. The Committee estimated that about 1,000 barrels of organic fruit will be sold this season, compared to 450 barrels last season. Organic cranberries are a growing niche market and regulating them could have an adverse effect on marketing this product. Demand for organic cranberries is in line with the current limited production. Thus, all organic cranberries can be marketed, and they do not contribute in any meaningful way to the current oversupply experienced with processing fruit. The Committee therefore recommended that organically-grown cranberries be exempt from volume regulation during the upcoming season. In order to be exempt, organic cranberries will have to be certified as such by a third party organic certifying organization that is acceptable to the Committee.

The fresh fruit exemption was further discussed at the Committee's June 6, 2000, meeting. Concerns were expressed that this exemption would give an unfair advantage to some cranberry processors (those that do not handle fresh fruit) and to their growers. It was suggested that any unused allotment earned by a fresh fruit grower be forfeited, similar to what happens to unused allotment received by growers with new acreage (based on the State average yield).

The Committee considered this suggestion, but continued to support its recommendation to exempt fresh fruit from volume regulation. It was concerned that any substantive departure from the requirements proposed in the May 30 rule would require a second proposed rule to be issued and an opportunity for additional comments to be made available. In any event, the effect of the fresh fruit exemption on the market would probably be minor. The Committee stated that the way in which fresh fruit is handled in future years will be given additional consideration.

Moreover, encouraging growth in organic and fresh markets for cranberries is consistent with the Committee's (and industry) objectives to develop additional market outlets for cranberries. Future industry growth depends on expanding market outlets for cranberries and should not be discouraged.

This rule provides an exemption from volume regulation for fresh and organically-grown cranberries by adding a new § 929.158, as included in the May 30, 2000, proposed rule.

The purpose of the producer allotment program implemented by this rule is to limit the amount of the total crop that can be marketed for normal commercial uses. There is no need to limit the volume of cranberries that may be marketed in noncommercial or noncompetitive outlets. Thus, in accordance with § 929.61, handlers will be able to dispose of excess cranberries in certain designated outlets. That section of the order provides that noncommercial outlets may include charitable institutions and research and development projects for market development purposes. Noncompetitive outlets may include any nonhuman food use (animal feed) and foreign markets, except Canada. Canada is excluded because significant sales of cranberries to Canada could result in transshipment back to the United States of the cranberries exported there. This could disrupt the U.S. market, contrary to the intent of the volume regulation.

To ensure that excess cranberries diverted to the specified outlets do not enter normal market channels, certain safeguard provisions are established under § 929.61. These provisions require handlers to provide documentation to the Committee to verify that the excess cranberries were actually used in a noncommercial or noncompetitive outlet. In the case of nonhuman food use, a handler would be required to notify the Committee at least 48 hours prior to disposition so that the Committee staff would have sufficient time to be available to observe the disposition of the cranberries.

The proposed rule published on May 30, 2000, proposed revising § 929.104 of the order's rules and regulations to list the outlets in which handlers can divert excess cranberries. That section currently lists outlets for “restricted cranberries.” “Restricted cranberries” is a term used in connection with withholding requirements—another type of volume regulation authorized under the order. While the specific outlets listed were not proposed for revision, changes were proposed in the regulatory text to provide that these outlets are authorized for excess cranberries under a producer allotment program. The outlets listed included all those mentioned in § 929.61 of the order.

At its June 6, 2000, meeting, the Committee recommended that foreign markets be excluded as outlets for excess cranberries.

When foreign markets were listed as potential outlets for excess cranberries, cranberry exports were not as significant to the industry as they are today. Exports of fresh cranberries for 1998 were 51,615 barrels, and for processed cranberries, 516,667 barrels. This represents about 10 percent of total sales.

The Committee indicated that the industry is actively selling cranberries in at least 54 foreign countries. The Committee concluded that it would be difficult to list all the countries that are not currently receiving U.S. cranberries (and therefore would be defined as “noncompetitive”) and to monitor the sales activity in each such country.

Moreover, the Committee intends to continue foreign promotion activities to encourage cranberry export sales. These activities are financed, in part, by funds from USDA's Foreign Agricultural Service, which are matched by industry funds for promotional activities in foreign markets. Currently, funds are being used for promotional activities in Germany and Japan.

Additionally, individual handlers are working on developing markets in many foreign countries. Encouraging disposal of excess cranberries in countries where the Committee and individual handlers are attempting to build cranberry markets could undermine these individual efforts to develop commercial markets. Therefore, the Committee unanimously recommended that foreign countries be excluded as eligible outlets for excess cranberries.

The Department has concluded that the Committee's June 6, 2000, recommendation is unnecessary. Excess cranberries cannot be “handled,” which means they cannot be processed. Therefore, under current requirements, excess cannot be processed and then exported. Fresh sales are exempt from volume regulation, so fresh cranberries can be exported free from regulation. We have, however, revised § 929.104 of the regulations to clarify that excess cranberries cannot be processed and sent to foreign markets.

Section 929.125 of the order's rules and regulations establishes an appeal procedure for growers who are dissatisfied with their sales histories as determined by the Committee pursuant to § 929.48 of the order. Under procedures which have been used, a grower may submit to the Committee a written argument within 30 days after receiving the Committee's determination of that grower's sales history, if such grower disagrees with the determination. The Committee must review its determination within a reasonable time, reviewing all the material submitted by the grower, and notify the grower of its decision. If the grower is not satisfied with the Committee's decision, that grower may appeal to the Secretary, through the Committee, within 30 days after being notified of the Committee's decision. The Secretary must review all pertinent information and render a decision. The Secretary's decision is final.

On March 30, 2000, the Committee recommended revising the process. The Department concurs with the Committee recommendation. Specifically, this rule provides than an appeals subcommittee be established and that the full Committee be provided with 15 days to further review appeals by growers. This process should be more efficient in handling grower appeals. The subcommittee, appointed by the Committee Chairman, will be comprised of two independent and two cooperative representatives, as well as a public member. Although an additional level of review is being established, it should be more efficient for a smaller subcommittee to consider grower appeals. The subcommittee will have 30 days to render a decision on each appeal.

If a grower is not satisfied with the appeal subcommittee's decision, that grower could further appeal to the full Committee. The grower would submit his or her written argument to the Committee along with any pertinent information for the Committee's review within 15 days after being notified of the subcommittee's determination. The Committee will have 15 days from the receipt of the grower's appeal to respond. The Committee will promptly inform the grower of its decision, including the reasons for its decision.

The grower may further appeal to the Secretary within 15 days after notification of the Committee's findings, if the grower is not satisfied with the Committee's decision. The Committee will forward a file with all pertinent information related to the grower's appeal. The Secretary will inform the grower and Committee staff of the Secretary's decision. All decisions by the Secretary will be final.

This rule revises § 929.125 of the order's rules and regulations to implement the Committee's recommendation, consistent with the proposed rule published on May 30, 2000.

Section 929.49 of the order provides that in any year in which an allotment percentage is established by the Secretary, the Committee must notify growers of their annual allotment by June 1. That section also requires the Committee to notify each handler of the annual allotments for that handler's growers by June 1.

The May 30 proposed rule proposed establishing a marketable quantity and allotment percentage for the 2000 cranberry crop. To allow adequate time for interested parties to comment on the proposal and for the Department to give due consideration to the comments received, it was determined that a final decision on the proposed rule would not be reached before June 1. Therefore, the Department proposed that the June 1 deadline be suspended for the 2000-2001 crop year.

This rule suspends the June 1 date appearing in § 929.49 of the order as proposed on May 30, 2000.

At its June 6, 2000, meeting, the Committee discussed two of the order's rules and regulations that are now obsolete, and unanimously recommended that they be deleted. Those sections are § 929.109 Unusual circumstances as used in determining base quantities and § 929.151 Allotment transfers and disposition of the growers annual allotment certificate .

Both of these sections pertain to the “base quantity” method of producer allotment, which was replaced in 1992 with the sales history method of producer allotment. These sections were inadvertently left in the regulations and do not apply to the sales history program.

Removing these sections from the order's rules and regulation will reduce confusion to the cranberry industry. Therefore, this rule removes §§ 929.109 and 929.151 from the rules and regulations in effect under the order.

Pursuant to requirements set forth in the Regulatory Flexibility Act (RFA), the Agricultural Marketing Service (AMS) has considered the economic impact of this action and alternatives considered on small entities. The purpose of the RFA is to fit regulatory actions to the scale of business subject to such actions, in order that small businesses are not unduly or disproportionately burdened. Marketing orders issued pursuant to the Act, and rules thereunder, are unique in that they are brought about through group action of essentially small entities acting on their own behalf. Thus, both statutes have small entity orientation and compatibility. Accordingly, AMS has prepared this final regulatory flexibility analysis.

According to the Small Business Administration (13 CFR 121.201) small handlers are those having annual receipts of less than $5,000,000 and small agricultural producers are defined as those with annual receipts of less than $500,000. Because prices have declined significantly in the past year, and because the small farm definition is based on estimated sales, nearly all producers and some handlers are considered small under the SBA definition. Therefore, this RFA analysis is properly applicable for the entire industry. Of the 1,100 cranberry growers, between 86 and 95 percent are estimated to have sales equal to or less than $500,000. Fewer than 60 growers are estimated to have sales that would have exceeded this threshold in 1999. Thus, the consequences of this final action apply to virtually all growers.

Over two-thirds of the U.S. cranberry crop is handled by a grower-owned marketing cooperative. Five other major processors, together with the cooperative, handle over 97 percent of the crop. Using Committee data on volumes handled, AMS has determined that none of these handlers qualify as small businesses under SBA's definition. The remainder of the crop is marketed by about a dozen grower-handlers who handle their own crops. Dividing the remaining 3 percent of the crop by these grower-handlers, all would be considered small businesses.

This action makes the following amendments to the regulations under the cranberry marketing order: (1) revises the calculation of sales histories; (2) exempts fresh and organic fruit; (3) includes a definition of State average yields; (4) changes volume needed to qualify as commercial production; (5) revises Committee review procedure for determination of sales history; (6) suspends that annual allotment notification date; and (7) establishes levels of marketable quantity and allotment percentage to determine the level of volume control.

Most of the changes as a result of this final rule are expected to have little or no regulatory burden on industry, or are made expressly to acknowledge problems faced by new producers and producers with new acreage. The revisions to calculating sales histories will benefit new growers or those who want to enter cranberry production. The exemption for fresh and organic cranberry sales should help those two niche markets continue to develop. Recalculating the number of barrels needed to qualify for commercial production will enable new growers to use the revised sales history calculation to obtain a higher sales history. Before assessing the impact of volume control on the industry, an economic profile of the cranberry market conditions is provided.

Cranberries are produced in 10 States, but the vast majority of farms and production is concentrated in Massachusetts, New Jersey, Oregon, Washington, and Wisconsin. Massachusetts was the number one producing State until 1990, when Wisconsin took over the lead. Since 1995, Wisconsin has been the top producing State. Both States account for over 80 percent of cranberry production. The industry has operated under a Federal marketing order since 1962.

Average farm size for cranberry production is very small. The average across all producing States is about 33 acres. Wisconsin's average is twice the U.S. average, at 66.5 acres, and New Jersey averages 83 acres. Average farm size is below the U.S. average for Massachusetts (25 acres), Oregon (17 acres) and Washington (14 acres).

Small cranberry growers dominate in all States: 84 percent of growers in Massachusetts harvest 10,000 or fewer barrels of cranberries, while another 3.8 percent harvest fewer than 25,000 barrels. In New Jersey, 62 percent of growers harvest less than 10,000 barrels, and 10 percent harvest between 10,000 and 25,000 barrels. More than half of Wisconsin growers raise less than 10,000 barrels, while another 29 percent produce between 10,000 and 25,000 barrels. Similar production patterns exist in Washington and Oregon.

Over 90 percent of the cranberry crop is processed, with the remainder sold as fresh fruit. In the 1950s and early 1960s, fresh production was considerably higher than it is today, and in many years, constituted as much as 25-50 percent of total production. Fresh production began to decline in the 1980s, while processed utilization and output soared as cranberry juice products became popular. Today, fresh fruit claims only about 5-6 percent of total production. (Typically, “shrinkage” absorbs the remaining 3 percent of production.) Three of the top five States produce cranberries for fresh sales. New Jersey and Oregon produce fruit for processed products only.

Production has risen steadily since the early 1950s, as more acreage was brought into production and yields increased. Cranberry output first exceeded 1.5 million barrels in 1966, 3 million barrels in 1982, 4 million in 1988, and hit a record 6.4 million barrels in 1999. Acreage rose 62 percent since 1954, from just under 23,000 acres to 37,200 acres. Output growth was also fed by soaring yields—a 288-percent increase from 44.3 barrels per acre in 1954 to almost 172 barrels in 1999.

The industry enjoyed healthy increases in demand as a result of new juice drink products, which in turn prompted expansion in acreage and output. Demand peaked in 1994 with per capita consumption of processed berries at 1.7 pounds and has since declined, to 1.6 pounds in 1998. Prices above $60 per barrel in 1996 and 1997 continued to stimulate output. As a result, inventories began building. Over the period 1954-1969, carryover averaged 222,179 barrels, about 19 percent of annual average production. During the 1970s, annual production rose nearly 90 percent from 1954-69, and carryover stocks rose to about 29 percent of annual average production during the decade. Carryover as a percent of output fell back to 19 percent during the 1980s. The 1990s have seen both large output increases and carryover stocks. For 1990-99, beginning inventories rose to a level equal to nearly a third of annual production over the decade. In 1999 alone, carryover swelled to more than 3.1 million barrels, equivalent to 49 percent of the year's crop. Current estimates of beginning stocks are for a record 4.6 million barrels at the start of the 2000/2001 marketing year—equivalent to 78 percent of anticipated production. With no significant increases in demand or cutbacks in production, at the end of the 2000/2001 marketing year, there could be nearly a full year's production in storage (5.25 million barrels) to start the 2001 marketing season. Table 1 provides indicators of average annual carryover, production, and prices.

The value of utilized production increased steadily from 1974 to 1986, dipped 9 percent in 1987, then began a more volatile but still upward trend through 1997 before plunging 40 percent in 1998. Prices per barrel over the 1979-98 period averaged $44.375, but dropped below $40 a barrel for 1998 crop berries, and could fall below $20 for the 1999 crop. For the 2000/2001 marketing year, some handlers have indicated they may only offer $9-$10 per barrel. If prices do not exceed $20 per barrel in 1999, the value of utilized production will decline again by half—from $211 million estimated for the 1998 crop to less than $110 million in 1999. This would be the lowest crop value since 1981.

The volume control for cranberries imposes no restrictions on entry into production. For example, there is no quota such as used in the tobacco industry that a new entrant would have to acquire from an existing quota holder. The impact of volume control is evaluated relative to the income effect that excessive inventories would otherwise exert on growers and the likelihood that, without significant improvement in either prices or sales or both, many growers will not be able to remain in business.

Because inventories are large and cranberries may be stored for long periods without deterioration, producers may not receive full payment for cranberries delivered to storage for several years; and storage costs are deducted from their final payment. In addition, reports from various growers estimate current total costs of production at approximately $30-$35 per barrel. With expectations of prices declining well below this range in the 1999 marketing year, most producers are not expected to cover variable costs of production, thus increasing the likelihood they will either exit the industry or abandon bogs until the market situation improves.

The effect of the Committee's revised volume control recommendation (CMC2) contained in this final action may be evaluated in terms of the loss of sales that producers incur as a result of volume control, compared with the extent to which price increases due to volume control offset that sales loss.

For the 15-percent volume control to be revenue-neutral—that is, to leave producers on average no worse off with respect to revenue realized from lower production—prices would need to rise by 17.7 percent in 2000/01. An alternative allotment percentage that was considered by the Committee would have resulted in a volume control of 29 percent. A 29-percent volume control would require prices to rise by 40.8 percent to remain revenue-neutral. In both cases, a lesser price increase results in a gross revenue loss to producers. In and of itself, this would not necessarily mean that volume control should be rejected as a marketing tool. Even if prices do not rise, producers realize some savings from production costs not incurred and from higher prices that may result in subsequent marketing years as a result of lower inventories.

Economic analyses of factors affecting cranberry prices have been conducted by Sexton, Jesse, and USDA in 1999 and 2000. All of the analyses reported positive price impacts associated with a 100,000 barrel change in supply, ranging from $0.49-$1.26 per barrel for each 100,000 barrel change. Because inventories are so large, this analysis uses the lowest reported price impact, of $0.49 for each 100,000 barrel change, or $4.89 per barrel for a change of 1 million barrels. Thus, if inventories decrease (increase) by 1 million barrels, prices are estimated to increase (decrease) by $4.89 per barrel. In the aforementioned economic analysis, prices averaged $27.695 per barrel over the period analyzed from 1954 to 1998. The estimated price impact of $4.89 per barrel represents a 17.7 percent change in prices compared with the average over the 45-year period.

The 15-percent volume control is estimated to lead to a reduction in inventories by 884,000 barrels, based on a 2000/2001 domestic production forecast of 5.89 million barrels (prior to the 15-percent volume control). This reduction in inventory is estimated to increase prices by $4.32 per barrel (.884 × 4.89). Using a projected 2000/01 average price of $20 per barrel, prices are estimated to increase to $24.32 per barrel. Thus, a grower who reduced output from 1,000 to 850 barrels would realize a gain in revenue from $20,000 to $20,672 or 3.4 percent. Some additional gain would be realized from cost savings from 150 barrels that were not produced. And, the volume reduction would be expected to generate price increases in future years, providing cumulative positive effects from the volume control.

The results of econometric analyses are subject to some level of uncertainty. Results are generally reported as estimates subject to a specified error. Assuming a 5 percent error to illustrate the sensitivity of the results, the $4.89 per barrel price change estimate could range from $4.65 to $5.14 per barrel. Then, a reduction in inventory of 884,000 barrels would lead to higher prices ranging from $4.11 to $4.54 per barrel. Table 2 illustrates these estimated price increases and their effect on producer revenue, using a forecast price for 2000/01 of $20 per barrel.

We conclude that the 15 percent volume control would not unduly burden producers, particularly smaller growers. While there would be a loss of salable product, producers are likely to benefit from the price-enhancing effect of the reduced inventories in 2000/01. If producers do not benefit in 2000/01, the reduction in inventory is expected to raise prices in future years which would provide cumulative annual effects. The estimated price increases reported here would mean higher prices for consumers. However, recent prices have been significantly higher than these estimated prices; thus the consumer price effect is still well below previous years' prices.

In accordance with § 929.49 of the order, this rule establishes a marketable quantity of 5.468 million barrels and an allotment percentage of 85 percent for cranberries in the 10-State production area during the 2000-2001 crop year. Because the Department is making allowances for established growers with acreage with four years of sales histories or less, this rule also provides for an increase in the marketable quantity which may be needed to maintain the 85 percent allotment percentage. This action also revises procedures for calculating growers' sales histories, defines the State average yield, increases the barrels per acre for determining a commercial crop, exempts fresh and organic cranberries from volume regulation, and revises Committee review procedures. These actions are designed to improve cranberry marketing conditions and the operation of the volume regulation program.

The marketable quantity for the 2000-2001 crop year is established at 5.468 million barrels with an allowance for an adjustment to allow for the additional sales history calculation provision. This is equal to the expected demand for processing fruit. Fresh fruit sales were not included because fresh fruit is exempt from volume regulation. Organically-grown cranberries are also exempt because projected sales are only about 1,000 barrels. Using a marketable quantity equal to processed fruit demand should result in a more stable level of inventories. Supplies in inventory could easily cover any unexpected increases in market demand.

Section 929.49(b) provides that the marketable quantity be apportioned among growers by applying the allotment percentage to each grower's sales history. The allotment percentage equals the marketable quantity divided by the total of all grower's sales histories. No handler can purchase or handle cranberries on behalf of any grower not within the grower's annual allotment.

Total growers' sales histories were established by the Committee at 6.432 million barrels. Using the formula established under the order (5.468 million barrels divided by 6.432 million barrels), the annual allotment percentage is 85 percent. The order provides that a grower's sales history is established by computing an average of the best four years' sales out of the last six years' sales for those growers with existing acreage. Under this rule, growers with 5 years of sales history will use an average of their highest 4 years of sales. Growers with 6 or more years will use an average of their highest 4 of the most recent 6 years of sales. For growers with four years or less of commercial sales history, the sales history is calculated by using the highest single year of all available years of such growers' sales. New acreage with no sales history for both brand new and existing growers would receive a sales history using the State average yield or the total estimated commercial sales from that acreage, whichever is greater. If these growers also have newer acreage with four years of sales history or less, and such growers can provide the Committee with credible information which would allow the Committee to segregate the sales history of the newer acreage, then that acreage shall be treated in the same manner as acreage of a grower with four years or less of sales history.

This rule changes the method of calculating sales histories for acreage with four years or less of sales. This rule should increase the amount of allotment available to growers with newer plantings. This is because a cranberry bog does not reach full capacity until several years after being planted. Using an average of early years' sales (which are low) normally results in a sales history below current sales potential. A more established bog, on the other hand, would have a sales history more reflective of his or her production capacity. The Committee recommended this adjustment be allowed only for growers who have no acreage with more than four years of sales. However, the Department is accommodating more established growers by making this calculation available to them as well.

Calculations of sales histories are made on “commercial” cranberry acreage. This rule raises the amount of barrels that defines a commercial crop under the order from 15 to 50 barrels. This action will assist growers who harvested cranberries for the first time in 1999. Such grower's first year of sales will not count if it was less than 50 barrels per acre. Instead, the grower will receive the same sales history as is provided to a grower with no sales history on his or her acreage (which is the State average yield or the grower's estimated commercial sales, whichever is greater). This will benefit growers who had very low yields per acre for their first year of production.

Growers with no sales history on their acreage receive the State average yield. This applies to both brand new growers and growers with sales history on some of their acreage. This rule defines the State average yield for the 2000-2001 crop as the average yields during the year 1997 or the average of the best four years out of the last six years, whichever is greater. This calculation is similar to that used to compute sales history (an average of the best four years out of the last six years), and should average out seasonal variations in yields. However, if estimated commercial sales are greater than what is computed above, the Committee will use the commercial sales estimated by the grower.

There is no need to limit the volume of cranberries that may be marketed in these noncommercial and noncompetitive outlets. Thus, this rule provides that handlers may dispose of excess cranberries in such outlets. Noncommercial outlets are charitable institutions and research and development projects for market development purposes. Noncompetitive outlets are non-human food use and foreign markets, except Canada.

This rule exempts fresh and organically-grown fruit from the volume regulation. This exemption is provided pursuant to section 929.58 of the order which provides that the Committee may relieve from any or all requirements, cranberries in such minimum quantities as the Committee, with the approval of the Secretary, may prescribe.

Fresh fruit accounts for about 4.7 percent of the total production. The Committee estimated that about 280,000 barrels will be sold fresh this year, compared to 260,000 barrels sold last season. Sales of organically-grown fruit are projected at only 1,000 barrels. These relatively small volumes of fruit do not contribute in any significant way to the current oversupply or inventory build-up. Therefore, there is no need to cover them under the volume regulation.

The sales history re-determination procedures are being modified by appointing a subcommittee composed of two independent and two cooperative representatives and one public member to be the first level of review.

Currently, section 929.125 provides an appeal procedure for growers with their sales history determinations. A grower may submit to the Committee a written argument within 30 days of receiving the Committee's determination for sales history, if such grower disagrees with the determination.

This rule establishes an appeals subcommittee as a more efficient way to consider grower appeals. Although an additional level of review is being established, it will be more efficient for a subcommittee composed of 5 members to discuss and decide on appeals. Scheduling a meeting of the entire Committee to discuss and make determinations of grower appeals is more cumbersome and time consuming.

Finally, this rule suspends the June 1 deadline for notifying growers and handlers of their annual allotments. This will allow for adequate time to complete this rulemaking proceeding, without unduly impacting the cranberry industry.

Eight months ago, the Committee established a volume regulation subcommittee that researched the two methods of volume regulation available under the order. Those two methods are a producer allotment program and handler withholding program. The subcommittee's primary mission was to determine what method of volume control would be best for the industry if volume regulations were recommended. After holding several meetings, the subcommittee concluded that a producer allotment is the best method available to the industry at this time.

The withholding program has not been used since 1971. The provisions of the producer allotment program were amended in 1992, but never used. Under the withholding program, growers deliver all their cranberries to their respective handlers. The handler is responsible for setting aside restricted cranberries and ultimately disposing of the cranberries in authorized noncommercial and noncompetitive outlets. This could result in a large volume of cranberries being disposed of and perhaps destroyed. In addition, the withholding provisions require that all withheld cranberries be inspected by the Federal or Federal-State Inspection Service, which could be costly.

The producer allotment program allows cultural practices to be changed at the grower level prior to harvest. This could result in less fruit being produced and will not require the disposal of as many cranberries as with the withholding provisions. In addition, inspections are not required under the producer allotment method, which is more cost effective and simpler to administer. For these reasons, we conclude that the producer allotment program is the preferred method of volume regulation at the current time.

One alternative to this regulation discussed at length by the Committee and the industry was not regulating at all. Economic reports of the condition of the cranberry industry indicate that if supplies are not controlled, grower prices will continue to drop. It will be difficult for small growers as well as large ones to sustain further price declines. Thus, the Committee discarded this alternative. AMS concurs.

Another alternative to regulation was to increase demand through market development activities rather than control supplies through regulation. A domestic promotion program is being considered by the Committee, in addition to the export promotion activities already underway. These efforts in market development and new product development can increase demand for cranberries and assist in addressing the oversupply situation. This, in conjunction with volume regulation, was determined to be the best course of action for the cranberry industry at this time. AMS concurs.

In addition, the Committee considered alternative ways to calculate growers' sales histories and different levels of regulation. These are discussed in more detail in the section of this document entitled “Analysis of Comments.”

A grower's annual allotment is established by applying the allotment percentage to that grower's sales history. Several alternative methods of calculating sales histories were considered, primarily to mitigate the situation where newer growers (those with few years of sales history) would be more dramatically impacted by volume regulation than more established growers.

One change recommended by the Committee increases the number of barrels that defines commercial acreage. This change will allow growers who had a small initial crop in 1999 to market their entire 2000 crop (since they will receive as their sales history the State average yield). This should assist growers in their second year of production, without dramatically increasing the total industry sales history.

The Committee also considered a change proposed by USDA to allow every grower to use his or her best single sales year out of the last six years as that grower's sales history. This change would have increased the industry total by a substantial amount (about 20 percent), and would have resulted in either a much higher restricted percentage or marketable quantity (see the following discussion of USDA Options 1 and 2). This alternative was rejected as not being in the best interest of most cranberry growers.

The Committee ultimately recommended that growers with four years or less of sales history receive their highest year of sales as their sales history. This rule adopts this recommendation. It will result in a higher allotment for these growers than would be obtained by averaging all their available sales years. This will mitigate the impact of the restricted percentage on growers with relatively new acreage, without increasing the marketable quantity by a significant amount. In the case of growers with five years of sales, the Committee recommended their sales history be computed using an average of the highest four years of sales. For growers with six or more years of sales history, a sales history will be computed using an average of the highest four of the most recent six years of sales. Growers (both new and established growers) having new acreage with no sales history will get the State average yield or estimated commercial production, whichever is greater. This rule also adopts these recommendations. In addition, based on concerns expressed during the June 6 Committee meeting and in comments, the Department added a provision to this regulation which applies to established growers with newer acreage having four years of sales history or less.

The following three levels of volume regulation were also considered (in addition to that finally recommended by the Committee).

Initial Committee Recommendation (15% volume control; sales history—6.35 million barrels; marketable quantity—5.4 million barrels): This alternative was rejected because it does not take into account the additional sales histories being granted to newer cranberry growers as described above.

USDA Option 1 (29% volume control; sales history—7.6 million barrels; marketable quantity—5.4 million barrels): This option was rejected because it almost doubled the restricted percentage (from 15 to 29 percent) recommended by the Committee and anticipated by the industry. As previously stated, this would require prices to rise by 40 percent to remain revenue-neutral for growers.

USDA Option 2 (15% volume control; sales history—7.6 million barrels; marketable quantity—6.46 million barrels): This option dramatically increases the marketable quantity above anticipated market demand. Thus, it would have the same impact as no volume regulation and is therefore rejected.

As with all Federal marketing order programs, reports and forms are periodically reviewed to reduce information requirements and duplication by industry and public sectors. In addition, the Department has not identified any relevant Federal rules which duplicate, overlap or conflict with this rule.

In compliance with Office of Management and Budget (OMB) regulations (5 CFR Part 1320) which implement the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35), the information collection and recordkeeping requirements imposed by this order have been previously approved by OMB and assigned OMB Number 0581-0103.

There are some reporting and recordkeeping and other compliance requirements under the marketing order. The reporting and recordkeeping burdens are necessary for compliance purposes and for developing statistical data for maintenance of the program. The forms require information which is readily available from handler records and which can be provided without data processing equipment or trained statistical staff. This rule does not change those requirements.

The Committee's meetings were widely publicized throughout the cranberry industry and all interested persons were invited to attend them and participate in Committee deliberations. Like all Committee meetings, the March 30 and June 6 meetings were public meetings. Press releases were issued announcing the meetings and setting forth the agenda. Meeting announcements were also placed on a website specifically designed for the cranberry industry. All interested parties were invited to attend. All entities, both large and small, were able to express their views on these issues by attending the meetings or contacting their Committee representatives about their concerns prior to the meetings. Subsequent to the publication of the proposed rule on May 30, AMS mailed a copy of that rule to every cranberry grower and handler of record. That mailing also invited interested parties to attend the June 6 meeting and express their views. Additionally, AMS posted a summary of what transpired at that meeting (as well as a full transcript of the meeting) on its website and included it in the rulemaking record. The Committee itself is composed of eight members, of which seven members are growers and one represents the public. Also, the Committee has a number of appointed subcommittees to review certain issues and make recommendations. The Committee manager also held several meetings with growers throughout the production area to discuss the methods of volume regulation and the procedures for regulation.

A proposed rule concerning this action was published in the Federal Register on May 30, 2000 (65 FR 34411). Copies of the rule were mailed to all known cranberry growers in the production area. Also, the rule was made available on the Department's website. Finally, the rule was made available through the Internet by the Office of the Federal Register. A 15-day comment period ending June 14, 2000, was provided to allow interested persons to respond to the proposal.

A total of 131 comments were filed in response to the May 30, 2000, proposed rule by 125 individuals (4 persons submitted 2 and one individual submitted 3 comments). By far, the majority of commenters were cranberry growers. The six major cranberry handlers also commented, as did the Committee, three U.S. Congressmen, the New Jersey Department of Agriculture, and an attorney representing two cranberry processors. Sixty-nine comments were opposed to a volume regulation in general or opposed to a specific portion of the proposal. Fifty-six comments favored one of the options under consideration. A number of comments addressed the fresh fruit exemption. Also, James M. Talent, Chairman of the U.S. House of Representatives' Committee on Small Business commented that AMS did not prepare a sufficient regulatory flexibility analysis in the proposed rule published on May 30, 2000.

Sixty-nine comments opposed establishing a volume regulation for the 2000-2001 crop year. Following is a discussion of the six main arguments against volume regulation.

Many commenters believed that a 15 percent reduction will have little or no impact on improving the market or reducing the large inventories.

The producer allotment program is a tool available to the cranberry industry to use in time of need. In their consideration of this issue, agricultural economists who have studied the program concluded that volume regulation is one avenue available to the industry that can help stabilize prices and shorten the period of oversupply. Economists have addressed the Committee and indicated that grower prices will further plummet if some type of action is not taken to decrease the oversupply. It was also reported to the Committee that if volume regulation is implemented, a 100,000 barrel reduction in carryover inventory would result in a price increase ranging from $0.49 to $0.73 per barrel, while a 1,000,000 barrel reduction in inventories would result in a price increase of $4.89 to $7.26 per barrel.

It may be true that an 85 percent allotment percentage will not dramatically drive up grower prices. However, the Committee has communicated with a vast number of growers and determined that an allotment percentage lower than 85 percent would not be supported for the first year of volume regulation. By establishing a less restrictive percentage this year, growers will be eased into the mechanics of the program operations. Also, this volume regulation could be successful in stopping the decline of prices. The Committee and the industry are aware that the surplus situation cannot be resolved in one season or by volume regulation alone. It is possible that volume regulation may have to be instituted again in future years. However, that decision would be made on an annual basis.

The marketing order is only one tool the Committee has decided to use to assist in reducing the oversupply. The establishment of a domestic generic promotion program to increase the awareness and consumption of cranberries has also been recommended. The Committee is currently in the developmental stage of implementing such a program. The Committee is also involved in an export program using Marketing Access Program funds with USDA's Foreign Agricultural Service. Individual handlers have also taken steps to develop new products and expand foreign and domestic markets.

Some commenters believed that the regulation is being implemented too late for the upcoming season, and growers do not have time to adjust cultural practices to reduce production and associated costs.

Many growers have been aware for months that a volume regulation has been under consideration by the Committee and USDA. The Committee has been discussing the implementation of volume regulations for this season for more than eight months. In addition, all Committee meetings, including the March 30 and June 6, 2000, meetings were public meetings, widely publicized throughout the industry. All interested parties were encouraged to attend. The Committee manager also held several meetings with growers throughout the production area to discuss the possible implementation of volume regulation for the 2000 crop.

In anticipation of a volume regulation, many growers have been taking steps to prepare for a 15 percent crop reduction. Information received by USDA indicates that there are still steps growers can take to minimize production costs. Some examples are that bogs can be flooded, and chemical applications and bee pollination can be curtailed. Also, as previously discussed, handler costs associated with the storage of excess inventories (which are ultimately passed on to growers) would be reduced.

We agree that it would have been preferable for this rule to be recommended and implemented at an earlier date to provide more time for growers to prepare for a volume regulation. However, this did not happen for several reasons. The last time volume control was imposed under the order was approximately 30 years ago. Difficulties were encountered in arriving at the most fair method of calculating grower sales histories in order to achieve (within the order's current parameters) an equitable apportionment of allotments among producers. And finally, although the Committee recommended volume control and, along with USDA, proposed regulations to implement such control, the industry is not unified in its support of the proposals. Nevertheless, there is overall agreement that volume controls need to be implemented, and USDA concludes that the implementation of volume control as set forth in this regulation is an important step to take in addressing the oversupply situation and resultant low grower returns.

Many comments expressed concerns about the determination of sales histories, particularly that growers with four years or less of sales histories would be more dramatically impacted than others. The commenters stated that the reduction for these growers could exceed 15 percent by a substantial amount. Some suggested that these growers receive the State average yield as their sales history, similar to the method used to provide sales histories for growers with new acreage.

The Committee and the Department have been working for many months now to develop a way to calculate sales histories which would result in the most equitable allocation of allotment among growers in the cranberry industry as it exists today. The primary concern has been with growers with four years or less of sales history. In response to this concern, USDA's proposed recalculation of sales histories which modified the Committee's initial recommendation was intended to mitigate some of the perceived inequities that could arise. In its second recommendation, the Committee further recommended that the formula be changed so that growers with four years or less of sales be given their highest year of sales as their sales history. Growers with five years of sales or more would still have their sales history calculated by averaging the highest four years of sales during the most recent five or six years of sales, whichever is applicable.

This Committee recommendation is expected to help some growers with newly planted acreage. Instead of using an average of all years' sales, which could be lower on newer acreage, these growers can use their best year as their sales history. Most likely, with newer acreage, the last year of production will be the best year and will raise such growers' sales histories (over the current method of averaging all available years of sales).

Another concern was that the Committee's recommendation is not equitable for more established growers who have put in new acreage. Any grower who reports to the Committee that he or she has new acreage coming into production for the first time receives the State average yield as the sales history for that acreage. In that case, the established grower is treated in the same manner as a brand new grower. Once the new acreage starts producing cranberries, the grower reports to the Committee sales off all acres combined. Information reported to the Committee does not segregate sales by the age of the acreage. The combined sales are thus used in calculating the more established growers' sales histories (using an average of the best four years out of five or six). Since the sales are not separated, the Committee did not recommend making an adjustment for acreage belonging to an established grower that has been producing for four years or less. Nevertheless, based on concerns and comments expressed during this rulemaking proceeding, USDA has decided to allow such an adjustment if growers can produce credible records which would allow the Committee to segregate the newer acreage.

The Committee and USDA have worked diligently to ensure that all growers would receive a sales history that accurately represents each grower's capability to produce on such acreage while still being an effective regulation. The various recommendations, although not perfect, were intended to achieve the most fair method of computing sales histories, which would result in allotments being equitably apportioned among producers.

The allotment calculation in this rule is based on prior years' histories. There are no barriers to entry into the cranberry growing or handling business under the marketing order nor should there be any. In the early 1990's, the order was amended to change the producer allotment program from the base quantity to the sales history method. The program amendments were put in place after a public hearing and grower and processor vote. However, this is the first time the sales history program has actually been implemented. The Committee and USDA have discovered some areas of the order provisions that could to be improved for future seasons. The Committee is currently considering needed order amendments, which would likely be necessary to make any substantive changes in the sales history provisions of the order.

Many growers commented that their handlers are not responsible for the surplus, since two of the largest handlers maintain the largest inventories.

Review of this available information shows that the volume of inventories of these two handlers is directly proportional to the volume of cranberries handled. In addition, the increased plantings over the last few years, which have contributed to the surplus, was industry-wide. Regardless, the cranberry surplus is an industry problem, since large inventories depress overall grower prices. The marketing order's volume regulation features are designed to help all growers in the industry by stabilizing grower returns.

Some handler commenters said that with a restriction in place, they would have to purchase cranberries from their competitors to supply their customers since they do not have inventories like other handlers. Purchases among handlers is a standard practice in the cranberry business. With the surplus, there should be an abundance of fruit available for sale at a reasonable rate in the event handlers need additional product. In addition, one such commenter stated that they routinely purchase a large percentage (20-30%) of their cranberries from other handlers rather than directly from growers. The purpose of the volume regulation is to benefit the grower by stabilizing the marketplace. If handlers must purchase cranberries from other handlers, and inventories are reduced, the volume regulation is working. In addition, if a handler has excess cranberries, any unused allotment forfeited to the Committee will be equitably distributed among the remaining handlers.

Some commenters were concerned that Canada's cranberry industry could have a dampening effect on any volume regulation implemented in the United States. The marketing order regulates domestic cranberry handlers. Although any volume regulation implemented cannot extend to Canada, the British Columbia Cranberry Committee has voted to reduce their 2000 crop by 15 percent if volume regulations are implemented in the United States.

The Committee reported 1999 Canadian fruit production at 634,000 barrels of cranberries. A substantial portion of the Canadian fruit is grown in British Columbia. If volume regulation is instituted in Canada, growers will not be encouraged to plant new vines. Also, with the current U.S. surplus of cranberries, there are ample domestic supplies of fruit, which, along with current low grower prices, should discourage the importation of foreign fruit.

Fifty-six of the comments supported volume regulation in general, many of those favoring one of the options under consideration over the others. Some of those who opposed volume regulation indicated which option they preferred if USDA does implement a regulation.

Initial Committee Recommendation (15% volume control; sales history—6.35 million barrels; marketable quantity—5.4 million barrels): Few comments were received in support of this option. Those in support commented that this was the most equitable option and the Committee's original recommendation should be adhered to. One commenter favored the initial Committee recommendation because he believed that the two alternatives offered by USDA favored certain growers over others. The calculation of sales histories using the average of the best four out of six years was favored by these commenters.

USDA Option 1 (29% volume control; sales history—7.6 million barrels; marketable quantity—5.4 million barrels): Some commenters who discussed this option were against volume regulation but believed this would be the best if volume regulation were implemented. This option would have established a restricted percentage of 29 percent. Those supporting this option believed that a 15 percent reduction does not go far enough and will not have an impact on the surplus. One commenter stated that the volume regulation should be restrictive enough to make a difference. Some commenters believed that a 29 percent reduction is necessary if the oversupply situation is to be seriously addressed. One commenter stated that this is the best opportunity to return market prices to a level that will allow growers to break even this year, after heavy losses in 1998. This commenter further stated that this regulation will not raise consumer prices but will allow the industry to avoid incurring costs of delivering, cleaning, freezing, and storing cranberries only to have them be sold at a loss. Others commented that allowing all growers to use the best single sales year out of the last 6 years as a sales history was preferable to using an average.

Those opposed to USDA Option 1 stated that it would cause hardships for growers. Most of those commented on the negative impact a volume reduction exceeding 15 percent would have on many growers. One commenter stated that growers will be unduly disadvantaged by a 71 percent producer allotment because many growers have already incurred production costs at levels designed to target a reduction of 15 percent of the average of the best 4 out of 6 years. This commenter further stated that growers who have produced consistent crops for six years would see their volume reduction double. According to this commenter, this option overinflates sales histories to 7.6 million barrels, which would cause a doubling of the restriction in order to maintain a reasonable marketable quantity. Using the best year of 6 will alter the sales histories of virtually all growers.

Many commenters did not support using the best year of the last 6 to calculate sales histories for all growers (except those with new acreage) because it rewards growers who have contributed most to the current oversupply. Some felt this method of calculating sales histories was too advantageous for newer growers, and those who have expanded their acreage in recent years.

USDA Option 2 (15% volume control; sales history—7.6 million barrels; marketable quantity—6.46 million barrels): Comments in support of this option believed that it was the most equitable of all options. Some commented, however, that it still did not go far enough on how newer growers will be allocated allotment. One comment in support of the option stated handlers should not be allowed to transfer unused allotments to other growers.

One supporter believed that unlike the Committee option, this was a good faith attempt to determine grower sales histories in an equitable fashion. This supporter further stated this option will have a similar impact on the entire industry, whereby most growers' actual crop reduction will be closer to 15 percent. This commenter added that because it does not result in significant differences in allotments, it better complies with the Act regarding equitable apportionment of allotments.

Those opposed to this option were generally opposed to both USDA options as they relate to the calculation of sales histories. As with USDA option 1, some commenters believed the method of calculating sales histories under this option was too advantageous for newer growers. One commenter believed that raising the marketable quantity to 6.35 million barrels (USDA Option 1) was unrealistic and, therefore, the volume regulation would have no effect on reducing supply.

Revised Committee Recommendation (CMC2) (15% volume control; sales history—6.432 million barrels; marketable quantity—5.468 million barrels): Comments submitted on CMC2 (following the June 6 public hearing) in support of this option believed that this was the best option to bring market stability and reduce costs. While it would not have an equal impact on each individual grower, it would help the industry overall. Some stated that a 15% restriction will not eliminate the surplus, but believed that it will allow handlers to begin the process of balancing supply and demand. Many commented that the marketable quantity should be near 5.4 million barrels to be effective. Some were supportive of any proposal that limits the marketable quantity to approximately 5.4 million barrels, and believed calculating sales histories for established growers using the best 4 years out of 6 was the best method. Some supported CMC2 even though USDA option 1 would have a greater impact on reducing the surplus. They believed CMC2 would be best for the long-term interests of the industry.

One commenter stated that he could deliver 3000 more barrels under USDA option 2, but still supported CMC2 as being best for the industry overall.

Those opposed to CMC2 stated that this option is grossly inequitable. One commenter stated that under both Committee recommendations, some growers would see a small reduction but others would be forced to dump up to 50 percent of this year's crop. This commenter stated that the Committee presented CMC2 as a compromise, but it is not. The commenter stated that this option does nothing to remedy the inequities of the first Committee recommendation, and only creates additional inequities. This commenter further stated that this option would reward growers growing for 4 years or less and punish established growers that have added new acreage.

Conclusions: Since the Committee's meeting on March 30, 2000, the Department received additional information from cranberry growers and handlers pertaining to the way in which sales histories are computed. Of primary concern were the potential inequities that could result from the Committee's initial recommendation. Specifically, some were concerned about growers with four years or less of sales histories on some or all of their acreage. The Department suggested two alternative levels of volume regulation in an attempt to address those concerns, with the expectation that the Committee would meet and discuss all options and recommend any needed revisions prior to finalization of the rule. The Department looked for flexibility in the marketing order that would assist this segment of the industry while still providing for an effective volume regulation.

The Department's options changed the way in which nearly all growers would calculate their sales histories. Under USDA Option 1, the sales histories would have increased to 7.6 million barrels (as opposed to the Committee's established sales histories of 6.35 million barrels). Using the Committee's recommended marketable quantity of 5.4 million barrels resulted in an allotment percentage of 71 percent. USDA Option 2 increased the marketable quantity to 6.46 million barrels (as opposed to the Committee's established marketable quantity of 5.4 million barrels) to stay within the Committee's original recommendation to establish an allotment percentage no lower than 85 percent. The Department recognized that the proposed rule provided a wide range of possible methods of implementing volume regulation for the industry to consider.

At the June 6 meeting and in written comments, it was expressed that both USDA options dramatically inflate the sales histories and USDA option 2 further provides an unrealistic marketable quantity. To demonstrate the unrealistic marketable quantity in USDA option 2, a commenter stated that the marketable quantity established in CMC2 (5.468 million barrels) represents a 10 percent increase in demand in one year. The largest increase in annual demand in recent years has been only about 5 percent. Further, the 6.46 million barrel marketable quantity in USDA option 2 exceeds anticipated production by over a half a million barrels. USDA Option 2 would, therefore, result in no reduction of available supplies. It would thus be an ineffective regulation and would provide no benefits to cranberry growers. We therefore concur with the Committee and comments received that USDA Option 2 should not be implemented.

Also, based on Committee meetings and comments received, we agree that USDA Option 1, which would establish an allotment percentage of 71 percent, would not be prudent at this time. For months, many growers have anticipated a volume regulation and believed it would not entail a reduction of more than 15 percent. Many growers altered their cultural practices accordingly. Establishing a reduction of more than 15 percent so close to the beginning of the season would cause too many hardships on too many growers. Although an 85 percent allotment percentage would have a lesser impact on supplies and prices than a 71 percent allotment percentage, we conclude that doubling the restriction from what was anticipated would be too costly to growers.

Both USDA options changed the way sales histories are calculated by allowing virtually all growers to use the best year of production. The primary concern of the Committee and industry was the method of establishing sales histories for growers with new acreage. We agree with the Committee that this method would overinflate total industry sales histories. The calculation for more established growers (using the average of the best four out of six years) has been in effect for many years and provides a reasonable and accurate sales history for these growers.

Additionally, the Committee is continuing its work on amending the order to address some of the problems it has encountered while considering volume regulation for the 2000-2001 crop year.

For these reasons, the Department has concluded that implementing CMC2, the Committee's recommendation of June 6, 2000, is the best course of action. It provides the most equitable means of allocating producer allotments available at this time, and should provide benefits to growers in excess of its costs. The only change the Department is making is allowing established growers who also have newer acreage with four years of sales history or less to receive the highest sales season on that acreage. Because this change will cause an increase in the marketable quantity if established growers can segregate production from their newer acreage, a change has also been made in § 929.250 of the regulations to reflect this adjustment.

Fresh and organically-grown fruit are exempt from the volume regulation pursuant to § 929.58 of the order which provides that the Committee may relieve from any or all requirements cranberries in such minimum quantities as the Committee, with the approval of the Secretary, may prescribe.

Many comments were received regarding the fresh and organic cranberry exemption. Twenty-seven comments were against the exemption, primarily the fresh fruit exemption. Those in opposition were generally concerned that fresh fruit handlers are being given an unfair advantage as they will be in a position to make unused allotments from fresh growers available to their processed growers and virtually market all of their cranberries. Some commented that much of the fresh fruit excess would end up in the processed markets. In addition, some commented that the fresh market would be oversupplied with fresh cranberries and the quality would suffer, as well.

Five of the 27 who oppose the exemption commented that if the fresh fruit exemption is part of the regulation, any unused allotment realized from fresh fruit acreage should be forfeited in the same manner as with new growers who use the State average yield as their sales history and forfeit unused allotment.

Twelve comments supported the exemptions. In most cases, the commenters supported a specific option or volume regulation in general, including the fresh and organic exemption. One comment was against any volume regulation, but stated that if one is implemented, the fresh exemption should be a part of it.

The supporting commenters expressed that fresh and organic cranberries are small, but important segments of the overall cranberry market, and do not contribute to the oversupply situation. Because there is adequate demand for these products, one commenter stated that it does not make sense to restrict the volume of fresh cranberries that can be sold profitably. Another commenter stated that fresh fruit production requires special cultural practices that need to be implemented over the course of several growing seasons to transition the cranberry vines from processed fruit production to fresh fruit production. For this reason, it is unlikely that growers who normally produce cranberries for the processed market will become fresh growers during the 2000-2001 crop year. In addition, this commenter expressed that it would be unlikely for growers to market their excess fruit as fresh product for logistical reasons.

The Department supports the fresh and organic exemption. As stated previously, fresh fruit accounts for about 4.7 percent of the total production. Organically-grown cranberries comprise an even smaller portion of the total crop than fresh cranberries, about 1,000 barrels.

Under current marketing practices, there is a distinction between cranberries for fresh market and those for processing markets. Cranberries intended for fresh fruit outlets are grown and harvested differently. Most fresh cranberries are dry picked while cranberries used for processing are water picked. When cranberries are water picked, the bog is flooded and the cranberries that rise to the top are harvested. During this proceeding, it was noted that in the State of Wisconsin, cranberries for fresh market are water picked much like cranberries for processing. Additional information revealed that although cranberries intended for fresh market can be water picked, the resulting yields are more similar to the labor intensive dry picked cranberries, than to cranberries that are water picked for processing. This is partially attributable to the fact that only the highest quality fruit is earmarked for the fresh market.

Regarding the comments that many growers will become “fresh growers” and flood the market with fresh fruit, information received does not support that this will happen. Industry members advised that it takes many years to cultivate an acceptable “fresh” product. Handlers would not likely buy fresh cranberries from a first year fresh grower, as it would be expected the quality would not be acceptable. For these reasons, it would not be practical or economically feasible to convert from a processed grower to a fresh grower this season.

Regarding the comments that fresh cranberries will be diverted into processing outlets, safeguards are established under the program to protect against this. The exemption for both fresh and organic cranberries applies to cranberries packed in consumer packaging, such as cellophane bags for supermarkets. Any sorted-out cranberries converted to processing will count against that grower's allotment.

The Committee has deliberated for over eight months to arrive at a volume regulation recommendation that addresses the oversupply situation and is acceptable to most of the industry. The Committee recognizes that some improvements could be made in the way volume regulations are implemented, but it is impossible to make many more changes in time for the 2000-2001 crop year.

One idea that has been discussed, for example, is to amend the marketing order to provide that fresh and organic sales be segregated from processed sales, and allotment only be earned on the processed sales. The suggestion that fresh and organic cranberry growers forfeit any unused allotment is also an idea that could be considered in the future. The formal rulemaking process, which involves a hearing and grower referendum, usually takes 12 to 18 months to complete.

If the fresh or organic markets show significant growth in the coming years, and surplus becomes an issue, different measures can be taken at that time to include them in any volume regulation.

The Department supports the decision to exempt fresh and organically-grown cranberries from volume regulation this year. It is concluded that fresh and organic supplies do not contribute significantly to the current cranberry surplus, and that such cranberries should therefore be exempt from the allotment percentage this rule imposes.

James M. Talent, Chairman of the U.S. House of Representatives' Committee on Small Business commented that the proposed rule issued by AMS apparently did not comply with the Regulatory Flexibility Act. Specifically, he commented that our Initial Regulatory Flexibility Analysis did not find that the proposed rule would have a significant economic impact on small entities. Our initial analysis did conclude that cranberry growers and handlers (both large and small) would benefit from the establishment of volume regulation during the upcoming season. The Final Regulatory Flexibility Analysis contained in this document provides further analysis to support this conclusion. Also, this document analyzes the impact of the various alternative levels of regulation offered in the proposed rule.

Congressman Talent also stated that AMS eliminated opportunity for public comment on the Committee's revised recommendation for volume regulation (CMC2) that it made on June 6, 2000. Subsequent to the publication of the proposed rule on May 30, AMS mailed a copy of that rule to every cranberry grower and handler of record. That mailing also invited interested parties to attend the June 6 meeting and express their views. Additionally, AMS posted a summary of what transpired at that meeting (as well as a full transcript of the meeting) on its website and included it in the rulemaking record. Many of those who filed comments in response to the proposed rule specifically addressed the second Committee recommendation. More importantly, CMC2 falls within the scope of options contained in the proposed rule. The marketable quantity is slightly higher than in two of those options, and lower than in a third. The 85 percent allotment percentage established by this rule is the same as that contained in two of the three published options. The change in the way sales histories are computed is also within the scope of options proposed.

A small business guide on complying with fruit, vegetable, and specialty crop marketing agreements and orders may be viewed at the following website: http://www.ams.usda.gov/fv/moab.html. Any questions about the compliance guide should be sent to Jay Guerber at the previously mentioned address in the FOR FURTHER INFORMATION CONTACT section.

After consideration of all relevant matter presented, including the information and recommendation submitted by the Committee and other available information, it is hereby found that this rule, as hereinafter set forth, will tend to effectuate the declared policy of the Act.

It is further found that good cause exists for not postponing the effective date of this rule until 30 days after publication in the Federal Register (5 U.S.C. 553). The crop year begins on September 1, 2000. This rule should be effective prior to the beginning of the crop year so that the Committee can initiate its appeals procedures well in advance of the start of the volume regulation. Also, growers need time to adjust their cultural practices in preparation for the volume regulation. Further, handlers and growers are aware of this rule, which was recommended and modified based on public meetings. Also, a 15-day comment period was provided for in the proposed rule.

Growers may request, and the Committee may grant, a review of determinations made by the Committee pursuant to §§ 929.48 and 929.149, in accordance with the following procedures:

(a) If a grower is dissatisfied with a determination made by the Committee which affects such grower, the grower may submit to the Committee within 30 days after receipt of the Committee's determination of sales history, a request for a review by an appeals subcommittee composed of two independent and two cooperative representatives, as well as a public member. Such appeals subcommittee shall be appointed by the Chairman of the Committee. Such grower may forward with the request any pertinent material for consideration of such grower's appeal.

(b) The subcommittee shall review the information submitted by the grower and render a decision within 30 days of receipt of such appeal. The subcommittee shall notify the grower of its decision, accompanied by the reasons for its conclusions and findings.

(c) If the grower is not satisfied with the subcommittee's decision, the grower may further appeal to the full Committee. The grower must submit its written argument to the Committee along with any pertinent information for the Committee's review within 15 days after notification of the subcommittee's decision. The Committee shall respond within 15 days of the receipt of the grower's appeal. The Committee shall inform the grower of its decision, accompanied by the reasons for its decision.

(d) The grower may further appeal to the Secretary, within 15 days after notification of the Committee's findings, if such grower is not satisfied with the Committee's decision. The Committee shall forward a file with all pertinent information related to the grower's appeal. The Secretary shall inform the grower and all interested parties of the Secretary's decision. All decisions by the Secretary are final.

This 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 rule has been reviewed in accordance with Executive Order 12988, Civil Justice Reform. RUS has determined that this rule meets the applicable standards provided in section 3 of that Executive Order. In addition, all State and local laws and regulations that are in conflict with this rule will be preempted; no retroactive effect will be given to this rule; and, in accordance with section 212(e) of the Department of Agriculture Reorganization Act of 1994 (7 U.S.C. 6912(e)), administrative appeal procedures, if any, must be exhausted prior to initiating litigation against the Department or its agencies.

RUS has determined that this rule will not have a significant economic impact on a substantial number of small entities, as defined by the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ). The RUS telecommunications loan program provides borrowers with loans at interest rates and terms that are more favorable than those generally available from the private sector. RUS borrowers, as a result of obtaining federal financing, receive economic benefits that exceed any direct cost associated with complying with RUS regulations and requirements.

This rule contains no new reporting or recordkeeping burdens under OMB control number 0572-0079 that would require approval under the Paperwork Reduction Act of 1995 (44 U.S.C. chapter 35).

Send questions or comments regarding this burden or any other aspect of these collections of information, including suggestions for reducing the burden to F. Lamont Heppe, Director, Program Development and Regulatory Analysis, Rural Utilities Service, 1400 Independence Avenue, SW., Room 4034, STOP 1522, Washington, DC 20250-1522.

The Administrator of RUS has determined that this will not significantly affect the quality of the human environment as defined by the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq. ). Therefore, this action does not require an environmental impact statement or assessment.

The program described by this rule is listed in the Catalog of Federal Domestic Assistance programs under numbers 10.851, Rural Telephone Loans and Loan Guarantees, and 10.852, Rural Telephone Bank Loans. This catalog is available on a subscription basis from the Superintendent of Documents, the United States Government Printing Office, Washington, 20402-9325. Telephone: (202) 512-1800.

This rule is excluded from the scope of Executive Order 12372, Intergovernmental Consultation, which may require consultation with State and local officials. See the final rule related Notice entitled “Department Programs and Activities Excluded from Executive Order 12372,” (50 FR 47034).

This rule contains no Federal Mandates (under the regulatory provisions of title II of the Unfunded Mandates Reform Act of 1995) for State, local, and tribal governments or the private sector. Thus, this rule is not subject to the requirements of sections 202 and 205 of the Unfunded Mandates Reform Act of 1995.

The telecommunications industry is becoming increasingly competitive. The Telecommunications Act of 1996 (Pub. L. 104-104) and regulatory actions by the Federal Communications Commission are drastically altering the regulatory and business environment of all telecommunications systems, including RUS borrowers. At the same time, changes in overall business trends and technologies continue to place pressure on RUS-financed systems to offer a wider array of services and to operate more efficiently.

RUS regulations currently stipulate that an entity must provide or propose to provide the basic local exchange telephone service needs of rural areas to be eligible for RUS financing (7 CFR 1735.14, Borrower Eligibility) and that loans cannot be made for facilities to serve subscribers outside the borrower's local exchange service area (7 CFR 1735.17, Facilities Financed). The Telecommunications Act of 1996, however, made the term “basic local exchange service” obsolete. The law mandates that universally available and affordable telecommunications services, including access to advanced services, be made available to all US citizens—whether in rural areas or city centers, affluent or poor communities. RUS supports this mandate and the goal that, with the assistance of advanced telecommunications technology, rural citizens be provided the same economic, educational, and health care benefits available in the larger metropolitan areas. RUS believes that the most expeditious way to bring the full range of telecommunications services to rural areas is to make certain providers of services, in addition to providers of local exchange services, eligible for RUS financing. Mobile telecommunications services are included among the telecommunications services financeable under the Rural Electrification Act (RE Act) and among those contemplated in the Telecommunication Act of 1996. Therefore, RUS believes that, in addition to wireline service, mobile telecommunications services should be made available in all rural areas. As such, RUS is deleting its requirement that all borrowers provide local exchange service. Mobile telecommunications service, which allows the user to move within the service area while making and receiving telephone calls and other services, is fundamentally different from wireline service and is not, therefore, duplicative under the RE Act. Since mobile telecommunications services do not and cannot serve the same function as contemplated in state telecommunications modernization plans (TMPs) for wireline services (see 7 CFR 1751.106), RUS policy is to consider a borrower receiving a loan to finance such services to be participating in the state's plan so long as the loan funds are not used in a manner that, in RUS' opinion, is inconsistent with the borrower achieving the goals contained in the plan. RUS will continue to follow this policy regardless of whether the borrower provides any local exchange services. In addition, RUS has included criteria for determining “reasonably adequate service” levels for mobile telecommunications service.

RUS regulations are also utilized by the Governor of the Rural Telephone Bank in carrying out the loan program of the Rural Telephone Bank (the Bank); therefore, these policy revisions would apply to loans made by the Bank, as well.

RUS received eight comments regarding the proposed rule, published at 65 FR 6922 on February 11, 2000, which were taken into consideration in preparing the final rule. A list of the commenters and comment summaries and responses follows:

Comment: NPI, a mobile wireless telephone service, supports the proposed amendments to the existing regulations, stating that they will increase rural access to advanced telecommunications technology. CTIA and WWC also support the expansion of the RUS loan program to facilitate the provision of wireless telecommunications services to rural areas. They believe that the proposed rule correctly recognizes that wireless services fall within the definition of “telephone service” as defined by Congress for RUS. CTIA and WWC support RUS' conclusion that prudent public policy ensures that consumers in rural areas have access to wireless and advanced telecommunications services comparable to that of their urban counterparts. However, CTIA, WWC, and FTC recommended that RUS go further to encourage the development of competitive telecommunications services in rural areas between wireless and wireline service providers. They stated that RUS policies should facilitate wireline-wireless competition. They further stated that the proposed rule should be amended by removing the word “incidentally” to allow rural consumers to receive the benefits of genuine facilities-based competition. RUS' new rules should encourage multiple competing carriers to provide service to presently unserved and underserved rural markets.

Reply: RUS appreciates the support for its efforts to expand modern telecommunications in rural areas. However, unless authorized by the provisions of the RE Act, RUS is prohibited from making a loan that results in “duplication of lines, facilities, or systems providing reasonably adequate services * * *.” (7 U.S.C. 922) (hereinafter referred to as “duplication”). Replies to other comments explain that RUS believes that wireline and mobile service do not duplicate each other. RUS' mission is to ensure that rural consumers have access to modern telecommunications service including wireless and advanced telecommunications services comparable to urban and suburban subscribers. The rule, therefore, promotes the financing of mobile service where such service is non-existent or is determined to be inadequate.

Comment: CTIA and WWC stated that RUS should modify its rules to specify that, because states are federally preempted from requiring certificates of convenience (CCN) and necessity for wireless providers, § 1735.12(a) of the rule does not apply to wireless carriers, and mobile wireless carriers should be subject to § 1735.12(b) instead.

Reply: The RE Act dictates what action RUS will take when borrowers have a CCN or do not have a CCN. RUS will make a nonduplication finding in those cases where one is required.

Comment: CTIA and WWC further recommended that § 1735.12(d) of the proposed rule be revised to insure that it does not impose greater requirements on commercial mobile radio service (CMRS) carriers than those imposed by the FCC. Thus, RUS should hold that the clarity, reliability and signal strength requirements contained in proposed § 1735.12(d)(2) and (3) are met so long as a wireless provider is operating within the parameters of its FCC license, and that the mobile 911 requirements of proposed § 1735.12(d)(5) are consistent with those established by the FCC. NRTC recommended that the proposed requirements for mobile telecommunications service be interconnected with the public switched telephone network (PSTN) and that mobile 911 service be available to all subscribers, should not be determinative of eligibility for RUS loans. NRTC stated that the safety advantages of wireless technology do not depend on access to the PSTN or 911. Businesses and individuals using mobile wireless services not connected to the PSTN may still report emergency situations at the scene, rather than going to the nearest telephone. NRTC recommended that RUS eliminate the requirements of interconnection (§ 1735.12(d)(4)) and 911 availability (§ 1735.12(d)(5)) in its proposed rule changes.

Reply: The criteria used in determining if service is reasonably adequate are designed to ensure that no rural area is trapped with inferior, substandard service. RUS has, therefore, established criteria to ensure that service being provided is adequate. RUS will consider all criteria in § 1735.12(d) before making a determination as to whether a loan can be made based on a finding of inadequate service. RUS and the FCC have different roles. RUS' function is to promote and finance telecommunications service in rural areas. RUS is prohibited from financing duplication. The service features described in determining adequate service are a minimum standard of service RUS believes present-day subscribers should receive.

Comment: CTIA and WWC recommended that RUS should also implement proposed § 1735.12(d)(8), which allows the Administrator to impose “any other criteria * * * determine[d] to be applicable,” in a manner that ensures that wireless carriers applying for RUS loans are not subjected to unreasonable requirements or provisions that conflict with FCC rules and policies. In addition, RUS should likewise implement proposed § 1735.12(d)(7), which precludes RUS loans from being used to provide service “at rates which render [it] unaffordable to a majority of rural persons,” in a manner that takes into account competition in the wireless marketplace.

Reply: RUS appreciates the comment and will consider all relevant circumstances in applying § 1735.12(d) in a manner designed to promote modern mobile service in rural areas. Allowing the RUS Administrator the discretion to establish or evaluate “other criteria” is necessary and prudent in the rapidly evolving technological environment of the telecommunications industry. In addition, since the Administrator is responsible to the taxpayers for the security of the government's loans, he or she must be afforded the ability to adequately assess unique or rare situations to determine what is in the best interest of the rural residents measured against a provider's ability to repay its debt. With regard to rates, the word “majority” in the proposed rule has been changed to “significant number.” RUS believes that the mobile service offered at unaffordable rates is not “available” if it is offered at rates that are unaffordable to a significant number of persons, and cannot, therefore, be adequate. Financing for mobile wireless service will only be provided where such facilities and the resulting service do not currently exist or is found to be inadequate.

Comment: The Associations stated that RUS should not distinguish between mobile telecommunications service and wireline telecommunications service. The Rural Electrification Act defines “telephone service” so as to include both. The two kinds of service duplicate each other if both are offered in the same area.

Reply: RUS believes that mobile and wireline telecommunications services are easily distinguishable from each other. The most obvious difference is that wireline service reaches only a fixed location while a receiver for mobile service allows the subscriber to send and receive communications while moving within a wide area. There is also a significant difference in capacity, with the wireline facilities being able to handle a significantly larger volume of information. Wireline's greater capacity is reflected in the difference in the pricing of the two services with subscribers being predominantly charged a fixed monthly rate while mobile service subscribers are charged rates that are more sensitive to usage levels. The RE Act definition of “telephone service” is sufficiently broad to allow RUS to finance wireline services and mobile services. Neither the definition nor any other provision of the RE Act prevents the RUS from financing more than a single provider of non-duplicating services in a specific area.

Comment: The Associations stated that Congress never envisioned RUS financing telecommunications competition. Neither the RE Act nor the Telecommunications Act of 1996 gives RUS the authority to finance competition.

Reply: As noted in the reply to the previous comment, the mobile and wireline services are distinct and, therefore, do not duplicate or compete with each other when offered in the same area. Moreover, the RE Act prohibits RUS financing of duplication, not competition, so that RUS may provide financing in some situations, even though another provider purports to serve the same area. The RE Act makes another distinction, between (1) cases where there is “a state regulatory body having authority to regulate telephone service and to require certificates of convenience and necessity,” 7 U.S.C. 922, and (2) cases where there is not such a body. Non-duplication findings are required only in the second.

Comment: RTFC stated that RUS should concentrate on financing telecommunications services in rural areas, instead of promoting competition and also asserted that there are other sources of funds for mobile telecommunications services.

Reply: RUS' mission is to promote and finance the widest range of telecommunications services defined in the RE Act throughout rural America. RUS is not simply a lender of last resort as the comment implies. Just as RUS in the last 50 years led extension of telephone service in rural areas, it looks forward to leading in the deployment of mobile wireless and advanced telecommunications services currently underway.

Comment: The Associations stated that RUS, by financing wireless and wireline services in the same area, increases the risk of default on its loans and jeopardizes provision of services in the area.

Reply: RUS is alert to the possibility of the risks mentioned in the comment. The agency believes that mobile wireless and wireline are distinct and do not, therefore, duplicate each other to any significant degree. Therefore, entry of a mobile telecommunications provider into an area poses little financial risk to an existing wireline provider. The language in the regulation states that generally, RUS will not make a loan to another entity to provide the same service ( i.e., mobile where mobile already exists) already being provided by a RUS borrower unless the borrower is unable to meet its obligations to RUS (this section, in proposed rule as an amendment to § 1735.14, will instead be added to § 1735.17). As a Federal lender, it is RUS' responsibilities to ensure, to the best of its ability, security for all outstanding and future loans, and to encourage telecommunications services in rural areas.

Comment: In the proposed regulations, the Associations assert that RUS fundamentally changed its definition of adequate telephone service by making the existing definition of adequate service apply only to wireline service and by adopting a new definition of mobile telecommunications services.

Reply: The RE Act requires the Administrator of RUS to determine that a loan will not result in the “duplication of lines, facilities, or systems, providing reasonably adequate services”. If the existing service is not reasonably adequate, an RUS loan to improve service does not result in duplication. Mobile service is distinct from wireline service thereby requiring a definition of adequacy that properly reflects its uniqueness. With rapidly advancing technologies, the quality of telecommunication service expected by all persons has risen dramatically in recent years. Therefore, the new definition of adequate mobile telecommunications service reflects these developments.

Comment: The Associations assert that RUS does not have authority to determine the affordability of wireline or wireless service.

Reply: The new regulations state that “mobile telecommunications service is not provided at rates which render the service unaffordable to a majority of the rural persons” is one of the criteria RUS will use in determining whether existing mobile telecommunications service is adequate (7 CFR 1735.12(d)(7)). RUS believes that service available only at extremely high rates that render it inaccessible to a significant number of rural subscribers is not adequate service. The evaluation of whether rates are affordable to rural subscribers is made only to determine whether RUS will make a loan in the particular situation and is clearly different from the regulatory judgement of whether rates are reasonable. Therefore, RE Act purposes would be furthered by a loan to finance mobile telecommunications services at reasonable rates that are affordable to rural persons who would not otherwise have access to such services.

Comment: The Associations believe that RUS should not eliminate the requirement in its existing regulations that borrowers must provide basic exchange service. Instead, RUS should amend its regulations to authorize the financing of mobile and other advanced telecommunications services for providers that are also providing basic exchange service.

Reply: Telecommunications providers offering basic local exchange telephone service are eligible for RUS loans currently and will continue to be eligible under the new regulations. The facilities used to deliver mobile services are distinct from wireline facilities, including those facilities that provide basic exchange service, and RUS believes that treating mobile services separately will expedite their expansion in rural areas. Limiting RUS funding of mobile services to those companies providing basic exchange services would in most instances mean that the existing telephone company could decide not to provide mobile services and then prevent persons and businesses in its service area from receiving the service from any other company as well.

Comment: The Associations stated that RUS cannot exempt carriers from the statutory State telecommunications plan (TMP) requirements.

Reply: The RE Act requires, as a condition of receiving a loan, that “the applicant is a participant in the [TMP]” for the state in which the proposed service is located, “if the plan was developed by telephone borrowers under [the RE Act]” (7 U.S.C. 935(d); 7 U.S.C. 948(b)(4)(B)). The statute sets forth requirements for a TMP that contemplate only wireline carriers (see 7 U.S.C. 935(d)(3)) and existing regulations have been developed utilizing that interpretation (7 CFR 1751.101(d)). RUS believes that technologies that allow mobile service to meet TMP standards will not be practical for a considerable time, if ever, and that it was not Congress' intention to delay expansion of mobile services in rural areas. Under the existing interpretation of the TMP standards, RUS does not require that all of the wireline services provided by a borrower be upgraded to comply with the TMP, including services not covered by the loan. Instead, RUS requires that loan funds be spent in a manner consistent with the borrower achieving TMP standards (7 CFR 1751.103). RUS interprets the provision in the same way for mobile loans—the borrower must not use the funds in a manner inconsistent with achieving TMP standards. This interpretation will facilitate both accomplishing TMP standards at the earliest possible date and the expansion of mobile service in rural areas.

This rule becomes effective on the date of publication in the Federal Register because any further delay would contribute to denying benefits to residents in rural areas. This rule is part of an Administration initiative to ensure that rural areas receive access to all types of telecommunications services—services already available to urban residents. Part of the intent of that initiative is to provide funding, this fiscal year (fiscal year 2000), to entities to provide mobile telecommunications service where that service does not exist or is inadequate. In order to do that, applicants must have time to prepare and submit applications in accordance with this and other applicable RUS regulations; RUS must also have adequate time to process and approve eligible applications. A delay in the effective date of this rule of 30 days, coupled with application preparation, review and processing times, would undermine the ability to provide funding this fiscal year, thereby denying benefit to rural residents.

The Commission is publishing today the final text of revisions to the regulations at 11 CFR 104.3, 104.7, 104.8 and 104.9. These rules implement section 641 of Public Law 106-58 (Pub. L. No. 106-58, 106th Cong. 1st Sess., § 641, 113 Stat. 430, 477 (1999)), which amended section 434(b) of the Federal Election Campaign Act of 1971, 2 U.S.C. 431 et seq. (“FECA” or “the Act”), to require, inter alia, that the Commission require the authorized committees of Federal candidates to aggregate and report their receipts and disbursements on an election-cycle-to-date basis, rather than a calendar-year-to-date basis, as was previously required. The goals of the 1999 amendment to the FECA and the new rules are to simplify recordkeeping and reporting for authorized committees by itemizing contributions, other receipts, and disbursements on the same election-cycle-to-date basis, and to provide the public with more relevant information for the current election cycle. 145 Cong. Rec. E1896-02, September 17, 1999 (statement of Hon. William M. Thomas). The 1999 amendment to the FECA requires these rules to be effective for reports covering periods after December 31, 2000.

Section 438(d) of Title 2, United States Code requires that any rules or regulations prescribed by the Commission to carry out the provisions of Title 2 of the United States Code be transmitted to the Speaker of the House of Representatives and the President of the Senate 30 legislative days before they are finally promulgated. These regulations were transmitted to Congress on July 6, 2000.

The Commission initiated this rulemaking by publishing a Notice of Proposed Rulemaking (“NPRM”) in the Federal Register on May 3, 2000, 65 FR 25672 (May 3, 2000). The NPRM contained proposed rules at 11 CFR 104.3, 104.8 and 104.9 requiring authorized committees of Federal candidates to itemize and report their receipts and disbursements on an election cycle basis. The proposed rules used the definition of election cycle at 11 CFR 100.3(b), under which the election cycle begins the day after the general election for a seat or office and ends on the day of the next general election for that seat or office. The NPRM also contained two alternative approaches to the definition of election cycle. Under alternative one, the election cycle, for reporting purposes, would begin on January 1 of the year following the general election and end on December 31 of the year of the next general election. Under alternative two, the election cycle would begin twenty-one days after the general election for a seat or office and would end twenty days after the next general election for that seat or office. Additionally, under the second alternative, the contribution limit regulations at 11 CFR 110.1 and 110.2 would have been revised to require that undesignated contributions made up until the twentieth day after the election would aggregate to the contributor's contribution limit for the election that was just held. 1

The comment period ended on June 2, 2000. The Commission received two comments from the Project On Government Oversight and Eliza Newlin Carney, a staff correspondent for the National Journal. One commenter stated that it has studied the problems with reviewing and searching FEC records and has found it very difficult to determine the amounts of individual contributions reported for a specific election. The commenter stated that the proposed rules directly correct the problem and that it fully supports their implementation. The second commenter was concerned that the rulemaking would eliminate year-end reports. The revised rules do not change the filing of year-end reports, or the filing frequency of any other reports, which are mandated by § 434 of the FECA. The rules simply alter the manner in which authorized committees aggregate and disclose their receipts and disbursements within the required reports. In addition, a comment from the Internal Revenue Service (“IRS”) stated that the proposed rules are not inconsistent with IRS regulations or the Internal Revenue Code.

The final rules are identical to the rules proposed in the NPRM. Revisions to 11 CFR 104.3 state that the specified contents of authorized committee's reports must be disclosed for the reporting period and the election-cycle-to-date. Section 104.7 is being amended to change references to authorized committee's itemizations of contributions aggregating in excess of $200 per calendar year to $200 per election cycle and to provide authorized committees with examples of clear statements requesting contributor information, which are required on written solicitations. Sections 104.8 and 104.9 are being revised to require authorized committees to provide identifying information for contributors whose contributions total over $200 within the election cycle and for persons to whom expenditures and other disbursements exceed $200 within the election cycle.

The Commission's regulations at 11 CFR 104.3 set forth the required contents of reports of receipts and disbursements. Section 104.3 is being revised to state that the specified contents of authorized committee's reports must be disclosed for the reporting period and for the election cycle-to-date rather than for the reporting period and calendar year-to-date. Please note that this amendment to the FECA does not affect unauthorized committees and the Commission is not issuing new rules modifying the calendar year reporting system they currently use, or changing the forms they file at this time. 2

The introductory language of paragraph (a) is being revised to state that authorized committees must disclose their receipts for the reporting period and for the election cycle.

Paragraph (a)(3) is being revised to state that authorized committees must report the amount of each category of receipt listed in that paragraph for the reporting period and the election cycle.

A parenthetical statement is being added to paragraphs (a)(4)(i) to require authorized committees to identify each contributor whose election cycle-to-date total contributions exceeds $200. 3 Parenthetical statements are also being added to paragraphs (a)(4)(v) and (vi) to require authorized committees to identify each person whose election-cycle-to-date total rebates, refunds or other offsets to operating expenditures, or total dividends, interest or other receipts provided to the authorized committee exceeds $200.

Similarly, paragraph (b) is being revised to state that authorized committees must disclose their disbursements for the reporting period and for the election cycle.

Paragraph (b)(2) is being amended to state that authorized committees must report the amount of each category of disbursement listed in this paragraph for the reporting period and the election cycle.

Paragraph (b)(4)(i) is being revised to require authorized committees to identify each person to whom expenditures in an aggregate amount exceeding $200 within the election cycle are made to meet the authorized committee's operating expenditures. 4

Paragraph (b)(4)(vi) is being reworded to require authorized committees to identify each person who has received any disbursements not otherwise itemized under paragraph (b)(4)(i), (ii), (iii), (iv) or (v) aggregating in excess of $200 within the election cycle.

Paragraph (i) is being revised to require that all reports filed by authorized committees under section 104.5 be cumulative for the election cycle rather than for the calendar year.

New paragraph (k) is being added to ensure the accurate reporting of election cycle-to-date activity for those candidates who are in mid-election cycle on January 1, 2001, when these regulations take effect. While receipts and disbursements made between November 8, 2000 (the day after the general election) and December 31, 2000, will be reported in the year-to-date totals for 2000 in the post-general election report and the year-end report, under new paragraph (k) of 11 CFR 104.3, these amounts must also be included in the election cycle-to-date aggregation totals that are reported beginning in 2001. Similarly, some candidates for the U. S. Senate in 2002 and 2004 and possibly some Presidential candidates for the 2004 election may have two, three, four or more years of previously reported receipts and disbursements. These amounts must also be included in the election-cycle-to-date figures reported on the first report covering financial activity occurring in 2001.

On the Detailed Summary Page of each report filed for the first election cycle in which these rules are in effect, election-cycle-to-date totals should be reported for each category of receipts (except itemized and unitemized contributions from individuals) and each category of disbursements. Please note that the Commission is creating a one-time worksheet to assist authorized committees in aggregating election-cycle-to-date data because this might require some authorized committees to aggregate several years of previously reported receipts and disbursements. However, the Commission is not making any changes to either the Detailed Summary Page, or the schedules of contributions or expenditures, that would necessitate the filing of amendments to reports covering pre-2001 financial activity.

The Commission received no comments on the proposed amendments to 11 CFR 104.3.

Under 11 CFR 104.7, treasurers are required to exercise best efforts to obtain, maintain and report certain identifying information for contributors whose total contributions exceed $200 in a calendar year. An amendment to paragraph (b) of 11 CFR 104.7 revises the references to $200 in a calendar year to $200 in an election cycle with regard to contributions itemized by authorized committees. This revision is consistent with the changes to the regulations at 11 CFR 104.3 requiring authorized committees to itemize contributions from any contributor aggregating in excess of $200 per election cycle. Paragraph (b) of 11 CFR 104.7 requires written solicitations to contain a clear statement requesting contributor information. The previous regulations gave two examples of clear statements. The Commission is adding two new examples at 11 CFR 104.7(b)(1)(i)(B) for authorized committees.

Paragraph (b)(3) of 11 CFR 104.7 requires political committees to disclose contributor information not supplied by the contributor if the political committees have the information in their records or reports filed within the same “two-year election cycle.” Paragraph (b)(4)(ii) of 11 CFR 104.7 requires that if political committees file an amendment containing contributor information received after contributions are disclosed, they must amend every report containing itemized contributions from those contributors for the “two-year election cycle.” The Commission sought comments on possibly revising paragraphs (b)(3) and (b)(4)(ii) to require authorized committees to supply information found in reports filed within the entire election cycle and to amend all reports disclosing itemized contributions from the contributor during the election cycle. Such a revision would require authorized committees to maintain copies of records and reports for the entire cycle (two, four or six years for House, Presidential and Senate candidates, respectively). Since the FECA requires political committees to maintain records and reports for a period of three years (2 U.S.C. 432(d)), the Commission has decided not to revise paragraph (b)(3) and (b)(4)(ii). For purposes of further clarification, “two-year election cycle” means the most recent two years in the current election cycle.

The Commission received no comments on this section.

Section 104.8(a) requires a political committee, if it knows an individual contributor's name has changed since an earlier contribution reported during the calendar year, to note the exact name or address previously used with the first reported contribution from that contributor subsequent to the name changes. A parenthetical is being added to note that an authorized committee is required to provide such information if it knows a contributor's name has changed within the election cycle.

A new parenthetical is being added to paragraph (b) of 11 CFR 104.8 to require authorized committees to aggregate contributions from an individual on an election cycle basis rather than on the calendar year basis.

The Commission received no comments on this section.

Paragraph (a) of 11 CFR 104.9 is being revised to require authorized committees to report certain identifying information for each person to whom disbursements totaling over $200 are made within the election cycle, rather than within the calendar year, as previously required.

Revised paragraph (b) of 11 CFR 104.9 requires authorized committees to disclose certain identifying information about any recipient to whom an expenditures totaling over $200 are made within the election cycle, rather than for the calendar year, as was previously required.

The Commission received no comments on this section.

Under 11 CFR 100.3(b), an election cycle begins on the day after the general election for the office or seat that the candidate seeks and ends on the day of the next general election for that seat or office. 5 For example, for many candidates for the House of Representatives, the 2004 election cycle begins the day after the general election in 2002 and ends on the day of the general election in 2004. Please note that the length of the election cycle varies depending on the office sought. The election cycle is two years for candidates for the House of Representatives, six years for Senate candidates and four years for Presidential candidates.

For purposes of the contribution limits of 2 U.S.C. 441a and 11 CFR 110.1 and 110.2, contributions to candidates and their authorized committees are aggregated on per election basis. Contribution aggregation regulations at 11 CFR 110.1 and 110.2 state that post-election contributions can only be made to the extent the recipient political committee has net debts outstanding, and these contributions must be properly designated for the previous election. 11 CFR 110.1(b)(3)(i) and 110.2(b)(3)(i). Those regulations further require that any undesignated post-election contributions be applied to the donor's contribution limit for the next election in which the recipient will be a candidate. In FEC v. Haley , 6 the Ninth Circuit Court of Appeals upheld the Commission's aggregation regulations at 11 CFR 110.1, ruling that post-election loan guarantees for a loan used to retire general-election debt were contributions subject to the limits and aggregation rules in Part 110 of 11 CFR. 7

In addition to the proposed rules, the NPRM also offered two alternatives approaches to defining election cycle, neither of which was included in the proposed rules.

Alternative 1. The first alternative was to add a new paragraph (c) to 11 CFR 104.1 stating that for reporting purposes only, authorized committees shall begin the “election cycle” on January 1 of the year following the general election for a seat or office and shall end the election cycle on December 31 of the calendar year in which the next general election for that seat or office is held ( e.g., January 1, 2003, to December 31, 2004, for House candidates). This approach has the advantage of causing less change to reporting practices and avoiding the need to include election-cycle-to-date figures for two different election cycles in post-general election reports (or year-end reports where no post-general report is filed). While the Commission recognizes that advantage, it is not adopting this alternative because it creates a greater discrepancy in the contribution totals reported for the election cycle and the contribution totals that actually accrue to the election just held. Under this alternative, undesignated contributions received after the general election but before January 1 of the following year are reported in the election cycle to date totals for the general election that was just held, even though these contributions count toward the contribution limits for the next election. Additionally, this approach introduces a definition of election cycle into the regulations that is different than the one in 11 CFR 100.3(b), which relates to determining whether an individual is a candidate. The Commission received no comments on this alternative.

Alternative 2. Under the second alternative approach, for both reporting and contribution limit purposes, authorized committees would begin the election cycle on the twenty-first day after the general election for the seat or office the candidate is seeking (the day after the end of the post-general election reporting period) and end the election cycle on the twentieth day after the next general election for the seat or office the candidate is seeking (the day the post-general reporting period ends for that election). Under this alternative, both 11 CFR 100.3(b) (election cycle definition) and 11 CFR 104.3 (reporting) would need to be amended. In addition, the contribution limit regulations at 11 CFR 110.1 and 110.2 would need to be changed to modify the attribution date of undesignated contributions for a general election from election day to the twentieth day after the election.

Under this approach, the post-general election report covers only one election cycle. Nevertheless, for candidates who do not participate in the general election (and therefore who do not file a post-general election report), the year-end report covers activity occurring both before the twentieth day after the election and after the twentieth day, and thus, spans two election cycles.

The Commission did not adopt Alternative 2 because it believes Congress did not intend to amend the contribution aggregation rules. Section 641 of Public Law 106-58 amended only 2 U.S.C. 434(b), “Contents or Reports.” There is no evidence, either on the face of the statute or in its legislative history, indicating Congressional intent to alter the current regulations upheld in Haley (see discussion, supra ) that contributions aggregate as of the date of the election. The Commission has concluded that the legislative intent was simply to change the basis for the contents of reports by authorized committees to provide better disclosure of financial activity from the beginning of the campaign to date. While neither Haley nor the lack of Congressional direction would prohibit the Commission from revising its contribution aggregation rules, the Commission has concluded that it is unnecessary and undesirable to alter those settled rules in this rulemaking. The Commission received no comments on this alternative.

The Commission recognizes that the 1999 amendment to the FECA and the new regulations will necessitate several changes to both the paper and electronic FEC Form 3 (used by House and Senate candidates' authorized committees to report receipts and disbursements) and FEC Form 3P (used by Presidential candidates' authorized committees to report receipts and disbursements). While most of the changes to the forms will consist of renaming headings and redrafting certain instructions, Forms 3 and 3P for the post-general election report (and the year-end report, if no post-general election report was filed) will have to be substantively changed. Section 434(a)(2)(A)(ii) of the FECA and 11 CFR 104.5 require that political committees file post-general election reports covering the period from the 19th day before the general election to the twentieth day after the general election. Thus, the post-general election covers two election cycles. Similarly, two election cycles will be covered in the year-end report for candidates who did not participate in the most recent general election (and therefore did not file a post-general election report). The Commission sought comments as to the simplest and easiest way for political committees to report separately the financial activity for each cycle, given that the activity occurred within the time period covered by the post-general election report or year-end report. The Commission received no comments on this issue. The Commission expects to transmit revised forms to Congress later this year.

These final rules will not have a significant economic impact on a substantial number of small entities. The only small entities subject to these regulations are candidates for Federal office and their authorized committees. The rules implement statutory reporting requirements that Congress enacted to reduce inadvertent violations of the contribution limits. Therefore, there will be no significant economic impact on a substantial number of small entities.

The proposed amendments to § 120.802, § 120.810, § 120.822(b), § 120.823(b), § 120.835, and § 120.837 in the Proposed Rule relate to the issue of where a CDC may operate. Public Law 85-699 published August 21, 1958 enacted Title V of the Small Business Investment Act of 1958 (“Act”)—Loans to State and Local Development Companies (“Pub. L. 85-699”). In the Proposed Rule, SBA set forth its understanding that Pub. L. 85-699 authorized SBA to assist development companies that are (1) principally composed of and controlled by persons residing or doing business in that community and (2) formed for the purpose of furthering economic development in the community. The Proposed Rule also noted that when the § 503 Development Company Loan Program was authorized in 1980, its purpose was to provide financing through corporations “formed by local citizens whose primary purpose is to improve their community's economy.” (Emphasis added. Legislative History, Pub. L. 100-590, p. 22.) Aware that this concept of local citizens working to develop and improve their local economy is a fundamental aspect of SBA's Development Company Loan Program (“504 Program”), SBA attempted in the Proposed Rule to balance this fundamental principle of local economic development with SBA's goal of increasing the availability of 504 lending to small businesses across the country. The Small Business Investment Act, section 504, authorized the private sale of CDC debentures to fund CDC loans. The program is now traditionally referred to as the 504 program.

In the Proposed Rule, SBA proposed to allow an applicant CDC (§ 120.810) or existing CDC (§ 120.835) to apply to operate in a county within its State of incorporation even if that county is currently being “adequately served” (as defined by SBA) by another CDC, if that county has a population of 100,000 or more and only one CDC incorporated in that State includes that county in its Area of Operations. SBA stated in the Proposed Rule that, “this will give small businesses more choices.” In this Final Rule, SBA retains the conditions set forth in the Proposed Rule and, for the reasons set forth below, adds the condition that the CDC that includes the county in its Area of Operations submit a statement of no objection.

Several commentors supported competition among CDCs. A typical supporting comment read: “Because we are focused on the end customer ( i.e. , the citizens of our member communities) we believe he will only be aided by a higher level of competition—whether because it makes us sharper and more innovative, or because there is greater exposure for the 504 program, resulting in more loans made to more borrowers.” A few commentors noted that competition in overlapping Areas of Operations has already been successful in their areas: “Competition is good for the 504 Loan Program * * * competition stimulated activity, service to the community and enhancement of the 504 Loan Program.”

On the other hand, more than three-quarters of the commentors were opposed to the Proposed Rule for several reasons. Many commentors were concerned that competition in the more densely populated counties of a CDC's Area of Operations would affect the CDC's ability to do projects in more rural counties. One commentor stated: “I am concerned that this proposed regulation would have the opposite effect of that intended. Allowing CDCs to form in counties that are already being adequately serviced would encourage participation in those areas that offer a high probability of success, while leaving the ‘Rural,’ ‘Less-Growth’ areas unattended. In fact, an existing CDC may be potentially forced to reduce its focus from the rural areas of its territory, to those areas attractive to a start-up CDC * * *. The National Association of Development Companies (NADCO), the CDC industry trade association, commented that “we are deeply concerned that the Proposed Rule will foster a high level of CDC competition in areas of high small business density, to the detriment of rural areas where it might be difficult to make and service 504 loans.”

Another concern expressed by several commentors was that increased competition might burden or reduce a small CDC's cash flow thus hurting its ability to cover its expenses related to 504 loans. One commentor stated: “It takes a population base of several hundred thousand to produce sufficient revenue for a CDC to be self-sustaining. What is being proposed will ultimately weaken existing CDCs and result in cutting services and assistance to (small businesses) as CDCs try to cut expenses due to less revenue.” Several commenters stated that many CDCs depend on the cashflow of the 504 loan program to subsidize other local economic activities, such as participation in the microloan program or the provision of a revolving line of credit program. These commentors indicated their beliefs that a CDC approved to expand into an adequately served county would not reinvest in the local community. “Our concern is that another CDC operating in our community would not be reinvesting in our community, but taking the fee income generated and spending it on marketing and salaries instead of the businesses that are in [the county].”

Many commentors used the term “cherry-picking” to describe the effect of allowing other CDCs to compete in the more lucrative markets: “Market forces will lead the larger, more urban CDCs to ‘cherry pick’ the more lucrative projects from larger companies who require a lower level of service and assistance. Organizations such as ours use the returns from the occasional large debentures to subsidize the higher costs of providing service to small, needier borrowers * * * It would be extremely damaging to the cause of competition in the 504 loan program if the large CDCs were ever able to invade the territory of performing small CDCs. Many of the small rural performing CDCs just barely bring in enough revenue to support our small staffs, and a ‘cherry picking’ statewide [CDC] would eventually be able to rob many of us of the ability to operate. The result would be to decrease competition rather than an increase.”

The comments made it clear to SBA that concerns that competition will hurt a CDC's ability to promote economic development in less densely populated counties should be further considered. The comments indicated that many CDCs subsidize their rural economic development efforts with the servicing fees generated by 504 loans made in the more densely populated counties. The comments also indicated that this subsidization would be frustrated by the loss of revenue caused by increased competition in the more densely populated counties. In addition, CDCs would be inspired to “cherry pick” or seek counties with high small business density to gain more fee income. The result would likely be a general shift of CDC resources and focus on high-density counties at the expense of more rural counties.

SBA remains committed to the concept of expanding local economic development through increased competition in the 504 program. The commentors raised legitimate concerns but did not provide enough evidence or other support for SBA to totally accept their assessment of the negative impact competition would have on CDC operations. However, the negative predictions by the commentors raised additional issues that require further consideration as SBA seeks to increase competition in the 504 program. For example, it is a reasonable assertion that the drain in resources and possible loss of loan volume caused by competition in counties with high small business density could hinder a CDC's efforts to serve rural counties. The question is whether, and to what degree, this really will happen. SBA believes the best way to respect the concerns of the commentors while remaining committed to increasing competition is to approach increasing competition in two phases. The first phase will be implemented by this Final Rule. By this Rule, SBA will adopt a policy allowing an applicant or expanding CDC to apply to serve a county with a population of 100,000 or more if:

• The county is part of the Area of Operations of only one CDC;

• The county has not become part of another CDC's Area of Operations within the past 24 months;

• The applicant CDC is incorporated in the State where the county is located; and

• The CDC that includes the county in its Area of Operations submits a statement of no objection.

SBA added in this Final Rule the requirement that the CDC already serving the county submit a statement of no objection so that such CDC could oppose competition in the area if such competition would cause a negative impact on the original CDC's economic development efforts. SBA added this requirement because we believe there is merit to the concerns that competition may, in some circumstances, hinder the original CDC's economic development efforts. So, at this time, SBA will give CDCs the opportunity to draw on their knowledge of their markets and operations to assess whether competition will hurt their economic development efforts. It has been SBA's experience that a CDC will not object to the introduction of competition when it will help serve the local community in ways that the existing CDC is not able to do and will not be counterproductive to the CDC's ability to meet its local economic objectives.

The second step that SBA will take to increase competition in the 504 program will be its publication of an Advanced Notice of Proposed Rulemaking (“ANPR”) specifically soliciting comments on some of the concerns regarding competition raised in response to the Proposed Rule. This ANPR will be published shortly and will give SBA the opportunity to further consider the issue of competition as well as other 504 program issues.

When Title V of the Small Business Investment Act of 1958—Loans to State and Local Development Companies—was enacted by Public Law 85-699 on August 21, 1958, it defined a Development Company as “an enterprise * * * formed for the purpose of furthering economic development of its community and environs, and with authority to promote and assist the growth and development of small-business concerns in the areas covered by their operations * * * A local development company is a corporation chartered under any applicable State corporation law to operate in a specified area within a State * * * A local development company shall be principally composed of and controlled by persons residing or doing business in the locality * * *” (13 CFR part 108, section 2, as of January 1, 1967).

When the § 503 Development Company Loan Program was authorized in 1980, its purpose was to provide financing through corporations “formed by local citizens whose primary purpose is to improve their community's economy. They assist in the planned economic growth of the community by promoting and assisting the development of small business concerns in their area.” (Legislative History, Pub. L. 100-590, p. 22) It continues, “to qualify for this program, a development company must be chartered in the State where it intends to operate * * *” ( Id. at 23)).

Since the inception of the 504 Program, no CDC has been certified to operate permanently in more than one State, except for a relatively few circumstances when the CDC's operations crossed state lines, but only to the extent that the area was determined to be a Local Economic Area. Regulations published on August 10, 1982, permitted a CDC to operate within two States if “(i) a State line bisects a city, in which case the 503 company may operate city-wide or (ii) the 503 company has obtained prior written approval to operate within a contiguous economic area, as determined by SBA, which crosses a State line.” Since this regulation was published, of the approximately 270 active CDCs, only nine have applied for and been approved by SBA to have their permanent Areas of Operations cross State lines to include a contiguous bi-sected local economic area. Currently, the permanent Area of Operations of all the other CDCs are within their State of incorporation.

There still remain substantial numbers of under-served counties. And, a few CDCs proposed to expand their Areas of Operations beyond their States of incorporation and beyond contiguous bi-sected local economic areas to include some of these under-served counties. To address these issues, and to achieve the goal of stimulating 504 lending activity in underserved areas, SBA proposed to permit out-of-state CDCs (Multi-State CDCs) to apply to cover such underserved areas. At the same time, SBA designed the Proposed Rule to ensure that Multi-State CDCs continue the 504 Program's statutory intent that local citizens responsible for assuring that the program contribute to the local economic development in their communities.

The many comments on this part of the Proposed Rule generally fall into three categories: (1) Those opposed to Multi-State CDCs under any circumstances; (2) those favoring Multi-State CDCs, but critical of the proposed organizational requirements; and (3) those supporting the strict controls SBA proposed on Multi-State CDCs which are designed to continue the emphasis on local involvement and influence in the economic development of each State. Approximately one-quarter of the comments were in the second category with the large majority of the comments closely divided between the first and third categories.

Commentors in the first category did not support the concept of Multi-State CDCs contained in the Proposed Rule. These commentors strongly disagreed with allowing CDCs to cross state lines to serve underserved counties. Representative comments include: “I cannot see how permanent expansion beyond State borders * * * can conceivably result in increased local involvement * * * It seems contra-intuitive to me * * * ” and “Creating multi-state CDCs and removing the territorial boundaries may in the short-run bolster the program's production numbers, but ultimately the overall quality and integrity of the program will suffer.” Many of these commentors believed that the local citizens helping their local economy principle would be violated. One commentor stated, “* * * the 504 program is grounded in federal legislation which mandates a strong role for local community involvement in the loan making process * * * If non-local and out of state CDCs have the ability to make and process loans, I believe you will lose the closeness and community involvement and you eventually will end up with a production line lending program, which, I believe, is contrary to the program's intent.” Other commentors believe that large CDCs would develop and drive many small CDCs out of business: “* * * the growth of large CDCs will ultimately prove the death knell of smaller CDCs that know their local areas well but do not have skills or capacity to overcome the relationships large CDCs can build with lenders.” (Emphasis in the original.) SBA understands the concerns but, at this time, believes that the increased program access for small businesses, that would result from allowing out-of-state CDCs justifies allowing such expansions. However, SBA will closely monitor the effect this rule has on smaller CDCs and will propose additional appropriate regulatory changes, if necessary.

The second group of commentors favored allowing CDCs to cover under-served counties outside of their States of incorporation but believed the proposed conditions were too restrictive. One commentor stated: “Your proposal to restrict the use of funds earned by a CDC to the area in which they were realized is impractical and will only make expansions impossible * * * The funds of a company are budgeted where they are needed to produce the most product and generate income.” Most of these comments were centered on the proposed membership and Board requirements. A representative comment is the following: “We suggest * * * the membership requirement be modified to reflect a total membership proportional with the CDC's population served in each of its areas of operations.” Another commentor stated that it opposed the requirement for a “CDC to expand its Board of Directors substantially if the CDC is authorized to expand into a limited number of counties in a neighboring state.”

SBA seriously considered requiring proportional representation for both CDC membership and Board membership but ultimately reasoned that a Multi-State CDC should meet the same minimum local presence requirements in each State as any other CDC incorporated in that State. The current Board and membership requirements in each State are minimum requirements for all CDCs in the State irrespective of the size of their Area of Operations. Thus, adopting a “proportional” standard for Multi-State CDCs would mean that a Multi-State CDC with the minimum number of members would need fewer members in the State to satisfy SBA requirements than a new CDC applying to cover the same area in that same State. To avoid these kinds of outcomes, SBA concluded that a Multi-State CDC should be required to meet the same membership and Board requirements a new CDC would need to meet if it applied to cover the under-served county or counties in the State.

In considering these comments, though, SBA has reconsidered the requirement for equal representation on the Board for each state in which the CDC is approved to operate by SBA. A Multi-State CDC must meet the minimum requirement of having a Board of Directors comprised of at least three of the four membership groups (government organizations responsible for economic development in the Area of Operations and acceptable to SBA; financial institutions that provide commercial long-term fixed asset financing in the Area of Operations; community organizations dedicated to economic development in the Area of Operations; and businesses in the Area of Operations) for each State in which it operates. However, the Final Rule will not require that the Board composition also be equally divided by the number of States in which the Multi-State CDC operates. SBA was persuaded that maintaining equal representation on the Board for each state could be impractical and overly burdensome as Directors' vacancies were created as a result of resignations or other reasons.

Commentors in this group also criticized other restrictions on Multi-State CDCs found in the Proposed Rule. A representative comment was the following: “(The commentor) disagrees with the proposed regulation of not counting Multi-State CDC loan production when SBA is considering either a new CDC certification or an expansion by an existing CDC [incorporated in the state]. In order to prepare for production in a new market, a Multi-State CDC would be required to make a substantial commitment of personnel and capital. Allowing another CDC to be approved while a Multi-State CDC is developing a new territory would serve as a deterrent for expansion of services in under-served areas across state lines.” SBA considered these comments and was persuaded that if SBA required the same membership, Board membership, and financial investment that it requires of a CDC incorporated in the state, then the Multi-State CDC should receive the same protection of its area as any CDC incorporated in the State. In the final rule SBA has modified the Proposed Rule to treat Multi-State CDCs the same as other CDCs in regards to counting loans to determine whether an area is adequately served and also to protect the area from expansion by another applicant CDC for a period of twenty-four months.

Commentors in the last category were generally opposed conceptually to Multi-State expansions but also recognized the failure of CDCs incorporated in the States where the under-served counties were located to provide adequate access to the 504 Program in these under-served areas. One commentor stated: “There are a few cases where entire States are substantially under-served by 504. It is my opinion that in these States local, regional and statewide initiatives have failed to invest sufficient resources needed to insure the operation of a successful program. This is not the responsibility of SBA nor is it SBA's fault.” While reluctant to accept the concept of Multi-State CDCs, they support the organizational restrictions in the Proposed Rule. A commentor stated that “Overall, I believe the Agency has done an excellent job on the proposed rules for multi-state CDCs, and if anything, did not go far enough.” Another commented: “If it's determined that a multi-state CDC is a necessity * * * the safeguards in the Proposed Rule are carefully drawn and we would support them.” Another commentor agreed with SBA's requirement that a Multi-State CDC “must abide by the same organizational rules, membership requirements, Board of Directors makeup, and uses of income. A CDC cannot truly serve an area of operations remote from the territory without local representation.” Another expressed his concerns as follows: “Our experience regarding multi-state CDCs demonstrates a need for better accountability, which could occur through local memberships, directors and loan review committees.”

Another set of comments in this category suggested a modification to the Proposed Regulations by recommending that the under-served counties that the Multi-State CDC could apply for had to be in a state that was contiguous to the Multi-State CDC's State of incorporation. The following are examples of comments that favored the addition of the concept of “contiguous” to the Area of Operations covered by Multi-State CDCs. One stated, “I would strongly encourage you to add ‘contiguous’ to any application being considered for expansion * * * I think to remove contiguous totally takes our economic development identity, that is unique to the 504 program, and throws it in the trash. Any CDC that applies to cross state lines * * * in a non-contiguous basis, in almost every instance, is not concerned with economic development, they are concerned with money.” Another stated, “CDCs need to operate in a contiguous area * * * Each market area requires a CDC to develop an understanding of the types of businesses, commercial lenders, etc. in that area. If a CDC's area is not contiguous then the CDC will try to standardize their lending process for all loans in all types of lending environments.”

SBA was persuaded by the rationale expressed in these comments and has decided to add to the Final Rule the requirement that any Multi-State expansion be into a “contiguous” state in order to further ensure the local focus. The change is also based, in part, on SBA's decision not to require Multi-State CDCs to have an equal number of Board Members in each state in which it operates. As a result of this change, it will now be possible for a Multi-State CDC to have a majority of Board Members from its State of incorporation control the out-of-state activities of the CDC. SBA believes this change makes it more important for SBA to monitor carefully how Multi-State CDC local activities are shaped by local members. Given this concern, SBA reasons that limiting Multi-State CDC expansions to states contiguous to its State of incorporation will serve several goals. First, the temporary CDC expansions discussed in the Proposed Rule that engendered the Multi-State CDC concept were all into contiguous states to the expanding CDC's State of incorporation. Second, it will limit the number of expansions, thus making it more likely that SBA will be able to carefully monitor all Multi-State CDC expansions. Third, the closer physical proximity of the home office to the out-of-state operations will make it more likely that members will have some familiarity with the markets in each state covered by the CDC and will participate in scheduled meetings, thus facilitating the development of local strategies appropriate for each community the CDC covers. This will help ensure that corporate policy does not favor the CDC's Area of Operations in its State of incorporation over the Multi-State areas in the contiguous states. Thus, when the Executive Director or full Board vote on matters, their understanding of all markets the CDC covers will be stronger as a result.

However, in order to give more specialized consideration to the issue of whether CDCs should be allowed to expand into non-contiguous states, SBA will include questions related to this topic in the ANPR that it intends to publish shortly. SBA also intends to use the ANPR process to solicit opinions regarding whether CDCs that are approved to operate across state lines as Multi-State CDCs should then also be eligible to expand into contiguous local economic development areas under the regulations regarding those expansions.

SBA initially proposed to limit the eligibility of counties to be included in an applicant CDC's or expanding CDC's Area of Operations to counties that had not become part of an Area of Operations of another CDC within the last 24 months. This proposed regulation was designed by SBA to permit a CDC to benefit from the upfront costs of establishing itself in a county. All comments were in favor of the new restriction. However, a few of the comments suggested that the timeframe of the restriction should be increased to 36 months. A representative comment states: “After a new or expanding CDC is allowed to enter a county, the proposed regulation provides that another application will not be approved for 2 years. In our opinion, a CDC given a new county should be allowed 3 years before another CDC is allowed to operate in the county. The proposed 2 year period is insufficient. Generally, it takes 18 to 24 months just to establish the 504 program in a new market.” SBA considered these comments but was not persuaded that the 24-month timeframe, which did not exist as a regulation previously, is not adequate.

SBA received several comments on SBA's Proposed Regulation that deleted the timeframe for the AA/FA to make his or her final decision on applications for a new CDC or an existing CDC to expand its Area of Operations requesting that the 504 Program retain a specific for such decisions. SBA understands the desire to have an identified timeframe and intends to use reasonable efforts to issue timely decisions. However, SBA anticipates that the Final Rule will significantly increase the volume and complexity of the applications and may involve many new policy considerations. Given these factors and SBA's limited staff, SBA believes that establishing a specific timeframe would not be feasible or desirable.

The proposed amendments to § 120.820, § 120.822, § 120.823, § 120.824, and § 120.825 in the Proposed Rule relate to CDC organization and operational requirements. SBA received many comments and suggestions on the proposed changes covering CDC membership, Boards of Directors, and professional management and staff.

In this Final Rule SBA adopts the policies concerning a CDC's Board of Directors as set forth in the Proposed Rule, with one modification. In light of the comments received on the Proposed Rule and several other factors, as discussed below, SBA has decided to amend the Proposed Rule to allow a CDC Manager to serve on its Board of Directors.

In the Proposed Rule, SBA prohibited all CDC staff, including the CDC Manager, from serving on the CDC's Board. SBA proposed this because we were concerned about the apparent possible loss of Board objectivity and independence if a Board were comprised of a number of CDC employees. SBA was concerned that a Board comprised of such members would lack the detached objectivity necessary to evaluate properly the performance of the CDC. However, as addressed below, SBA has amended the Final Rule to allow the CDC Manager, as the only CDC staff member, to participate as a Board Member. SBA believes that this approach will allow us to account for the concerns expressed by commentors while not impacting a Board's ability to operate independently.

In response to the Proposed Rule, SBA received several comments supporting the prohibition against CDC staff and management serving on its Board. However, more than two-thirds of the comments indicated that requiring CDCs to remove CDC Managers from their Boards would disrupt unnecessarily CDC operations. Commenters stated that CDC Managers typically manage the delivery of many small business assistance programs, including the 504 loan program, making it impractical, and therefore disruptive, to prohibit a CDC Manager from serving on a Board which oversees the full compliment of a CDC's economic development programs. SBA is persuaded by these comments and now better understands how disruptive it could be to prohibit a CDC Manager from serving on the CDC's Board.

In addition, the comments suggested that allowing only one individual employed by the CDC, the CDC Manager, to serve on the Board would not affect a Board's objectivity and independence. SBA now agrees with this position. Currently, for each Board vote, SBA regulations require a quorum of 5 Directors. If only one of those Directors is an employee of the CDC, then it is unlikely that a Board's objectivity and independence would be compromised. The authority of all the other Directors to vote on, and their responsibility to monitor, CDC operations will help assure that each Board decision is independent and objective.

SBA also notes that there are other protections in place that will help assure independent action by the Board even when a CDC Manager serves on it. First, each Board Member has a general fiduciary duty of care and good faith to the CDC. This duty applies to the CDC Manager if the Manager sits on the Board. Secondly, with the Final Rule SBA requires that each Board have a member, other than the CDC Manager, who has commercial loan experience. This will assure that the Directors who are not employees of the CDC will have the requisite expertise to objectively and independently evaluate loan decisions. Thirdly, with this Final Rule SBA prohibits a Board Member from being a contractor with the CDC. SBA has encountered situations where CDC Managers who serve as Directors have recommended that the CDC contract with them for certain services. SBA believes that such a recommendation could impact a Board's objectivity and independence. Therefore, when the CDC Manager is a contractor, the manager will not be permitted to serve on the CDC's Board.

In light of all of the above, in this Final Rule, SBA has decided to uphold the prohibition against CDC staff serving as Board Members, but has decided to permit the CDC Manager to serve on the Board, provided that the CDC Manager is not a contractor, or an associate of a contractor, of the CDC. SBA believes that this approach will allow CDCs to operate most efficiently and appropriately to manage the delivery of all of the CDC's economic assistance programs. In addition, SBA believes that having only one member of the Board employed by the CDC will not adversely impact the Board's objectivity and independence. Moreover, the other protections contained in the Final Rule ( e.g. , the prohibition against contractors serving as Board Members) and the general fiduciary duties of Board Members will further protect the objectivity and independence of the Board.

As a result of some comments, SBA is clarifying the Proposed Rule regarding a CDC's Loan Committees. The Proposed Rule established requirements for CDC Loan Committees to ensure that those CDCs that operated with Loan Committees were also in compliance with the current regulations that require a vote by a quorum of the CDC's Board on every 504 loan approval or servicing action. Some comments indicated confusion as to what was meant by a Loan Committee. One commentor stated that “We have a group of 30 Members of our Board of Directors that meet semi-annually. [Eleven] of those Board Members then meet as needed (once or twice a month) to approve loans and take servicing and collection actions, etc. These Loan Committee Members are elected by the full Board and are made up of the four required representative groups.” What this commentor describes meets the current regulatory requirements for CDC Board loan approval and servicing actions. In the Proposed Rule, SBA intended to deal only with Loan Committees composed of non-Board Members whose actions must be ratified by a quorum of the CDC's Board in order to comply with the current regulations.

A few comments expressed concerns that the proposed required composition of the Loan Committee would be redundant to the requirements of the Board membership. One commentor stated that he did not “understand the need for the Board to ratify the actions of the Loan Committee if the Loan Committee structure meets the make-up requirements of the 3 groups, has a quorum of at least 5, (and) has a lender at the meeting * * *” SBA was persuaded by the comments of the need to clarify the definition of Loan Committee by adding “non-Board Members” to the definition in the Final Rule. Since the Board must ratify the decisions of the Loan Committee, SBA agrees that some of the requirements in the Proposed Rule may be eliminated. The final rule eliminates the requirement that the Loan Committee members represent three of the four membership groups. SBA believes that regulations governing Loan Committees are especially important for Multi-State CDCs because such regulations help ensure local involvement with CDC loan-making decisions. Since the requirements for the Board of Directors for Multi-State CDCs have been modified in the Final Rule, the role of Loan Committees in each State for a Multi-State CDC will have increased importance to assure the local influence over 504 loan decisions and to minimize concerns about the Multi-State CDC concept expressed.

In the Proposed Rule, SBA clarified under what circumstances a CDC may contract out its management and staffing functions. Some of the comments received indicated confusion regarding what was meant by contracts. The opening paragraph of the Proposed Rule states: “CDCs may obtain, under written contract, marketing, packaging, processing, closing, or liquidation services provided by qualified individuals and entities who live or do business in the CDC's Area of Operations.” This explanation was apparently not clear because a few commentors raised concerns about the requirement that SBA approve contracts entered into by a CDC for space, equipment, etc. One commentor stated: “This type of micro-management is neither necessary nor within the spirit of SBA oversight.” SBA agrees that this would indeed be micro-managing. The Final Rule adds language to clarify that contracts for other than staffing or management do not have to be reviewed and approved by SBA. In the Final Rule, SBA also is adding the word “servicing” since that was inadvertently omitted in the list of staff functions that may be contracted out. In the Preamble to the Proposed Rule, SBA stated that “No contractor or Associate of a contractor may be a voting or non-voting member of the CDC's Board or Loan Committee.” However, SBA also inadvertently omitted the phrase “or non-voting” from § 120.824(e) of the Proposed Rule. SBA has corrected this omission by adding the phrase “or non-voting” to § 120.824(f) of this Final Rule.

Many commentors were in favor of the Proposed Rule regarding a CDC's staff requirements. One commentor states, “The proposed regulation gives further emphasis on full-time CDC management and on the manager being an employee, not a contractor. We heartily endorse this amendment and look forward to the enforcement of this regulation in the field.” The following comment is representative of several CDCs' concerns about contracting: “I believe it is very important that the CDC become independent of any affiliate * * * providing financial and management support as soon as deemed economically feasible by SBA upon its contract review as required every two years. This would avoid the possibility of the affiliate * * * rolling up its fee charges when the CDC starts to produce an income beyond the cost of the current contract. This could seriously inhibit the growth of the CDC and its services provided. I know this has happened in the past and is still (occurring).”

Several commentors were in support of the Proposed Rule with a modification. A typical comment follows: “Our organization contracts with a local, one county, non-profit, economic development corporation. Because they have four employees, they can easily obtain health insurance, etc. for employees. We do not believe insurance companies will provide health insurance for a company with one employee. If they do, then the costs for the insurance will be higher.” Another commentor is more specific: “The staff [of the non-profit affiliate] is required to maintain individual daily logs, in hours, for each revenue center (SBA, EDA, USDA, and Indirect) that is being benefited to prevent overcharging any loan program. One of EDA's audit contentions was their funds supplemented the SBA 504 Loan Program. Subsequently, each program has its own balance sheet and operating statement and pays its fair share of the cost of the lending organization. Compliance is assured by an annual certified audit and agency review * * * We respond to the loan requests without regard for the specific loan program.”

SBA is persuaded by these comments and has modified the Final Rule to eliminate the requirement that the non-profit affiliate that is contributing staff to the CDC must be financially subsidizing the CDC's operations. SBA was originally concerned that the non-profit affiliate could overcharge the CDC for the contract staff. SBA is persuaded by the comments that SBA's review of such contracts will minimize such risk. SBA notes that, in its experience, non-profit affiliates have no history of overcharging CDCs for staff. SBA reasons that non-profit affiliates have less incentive to overcharge than profit-making entities which occasionally have been found by SBA to charge staff costs that may be inappropriate. Finally, SBA's current policy already requires SBA to pre-approve all CDC contracts for staff and management as well as review the contracts annually. At this time, SBA believes its continued review that its oversight responsibility make of staff and management contracts is appropriate to minimize the possibility of abuse. We intend, however, to further address this issue in the Agency's ANPR to be published soon.

Some of the comments were concerned with SBA's role in pre-approving and reviewing all management and staff contracts. SBA considered these comments but did not modify the Proposed Rule regarding SBA oversight responsibilities. SBA is the regulatory agency for CDCs and, as such, is responsible for overseeing and reviewing many aspects of a CDC's operations. When a CDC contracts out its staff and management requirements, SBA must review such contracts to satisfy its CDC oversight responsibilities. Otherwise, SBA would fail in its responsibility to review how a CDC is satisfying its most fundamental responsibilities to borrowers as required by SBA regulations.

Although, as mentioned previously, several commentors, were strongly in favor of contracts having a limited term, other commentors were concerned that the proposed restrictions would increase the cost of contracted services as well as limit the choice of contractors. A representative comment was the following: “The time constraint—2 years—being the maximum length of a contract is far too short of a period of time. It is frequently normal and customary business practice to negotiate contract for services that exceed two years. We would urge SBA to avoid needless contract length regulation that could lead to higher costs and lower quality contract services for CDCs.” SBA considered these comments and has modified the Proposed Rule to remove the time constraint initially proposed. SBA believes that other requirements in the Final Rule, such as the requirement that SBA review the contracts annually and the requirement that the contract clearly identify procedures satisfactory to SBA which permit the CDC to terminate the contract prior to its expiration date, are sufficient to monitor contractual relationships. SBA will continue to review the matter and intends to re-address this issue in the ANPR.

A few commentors wanted to continue to contract with for-profit affiliates that receive income from the CDC that exceeds the fees for actual services performed. SBA considered these comments but was not persuaded that the benefit to a CDC from such arrangements outweigh concerns about shifting 504 income to other entities. As a commentor that was concerned about the possible impact of aggressive contracting out explained: “There are very profound factors which drive generally for-profit packagers and similar service providers to attempt, if you will, to take control of CDCs * * * the income potential is enormous in such a takeover, and SBA very properly guards against that * * * I would suggest that on this issue, fees for * * * services be limited to fees for services actually performed, for example hourly services. And that no rights to * * * income be permitted beyond the contracting term * * * The purpose * * * is to provide self sufficiency, the ability of the CDC to stand on its two feet. It's very easy in these relationships for the financial strength of the CDC to be drained in such a way that would make it, for all purposes, perpetually dependent on our contracting relationship.” These comments mirror SBA's concerns. SBA believes that its Final Rule strikes an appropriate balance by continuing to allow CDCs to contract out for some services, when such strategy is efficient and cost-effective while assuring that such contracting out is appropriately monitored by SBA. SBA wants to ensure that CDCs are given every opportunity to become independent and self-sufficient.

As indicated throughout this preamble, working with the CDC industry and its trade association, SBA intends to continue its consideration of a number of issues affecting CDC program operations. In addition to the issues already cited, in the ANPR that the Agency intends to publish shortly, SBA will seek comments regarding whether and under what circumstances CDCs should be required to engage in or support economic development activities other than the 504 program; whether and under what circumstances CDCs should be allowed to participate in profit-making activities; and whether SBA should amend the existing standard for determining that an area is adequately served by the 504 program, among others.

Section 120.802 Definitions. The definition of Multi-State CDC was modified to limit the States into which a CDC can apply to operate in as a Multi-State CDC to those States contiguous to the applicant CDC's State of incorporation.

Section 120.810 Applications for Certification as a CDC. The Final Rule modifies subparagraph (a) to reflect SBA's decision, based on the comments received, to allow a CDC to expand its Area of Operations into a county with a population of 100,000 or more that is already adequately served by only one existing CDC only when that CDC does not oppose the application. Also, subparagraph (a) was modified to allow loans made by a Multi-State CDC to be used when determining if a county is adequately served. Finally, subparagraph (a) was modified to prohibit applications to cover a county if the county has become part of a Multi-State CDC's Area of Operations within the last 24 months. This gives any CDC 24 months to fully establish its operations in a new county before another CDC can apply to operate in it. This change was made so that a Multi-State CDC's out-of-state operations would not be treated differently from the local operations of any other CDC. In the Proposed Rule, the 24-month grace period only applied when the county was part of a CDC's Area of Operations within its State of incorporation.

Section 120.820 CDC non-profit status. No changes from the Proposed Rule. The requirement that the non-profit corporation be in good standing refers to its being in good standing with the State in which it is incorporated.

Section 120.822 CDC Membership. No changes from Proposed Rule.

Section 120.823 CDC Board of Directors. The Final Rule modifies the Proposed Rule to permit the CDC Manager to be a member of the CDC's Board of Directors, but specifies that the requirement that “one Board Member with commercial loan experience” be satisfied by a Board Member other than the CDC manager. The Final Rule continues to prohibit other CDC staff members from being on the Board of Directors. The Proposed Rule also was reworded to require that a Multi-State CDC meet the Board representation requirements for each State, rather than requiring it to have separate Boards for each State or to have proportional Board representation as discussed above.

In addition, the Final Rule removes the requirement that Loan Committee members represent three of the four membership groups. This change was made because the Board already has representation from at least three of the four membership groups and a quorum of Board Members must approve, through a Board resolution (SBA Form 1528), its CDC's application for SBA's guarantee of each Debenture the CDC issues to fund one of its 504 loans prior to the sale of that Debenture. Requiring Loan Committee members to live or work in the State where the project they are voting on is located assures that local citizens will be part of the approval process for each loan made in their community. The Final Rule clarifies that this regulation only applies to a Loan Committee comprised of non-Board Members. The phrase “* * * no appearance of a conflict of interest” is changed to “no actual or apparent conflict of interest” throughout to emphasize the fact that actual conflicts of interest are prohibited and not just apparent conflicts. The Final Rule also clarifies that Multi-State CDCs are required to have Loan Committees in each State in which the Multi-State CDC operates. As stated above, this will assure local citizen participation in the loan approval process for each loan made in their community.

Section 120.824 Professional management and staff. The Final Rule corrects a technical error and adds “servicing” back into the list of services a CDC may obtain under contract. It also splits subparagraph (a) into two sections ((a)(1) and (a)(2)) for ease of reading. The Final Rule removes the phrase “that is financially subsidizing the CDC's operations” from 120.824(a) thus removing the condition that a non-profit affiliate of the CDC financially subsidize it before the CDC can apply for the waiver set forth in the section. Paragraphs (c) through (e) were expanded to (c) through (f) and were broken down into smaller paragraphs and subparagraphs for ease of reading. The phrase “or non-voting” was added to (f).

Section 120.825 Financial ability to operate. No change from the Proposed Rule.

Section 120.835 Application to expand an Area of Operations. The Final Rule reorders the section so that requests from CDCs to expand into counties within their State of incorporation or into a Local Economic Area are covered in section 120.835(a), requests from CDCs to expand into Multi-State Areas are covered in Section 120.835(b), and the general requirements for both are covered in 120.835(c).

The Final Rule modifies the Proposed Rule to reflect SBA's decision, based on the comments it received, to accept a CDC's application for expansion into a county with a population of 100,000 or more that is already being adequately served by only one existing CDC only if the original CDC does not oppose the application. The Proposed Rule was modified to allow loans made by a Multi-State CDC to be used when determining if a county is adequately served. The Proposed Rule was modified to prohibit CDC applications for a county if the county has become part of a Multi-State's Area of Operations within the last 24 months. (See discussion of changes to the Proposed Rule pertaining to § 120.810 above.)

The Final Rule removes the requirement for equal representation of each State on the Boards of Multi-State CDCs because SBA believes meeting the minimum Board requirements for each State is enough to assure proper local participation.

Section 120.837 SBA decision on application for a new CDC or for an existing CDC to expand Area of Operations. The Final Rule removes the parentheses from around the list of SBA programs conferring some special status, and changes “based solely on its activity” to “based solely on its activity and performance” to clarify the concept. The Final Rule also clarifies that any special status that a CDC's has earned such as ALP or PCLP only applies in the State or States in which that status was earned.

The Office of Management and Budget reviewed this rule as a “significant” regulatory action under Executive Order 12866.

SBA has determined that this Final Rule will not have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601-612. Currently, out of approximately 24 million small businesses in the United States, about 4,000 receive 504 loans annually. As described in the preamble, through this regulation, SBA hopes to increase the number of 504 loans made to small businesses. Even if SBA were to assume a generous result of a 20 percent increase in loans, it would only result in an annual increase of 800 loans per year. SBA does not consider this a significant impact on a substantial number of small entities. Other aspects of this rule clarify the management and structural requirements for CDCs. These aspects would have no economic impact on small entities, as they merely alter CDC requirements.

SBA has determined that this Final Rule does not impose any additional reporting or recordkeeping requirements under the Paperwork Reduction Act, 44 U.S.C., Chapter 35.

For purposes of Executive Order 12988, SBA certifies that this Final Rule is drafted, to the extent practicable, to accord with the standards set forth in section 3 of that Order.

For purposes of Executive Order 13132, SBA has determined that this Final Rule has no federalism implications.

9. Revise § 120.835 to read as follows:

In T.D. 85-38, 50 FR 8710 (March 5, 1985), Customs adopted as a final rule an interim amendment to the Customs Regulations, consisting of the addition of a new section 12.130 (19 CFR 12.130) to establish criteria to be used in determining the country of origin of imported textiles and textile products for purposes of multilateral and bilateral textile agreements entered into by the United States pursuant to section 204, Agricultural Act of 1956, as amended. In T.D. 85-38, Customs stated that section 12.130 is applicable to merchandise for all purposes, including duty and marking. A similar statement was made in T.D. 90-17, 55 FR 7303 (March 1, 1990).

Paragraph (c)(1) of section 12.130 provides in part as follows:

Paragraph (c)(2) of section 12.130 accords essentially the same treatment to products of insular possessions.

Chapter 98, Subchapter II, U.S. Note 2(a), HTSUS, (Note 2(a)), provides in pertinent part as follows:

Subsequently, in connection with the development of the final NAFTA Marking Rules, Customs concluded that Note 2(a) should not apply for general country of origin purposes, including marking. 60 FR 22312, 22318 (May 5, 1995). Accordingly, in order to clarify the applicability of this position for marking purposes, on June 15, 1998, Customs published a notice of proposed interpretation (hereinafter “proposed interpretation”) in the Federal Register (63 FR 32697) to the effect that section 12.130(c) of the Customs Regulations should not control for purposes of determining the country of origin marking of textile and textile products, and that Note 2(a) does not apply for country of origin marking purposes. The notice solicited public comments on the proposal, and the public comment period was extended to December 18, 1998.

A total of 7 entities submitted comments in response to the notice. Although all of the commenters were generally supportive of the proposed interpretation, two were opposed to the proposal as it pertains to textiles whose origin is determined by where the fabric is formed. The specific points made by the commenters are discussed below.

Comment: Several comments were received on particular operations that should or should not be allowed abroad in order for a U.S.-origin textile or textile product to remain of U.S. origin. One commenter strongly supports the proposed interpretation since minor operations performed on U.S. garments abroad should not force a change in origin solely because of 19 CFR 12.130(c). This commenter stated that imported articles that undergo a similar process in the United States do not undergo a change in origin in the United States. Another commenter supports the proposed interpretation as it would permit apparel produced in the United States that is exported for minor finishing operations such as silk screening, embroidery, stone washing, etc., to better compete against foreign competition.

Another commenter states that textiles and textile products made in the United States and sent abroad to be advanced in value or improved in condition should be considered products of the United States for marking purposes provided they: (a) “Do not undergo a change of tariff heading (sic) at the eight digit level; (b) do not otherwise undergo a substantial transformation; and (c) undergo no assembly operation while abroad.” The commenter states that if decorative components such as epaulets, patches, flaps, etc. are added to a U.S.-origin article while abroad, the article should still be able to be marked as a product of the United States. Other foreign operations that should be allowed without the U.S.-made article losing its origin are suggested to be washing, printing, painting, garment dyeing, and embroidery. The commenter also states that value-added criteria should not be considered in determining how articles shall be marked.

Customs Response: The textile rules of origin of section 334 of the Uruguay Round Agreements Act (URAA) (codified at 19 U.S.C. 3592), as implemented by section 102.21 of the Customs Regulations, are in most cases determinative regarding the country of origin marking of a U.S. textile or textile product that is processed abroad. Therefore, the origin rules provided for in 19 CFR 102.21 must be referred to in order to determine whether a U.S. textile product becomes a foreign product under those rules by virtue of the processing performed abroad. In response to the commenter's statement that U.S. textiles and textile products should not be considered U.S. products for marking purposes if they undergo a tariff change at the eight digit level, Customs presumes the commenter means from one eight digit classification to another eight digit classification. In examining 19 CFR 102.21, Customs notes that there are limited instances where a change is allowed at the eight digit level. However, these rules reflect section 334 of the URAA, as amended by the “Trade and Development Act of 2000”, Public Law 106-200, 114 Stat. 251 (May 18, 2000).

In reference to the commenter's statement that U.S. textiles and textile products should not be considered U.S. products if they undergo a substantial transformation abroad, Customs simply notes that section 334 of the URAA, as amended, represents the view of Congress on how the substantial transformation principle should be applied. See T.D. 95-69, 60 FR at 46195. Therefore, to the extent that a U.S. textile product undergoes a change in origin abroad as set forth in 19 CFR 102.21, it would be considered a foreign product for marking purposes. Additionally, Customs notes that, in general, the textile rules of origin at 19 CFR 102.21 provide that the complete assembly of two or more integral components in a single country will result in a change in origin, thereby requiring most U.S. textile products that are assembled abroad to be marked as foreign articles.

Furthermore, under the 19 CFR 102.21 rules, the attachment of minor decorative components to a U.S. textile product while abroad would not result in a change in origin. For example, affixing an emblem classified in heading 5810, HTSUS, to a U.S. T-shirt classified in heading 6109, HTSUS, in a foreign country would not result in a change in the T-shirt's origin. 19 CFR 102.21(e) tariff shift rules for HTSUS headings 6101-6117. Therefore, the U.S. T-shirt may be returned as a product of the United States, and would not be required to be marked as a foreign article for purposes of 19 U.S.C. 1304 as previously required by 19 CFR 12.130(c). However, the T-shirt would be required to be labeled in accordance with the Textile Fiber Products Identification Act which is within the jurisdiction of the Federal Trade Commission (see further discussion below). Customs also notes that a U.S. T-shirt sent abroad for silk-screening, painting, or printing would also not change origin by virtue of these processes occurring, and the returned T-shirt would not be required to be marked as a foreign article. A similar result would apply to U.S. jeans which are washed, stone-washed, dyed, or embroidered abroad. However, U.S. T-shirt components or jean components sent abroad for assembly into T-shirts or jeans would change origin as a result of the assembly and would require marking as a foreign article pursuant to 19 CFR 102.21.

The tariff shift rules at 19 CFR 102.21 also do not include value-added criteria. To the extent that origin may not be determined under the applicable tariff shift rule of 19 CFR 102.21(e), the origin is determined by referring to the country in which the “most important assembly or manufacturing process occurred”.

Comment: Two comments were received concerning the application of the proposed interpretation as it would pertain to textiles whose origin is determined by where the fabric is formed. One commenter opposes the proposed interpretation as it would apply to articles such as scarves, handkerchiefs, and bandannas. The other commenter opposes the proposed interpretation as it would apply to household linens and apparel accessories made overseas with domestic fabric. The commenters claim that the proposed interpretation would allow U.S.-made woven fabric made into scarves, etc. abroad to be labeled with a qualified “Made in U.S.A.” statement, while scarves, etc. made in the United States using foreign-made woven fabric would have to be labeled as being of foreign origin pursuant to 19 CFR 102.21(e) tariff shift rules for HTSUS headings 6215-6217(2). It is stated that domestic manufacturers of scarves, etc. use both domestic and imported fabric. The fabric may be imported in a finished or greige condition, and may be bleached, dyed and/or printed in the United States. The finished fabric is also cut and sewn to manufacture scarves, etc. It is claimed that this would place domestic manufacturers at a significant competitive disadvantage, because if imported finished fabric or greige fabric is used and made into scarves in the United States, for example, the article is required to be marked as a foreign article. The commenters state that the purpose of the marking statute, 19 U.S.C. 1304, is to let the consumer know when they are purchasing foreign-made products, and that the proposed interpretation ignores this purpose. It is claimed that the fact the Federal Trade Commission will require some form of qualification does not really eliminate the potential of consumer deception. Therefore, these commenters suggest a modification to the proposed interpretation to exclude household linens and apparel accessories.

However, a third comment from a domestic manufacturer of bedding and bath products supports the proposed interpretation and believes that its adoption is necessary to ensure the uniform application of the country of origin rules for textile products promulgated pursuant to 19 U.S.C. 3592. The commenter claims that 19 CFR 12.130(c) contradicts the intent of Congress as set forth in 19 U.S.C. 3592 which provides that the textile rules of origin shall govern for the purposes of the Customs laws and the administration of quantitative restrictions, and 19 U.S.C. 3592(b)(2)(A) provides that the origin of certain products, such as sheets, shall be the country in which the fabric was formed. The commenter submits that the proposed interpretation should extend to all textile products, not merely those classifiable in Chapter 98, and that the country of origin rules governing textile products should be uniformly applied for country of origin marking purposes. This commenter states that it has invested in state-of-the art equipment for weaving fabric from raw cotton and man-made fibers and that these investments have allowed them to compete in the world marketplace. The commenter claims that with the enactment of 19 U.S.C. 3592, it is appropriate to re-examine T.D. 85-38 and T.D. 90-17 to assess what statutory policies are being furthered by the application of 19 CFR 12.130(c) to textile products such as sheets that are produced abroad from U.S.-origin fabric.

Customs Response: Customs is of the opinion that 19 CFR 12.130(c) should no longer be applied for country of origin marking purposes. Section 12.130(c) states that merchandise which falls within the “purview of Chapter 98, Subchapter II, Note 2, HTSUS,” may not, upon its return to the U.S., be considered a product of the United States. As suggested by the supporting commenter that the proposed interpretation should extend to all textile products, not merely those classifiable in Chapter 98, Customs notes that the returned article need not necessarily be classifiable in Chapter 98, but must only be within the purview of Note 2. For example, U.S. greige fabric dyed abroad would not be classifiable in Chapter 98, but rather would be fully dutiable. See Dolliff & Company, Inc. v. United States, 455 F. Supp. 618 (CIT 1978), aff'd, 599 F.2d 1015 (Fed. Cir. 1979). However, the returned dyed fabric would be within the purview of Note 2 as it is a U.S. product sent abroad and advanced in value. Therefore, under the position stated in T.D. 85-38 and in T.D. 90-17, the returned fabric would be required to be marked as a foreign article. Because Customs applied section 12.130(c) for marking purposes due to the statements made in T.D. 85-38 and T.D. 90-17, 19 CFR 12.130(c) should no longer apply for country of origin marking purposes in light of the comments supporting the proposed interpretation, and in light of Customs previous statements made in connection with the NAFTA Marking Rules. 60 FR 22312, 22318 (May 5, 1995).

In regard to the marking of scarves, handkerchiefs, bandannas, household linens, etc., since 19 U.S.C. 3592 sets forth the rules of origin for textile and apparel products for purposes of the customs laws, Customs lacks authority to carve out any exception for these articles. However, Customs notes that with the passage of the “Trade and Development Act of 2000”, in particular section 405, some of the concerns raised by the commenter appear to have been alleviated as certain fabrics and articles will no longer be considered to originate where the fabric is made.

Comment: One commenter submits that 19 CFR 12.130(c) should no longer apply for country of origin marking purposes and for quota purposes. The commenter states that T.D. 85-38 was promulgated to prevent the circumvention of visa or export license requirements contained in multilateral and bilateral textile restraint agreements. The commenter notes that the Tariff Act of 1930 never addressed issues concerning country of origin determinations for quota purposes. Nonetheless, this rule was applied for marking and quota purposes because Customs believed that Congress did not intend Customs to apply one rule of origin for duty and marking purposes and a different rule for quota purposes.

This commenter states that it is unaware of any bilateral agreement that requires the imposition of quota restraints on products that are deemed to be of U.S. origin pursuant to the rules set forth in 19 CFR 102.21(e). As an example, the bilateral textile agreement negotiated between the United States and Fiji is presented, which requires Fiji to limit exports to the United States of cotton and man-made fiber textile and textile products of Fiji. The commenter notes that if a sheet is produced in Fiji using Australian fabric, Fiji would not possess authority to limit the exports of such sheets to the United States; however, it presently would if U.S. fabric were used, thus placing U.S. fabric manufacturers at a competitive disadvantage to fabric producers in nonquota countries such as Australia.

Another commenter questions whether Customs would still require a textile visa for textiles and textile products under the new proposed position.

Customs Response: With regard to the comments received regarding the applicability of 19 CFR 12.130(c) for quota purposes, we note that this would be more appropriately addressed to the Committee for the Implementation of Textile Agreements which issues instructions concerning these issues.

Comment: The Federal Trade Commission (FTC) notes that with respect to marking, the ordinary textile rules of origin, prescribed in 19 U.S.C. 102.21, as interpreted by Customs, would apply, but that the Textile Fiber Products Identification Act (TFPIA), set forth at 15 U.S.C. 70 et seq. , and the FTC rules implementing the TFPIA, set forth at 16 CFR Part 303, would also still apply.

The FTC states that the TFPIA requires that textile products be labeled to show the country of origin, whether domestic or foreign. 15 U.S.C. 70b(b)(4)&(5). The FTC rules implement the statutory requirement; explain how it applies to products made, in part, in the U.S. and, in part, in another country; and provide examples of proper labeling. 16 CFR 303.33. Therefore, under the TFPIA, imported textile products must name the country where they were manufactured or processed. Textile products made in the United States of materials also made in the United States should be labeled as “made in USA”, or words to that effect. Products made in the United States of imported materials should disclose both the U.S. manufacturing and the imported component—for example, “Made in USA of imported fabric” or “Knitted in USA of imported yarn.” Similarly, textile products partially manufactured in a foreign country and partially manufactured in the United States should be labeled to show the manufacturing process both in the foreign country and in the United States—for example, “Imported cloth, finished in USA,” “Sewn in USA of imported components,” or “Made in (foreign country), finished in USA.” The rules state further that for purposes of determining how a particular product should be labeled, a manufacturer needs to consider the origin of only those materials that are covered under the TFPIA ( i.e., those made of textile fibers) and that are one step removed from that manufacturing process ( i.e., a fabric manufacturer must identify imported yarn; a garment manufacturer must identify imported fabric).

The FTC also provides several examples of how it would view the labeling requirements of textile products made in the United States which are sent abroad for some additional finishing process, where there is no change in origin under 19 CFR 102.21. When there is no change in origin, some returned U.S. articles may simply be labeled “Made in USA,” but some additional foreign processes may have to be disclosed on the label. The FTC states that in many cases if the foreign processing is sufficiently minimal, disclosure would not be necessary for compliance with the TFPIA and the rules. Such processes would include: various kinds of washing or wet processing (stone washing, enzyme washing, acid washing, sizing, starching, etc. ); dyeing or bleaching; application of ink designs (heat transfer or screen printing); pressing (including permapressing and similar processes to make apparel wrinkle free); repairs or alterations; tagging or labeling; closure of single-component knit products (such as hosiery); adding or changing buttons; and boarding (adding cardboard to give the garment shape). These processes, although they enhance the value of the goods, do not alter the basic identity or character of the product.

The FTC states that the addition of ornamentation or decorative trim that involves adding textile fibers to a textile product (by embroidery, for example) is addressed in 16 CFR 303.12 and 303.26. If such trim or ornamentation either (a) does not exceed 15 percent of the surface area of the item, or (b) does not exceed 5 percent of the product's fiber weight, it is exempt from the rules' fiber content disclosure requirement. If exempt from fiber content disclosure, it is also exempt from origin disclosure if added in another country. If the decorative trim or ornamentation is more than 15 percent of the surface area and more than 5 percent of the product's fiber weight, and is applied in another country, the foreign processing would have to be disclosed (for example, “Made in USA, embroidered in Mexico”).

In those situations where the foreign processing is more than minimal finishing of an already finished article, disclosure of the foreign processing would be required. 16 CFR 303.33(a)(4). For example, if components of a garment are manufactured in the U.S., but the garment is assembled elsewhere, both aspects of the origin would have to be disclosed ( e.g., “Assembled in Mexico of U.S. Components”).

Customs Response: Customs appreciates the FTC's comments which clarify the marking requirements under the TFPIA. Further clarification of the rules administered by the FTC may be obtained by writing to: Textile Program, Division of Enforcement, Bureau of Consumer Protection, Federal Trade Commission, 600 Pennsylvania Ave., NW, Washington, DC 20580.

After analyzing the comments received and further consideration of the matter, Customs has decided to adopt the proposed interpretation that 19 CFR 12.130(c) does not apply for purposes of country of origin marking. As noted above, the textile rules of origin of 19 U.S.C. 3592, as amended, and as implemented by 19 CFR 102.21, will be determinative regarding the country of origin marking of a U.S. textile or textile product that is processed abroad and that is described in those statutory and regulatory provisions. Therefore, the origin rules provided by statute and in 19 CFR 102.21 must be referred to in order to determine whether a U.S. textile product becomes a foreign product by virtue of the processing performed abroad. Moreover, it should be noted that even if the U.S. textile product does not require labeling as a foreign product under those provisions, the interpretation adopted in this document does not exempt textile and apparel products imported into the United States from the labeling requirements of the Textile Fiber Products Identification Act, 15 U.S.C. 70, enforced by the Federal Trade Commission.

The National Transportation Safety Board (NTSB) currently has rules, at 49 CFR part 821, that govern practice and procedure in certain air safety proceedings, including proceedings in which the FAA Administrator seeks to amend, modify, suspend or revoke various FAA-issued certificates or privileges. Under 49 U.S.C. 44709(d), such certificate actions are reviewable on appeal to the Board by the affected certificate holder. 49 U.S.C. 44709(e) provides that the filing of such an appeal stays the effectiveness of the Administrator's order, pending disposition of the appeal by the Board, unless the Administrator determines that an emergency exists and that safety in air commerce or air transportation requires the order to be effective immediately. Prior to the enactment of the Aviation Investment and Reform Act for the 21st Century (Pub. L. 106-181, signed into law April 5, 2000), the Administrator's emergency determinations were not subject to administrative review. Section 716 of Public Law 106-181 expands the Board's jurisdiction, by amending 49 U.S.C. 44709(e) to provide that a person affected by the immediate effectiveness of an order, based on the Administrator's finding of the existence of an emergency, may, not later than 48 hours after receiving the order, petition the Board to review that emergency determination, under procedures promulgated by the Board. 49 U.S.C. 44709(e), as amended, further provides that the Board shall dispose of the certificate holder's request for review of the Administrator's emergency determination no later than five days after the request is filed, and that, if the Board finds that an emergency does not exist, the immediate applicability of the Administrator's order shall be stayed. In light of the immediate effectiveness of Public Law 106-181, the Board is issuing interim rules to establish procedures for its review of the Administrator's emergency determinations, without notice and comment.

Public Law 106-181 also amends the time period for the Board to make final dispositions of appeals in all emergency cases. Under 49 U.S.C. 44709(e) prior to amendment, the Board had 60 days from the time the Administrator advised it of the existence of an emergency (by filing a complaint in response to the certificate holder's appeal) to make its final disposition of the appeal, whereas 49 U.S.C. 44709(e), as amended, requires a final disposition not later than 60 days after the date on which the appeal is filed. The interim rules include amendments to part 821 that were necessitated by this change.

The Board believes that its current rules require certain immediate changes to accommodate these amendments to 49 U.S.C. 44709(e). These interim rules should permit the processing of any petitions for review of the Administrator's exercise of emergency authority that are instituted by affected certificate holders pursuant to the statutory amendments, while the Board has final rules under consideration.

Under the interim rules, the authority to review emergency determinations of the Administrator has been delegated to the Board's administrative law judges. The interim rules permit the Administrator to file a written reply to the certificate holder's petition for review of the emergency determination, and require the law judge to issue a written order granting or denying the petition, based upon such written submissions by the parties. In view of the short five-day period which Public Law 106-181 mandates for the disposition of this issue, the interim rules provide that the law judge's decision on the issue is final, and not appealable to the Board. The placement of such review authority in the law judges is a matter subject to revisitation in the future, and the Board is particularly interested in comments on this. The Board is also interested in comments on the practicality and/or advisability of putting in place an appeal process that would permit a review of the law judge's ruling on the emergency issue by the Board, which would, of necessity, occur during the running of the 30-day period in which the case must proceed to hearing.

Aside from minor changes to 49 CFR 821.10, the general provision relating to computations of time in air safety proceedings before the Board, all of the revisions to part 821 necessitated by the amendments to 49 U.S.C. 44709(e) created by Public Law 106-181 appear in subpart I, which sets forth special rules applicable to appeals of emergency and other immediately effective orders issued by the Administrator.

The addition and logical placement of rules specifically relating to the disposition of petitions for review of the Administrator's emergency determinations have necessitated a restructuring of subpart I. Section 821.54, which contained general provisions relating to emergency cases, has been redesignated as § 821.52, with minor changes. Paragraphs (a) and (b) of § 821.55 have been removed from that section and recodified, with revisions, at § 821.53. Paragraph (b) of § 821.53 amends former paragraph (b) of § 821.55, by requiring appeals of emergency or other immediately effective orders to include a copy of the appealed order. Previously, it was sufficient for the certificate holder to indicate in the appeal that an emergency or other immediately effective order was the subject of the appeal. Former paragraphs (c) through (f) of § 821.55 have been redesignated as paragraphs (a) through (d) of that section.

A new § 821.54 sets forth the rules and procedures governing the Board's review of the Administrator's emergency determinations. Paragraph (a) of that section provides that a certificate holder has 2 days from the date on which he or she receives the Administrator's emergency or other immediately effective order to file with the Board a petition for review of the emergency determination. The Board believes the interim rule's 2 day time limit is a reasonable application of the new legislation's requirement that review of the Administrator's emergency determination “shall be requested not later than 48 hours after the order is received” by the affected certificate holder, and that the rule's use of a 2 day time frame, rather than one of 48 hours, avoids the possibility of having cases turn on inquiries as to the precise hour and minute the order was received and/or the petition was filed. Paragraph (a) further provides that, as the time limit for filing a petition for review of the emergency determination has been created by statute, the Board has no authority to extend it (whereas time limits created by the Board's rules may, for good cause shown, be extended pursuant to § 821.11). Similar language appears in the Board's rule relating to the filing of an application for fees and expenses under the Equal Access to Justice Act (see 49 CFR 826.24(a)). Finally, paragraph (a) provides that, in those cases where a certificate holder files a petition for review of an emergency determination, but has not previously submitted an appeal from the emergency or other immediately effective order, the petition will also be regarded as a simultaneously-filed appeal from the order.

In the remainder of § 821.54, paragraph (b) provides rules as to the form, content, and service of the certificate holder's petition, and requires that the petition include a copy of the Administrator's order. Paragraph (c) provides for the submission of a reply to the petition by the Administrator. Rules governing the law judge's disposition of the petition are set forth in paragraphs (d) and (e), and the effects of the law judge's ruling are enumerated in paragraph (f). Under paragraph (e), the petition is to be disposed of by written order, and the standard to be applied is whether, based on the acts and omissions of the certificate holder as alleged in the complaint, the Administrator abused his or her discretion in determining that an emergency exists, requiring the order to be effective immediately. Since issues of fact are properly resolved at an evidentiary hearing, challenges to the truthfulness of the factual allegations appearing in the Administrator's order are not appropriate for this preliminary inquiry; thus, paragraph (e) provides that, for purposes of deciding this emergency issue, the law judge is to assume the truth of the factual allegations stated in the order. The abuse of discretion standard set forth in paragraph (e) is adopted from the United States Court of Appeals for the Ninth Circuit, which used that criteria when presented with a challenge to the Administrator's exercise of emergency authority in Nevada Airlines v. Bond, 622 F.2d 1017 (1980). In paragraph (f), it is provided that, if the petition is granted, the effectiveness of the Administrator's order will be stayed until the Board makes a final disposition of the certificate holder's appeal. Since, in that instance, the certificate holder will not be deprived of the use of the certificate(s) affected by the order while the appeal is pending, the certificate holder will not be permitted to waive the applicability of the expedited appeals process of subpart I, unless the Administrator consents to such a waiver.

Paragraph (a) of § 821.55 (formerly paragraph (c) of that section), which provides rules for the filing and service of the Administrator's complaint, has been revised to include rules as to when the complaint is to be filed in those cases where there has been a challenge to the Administrator's emergency determination. In addition, paragraph (a) now requires that the complaint be filed with the Board by overnight delivery or facsimile, with service on the respondent by the same means. Minor changes have been made to paragraph (b) (formerly paragraph (d)) of § 821.55, and no substantive changes were made to paragraphs (c) and (d) (formerly paragraphs (e) and (f)) of that section.

Paragraph (a) of § 821.56, which sets forth rules and procedures regarding the issuance of notices of hearing in emergency cases, has been amended to take into account the new legislation's shortening of the time frame for the Board to make a final disposition of an appeal in an emergency case to 60 days after the date on which the certificate holder's appeal is filed (as opposed to 60 days from the date on which the Board is advised by the Administrator of the existence of an emergency, which was accomplished when the Administrator filed a complaint in response to the appeal). Paragraph (a) has also been amended to provide rules for the issuance of notices of hearing in those cases where the certificate holder has challenged the Administrator's determination as to the existence of an emergency, upon the disposition of that preliminary issue. There are no substantive changes to the remaining provisions of § 821.56. Section 821.57 has not been amended.

Since our part 821 rules were last amended, the statutes referred to in that part—i.e., the Independent Safety Board Act of 1974; the Federal Aviation Act of 1958, as amended; and the FAA Civil Penalties Assessment Act of 1992—have been recodified, without substantive change, at 49 U.S.C. Chapters 11 (Sections 1101 et seq. ), 447 (Sections 44701 et seq. ), and 463 (Sections 46301 et seq. ), respectively. Thus, the Board will, solely for “housekeeping” purposes, amend part 821, where necessary, to reflect the current statutory designations. In addition, Section 821.38(b), as currently written, contains a reference to “§ 556(d) of the Administrative Procedure Act,” while § 821.41 refers to another section of Administrative Procedure Act by its United States Code citation. For purposes of consistency, and to follow the preferred convention of using United States Code citations to reference statutory authority in agency rules, the statutory reference in § 821.38(b) will be amended to reflect the appropriate United States Code citation.

The rules, as currently written, also contain references to parties involved in these proceedings, and actions taken by them, with the designations “he,” “him,” and “his.” The Board believes that such terms should be changed to the more proper “he or she,” “him or her,” and “his or hers,” and these changes will be made in the housekeeping amendments, as well.

Because such housekeeping amendments do not substantively change the Board's part 821 rules, comments on these matters are not solicited.

(b) Effective date of emergency. The procedure set forth herein shall apply as of the date when written advice of the emergency character of the Administrator's order is first received and docketed by the Office of Administrative Law Judges or the Board.

(c) Computation of time. Time shall be computed in accordance with the provisions of § 821.10.

NMFS manages the groundfish fishery in the GOA exclusive economic zone according to the Fishery Management Plan for the Groundfish Fishery of the Gulf of Alaska (FMP) prepared by the North Pacific Fishery Management Council under authority of the Magnuson-Stevens Fishery Conservation and Management Act. Regulations governing fishing by U.S. vessels in accordance with the FMP appear at subpart H of 50 CFR part 600 and 50 CFR part 679.

The 2000 TAC of Pacific ocean perch for the Western Regulatory Area was established as 1,240 metric tons (mt) in the Final 2000 Harvest Specifications of Groundfish for the GOA (65 FR 8298, February 18, 2000). See § 679.20(c)(3)(ii).

In accordance with § 679.20(d)(1)(i), the Administrator, Alaska Region, NMFS (Regional Administrator), has determined that the 2000 TAC for Pacific ocean perch in the Western Regulatory Area will be reached. Therefore, the Regional Administrator is establishing a directed fishing allowance of 1,140 mt, and is setting aside the remaining 100 mt as bycatch to support other anticipated groundfish fisheries. In accordance with § 679.20(d)(1)(iii), the Regional Administrator finds that this directed fishing allowance has been reached. Consequently, NMFS is prohibiting directed fishing for Pacific ocean perch in the Western Regulatory Area of the GOA.

Maximum retainable bycatch amounts may be found in the regulations at § 679.20(e) and (f).

This action responds to the best available information recently obtained from the fishery. It must be implemented immediately to prevent overharvesting the 2000 TAC of Pacific ocean perch for the Western Regulatory Area of the GOA. A delay in the effective date is impracticable and contrary to the public interest. Further delay would only result in overharvest. NMFS finds for good cause that the implementation of this action should not be delayed for 30 days. Accordingly, under 5 U.S.C. 553(d), a delay in the effective date is hereby waived.

This action is required by § 679.20 and is exempt from review under E.O. 12866.