[Federal Register Volume 65, Number 158 (Tuesday, August 15, 2000)]
[Rules and Regulations]
[Pages 49719-49726]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-20543]



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  Federal Register / Vol. 65, No. 158 / Tuesday, August 15, 2000 / 
Rules and Regulations  

[[Page 49719]]



DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Parts 272 and 274

[Amendment No. 384]
RIN: 0584-AC91


Food Stamp Program: Electronic Benefit Transfer (EBT) Systems 
Interoperability and Portability

AGENCY: Food and Nutrition Service, USDA.

ACTION: Interim rule.

-----------------------------------------------------------------------

SUMMARY: The purpose of this interim rule is to implement legislation 
requiring interoperability of Food Stamp Program Electronic Benefit 
Transfer (EBT) Systems and portability of electronically-used benefits 
nationwide. The rule revises Food Stamp Program regulations to ensure 
that recipients can use their electronic food stamp benefits across 
state borders by requiring interoperable state electronic issuance 
systems. The regulations establish uniform national standards to 
achieve this requirement. One hundred percent Federal funding is 
available to pay for the operational cost of this functionality, up to 
a national annual limit of $500,000. Costs beyond this level will be 
covered at the standard fifty percent program reimbursement rate for 
State administrative costs.

DATES: This interim rule is effective September 19, 2000. Comments must 
be received on or before November 13, 2000, to be assured of 
consideration.

ADDRESSES: Comments should be submitted to Jeffrey N. Cohen, Chief, 
Electronic Benefit Transfer Branch, Benefit Redemption Division, Food 
and Nutrition Service, USDA, 3101 Park Center Drive, Alexandria, 
Virginia, 22302. Comments may also be data-faxed to the attention of 
Mr. Cohen at (703) 605-0232, or by e-mail to [email protected]. 
All written comments will be open for public inspection at the office 
of the Food and Nutrition Service during regular business hours (8:30 
a.m. to 5 p.m., Monday through Friday) at 3101 Park Center Drive, 
Alexandria, Virginia, Room 718.

FOR FURTHER INFORMATION CONTACT: Questions regarding this rulemaking 
should be addressed to Mr. Cohen at the above address or by telephone 
at (703) 305-2517.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    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.

Executive Order 12372

    The Food Stamp Program is listed in the Catalog of Federal Domestic 
Assistance under No. 10.551. For the reasons set forth in the final 
rule in 7 CFR Part 3015, Subpart V and related Notice (48 FR 29115), 
this Program is excluded from the scope of Executive Order 12372 which 
requires intergovernmental consultation with State and local officials.

Regulatory Flexibility Act

    This rule has been reviewed with regard to the requirements of the 
Regulatory Flexibility Act of 1980 (5 U.S.C. 601-612). Samuel Chambers, 
Jr., Administrator for the Food, Nutrition, and Consumer Service, has 
certified that this interim final rule will not have a significant 
economic impact on a substantial number of small entities. State 
agencies and their EBT service providers will be the most affected to 
the extent that they administer or operate EBT services for Food Stamp 
Program benefit delivery.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995, Public Law 
104-13, the Food and Nutrition Service (FNS) is publishing for public 
comment a summary of new information collection being required by 
interim regulations. The collection has been submitted to the Office of 
Management and Budget (OMB) for emergency approval by September 18, 
2000.
    Comments on this document must be received by September 14, 2000. 
The 60-day period normally allowed for comment on a proposed collection 
of information has been shortened to the minimum 30 days under the 
emergency approval process because a longer period would likely prevent 
the U.S. Department of Agriculture (Department) from meeting the 
statutory deadline enacted under Section 7(k)(4) of the Food Stamp Act 
of 1977 (FSA), as amended by the Electronic Benefit Transfer 
Interoperability and Portability Act of 2000, Public Law 106-171 
(hereinafter ``Public Law 106-171'').
    Send comments to Office of Information and Regulatory Affairs, OMB, 
Attention: Desk Officer for FNS, Washington, DC 20503. Please also send 
a copy of your comments to Jeffrey N. Cohen, Chief, Electronic Benefit 
Transfer Branch, Benefit Redemption Division, Food and Nutrition 
Service, U.S. Department of Agriculture, 3101 Park Center Drive, 
Alexandria, VA 22302. For further information, or for copies of the 
information collection, please contact Mr. Cohen at the above address.
    Comments are invited on: (a) Whether the collection of information 
is necessary for the performance of the functions of the agency, 
including whether the information will have practical utility; (b) the 
accuracy of FNS's estimate of the burden of the proposed collection of 
information including the validity of the methodology and assumptions 
used; (c) ways to enhance the quality, utility and clarity of the 
information to be collected; and (d) ways to minimize the burden of the 
collection of information on those who are to respond, including 
through the use of appropriate automated, electronic, mechanical, or 
other technological collection techniques of other forms of information 
technology.
    All responses to this document will be summarized and included in 
the request for OMB approval. All comments will also become a matter of 
public record.
    For Further Information Contact: Jeffrey N. Cohen, (703) 305-2522.
    Title: Interoperability Funding Agreement.
    OMB Number: 0584-XXXX.
    Type of Request: New collection.
    Abstract: Under Public Law 106-171, the Secretary is required to 
ensure that electronic benefit transfer (EBT) systems

[[Page 49720]]

used for the issuance and redemption of Food Stamp Program (FSP) 
benefits are interoperable and that food stamp benefits are portable 
among all States by October 1, 2002, except where exemptions apply or a 
temporary waiver is granted. In addition, in accordance with the 
regulations promulgated by the Secretary, the Department is authorized 
to pay one hundred percent of the costs incurred by a State agency for 
switching and settling interstate food stamp transactions, up to an 
annual limit of $500,000 nationwide.
    In this rule, the FSP regulations are being revised to require that 
State agencies requesting one hundred percent funding for 
interoperability costs sign an Interoperability Funding Agreement to 
comply with the administrative procedures established by the 
Department. The administrative procedures will be issued to State 
agencies under separate guidance and do not impose additional 
information collection burdens other than those announced in this 
notice or which are part of a collection currently approved for the 
Department by OMB. The signed agreement will serve as the obligating 
document, which will enable the Department to put aside funds for the 
fiscal year to pay for interoperability costs incurred by State 
agencies. The agreement must be signed annually because appropriations 
laws stipulate that funding for interoperability costs must be 
obligated to State agencies in the same fiscal year as such costs are 
incurred. This requirement will add a new information collection burden 
for State agencies with EBT systems that request enhanced funding for 
interoperability costs. The recordkeeping burden includes maintaining 
interoperability cost information and other documentation used to 
support requests for payment, including contractor bills and 
interoperability transaction records.
    The estimated time to read, sign, and submit the Interoperability 
Funding Agreement is 0.5 hours per respondent. The estimated time to 
maintain interoperability cost information is .25 hours per respondent. 
Under Section 7(i) of the FSA (7 U.S.C. 2016(i)), a total of 53 State 
agencies are required to have statewide EBT systems by October 1, 2002. 
Two State agencies, Ohio and Wyoming, currently have Smart Card (off-
line) food stamp EBT systems, which are currently exempt from the 
interoperability requirements of Public Law 106-171. Therefore, we 
estimate that, under nationwide EBT implementation, 51 State agencies 
will submit the agreement once a year to request enhanced funding for 
interoperability costs, for a total of 38.25 hours.
    Estimates of Burden: We estimate the provisions of this interim 
final rule, as listed above, will take each State agency 0.75 hours on 
gathering, reporting, and maintaining information, for an overall 
burden of 38.25 hours annually.
    Respondents: State agencies with EBT systems delivering Food Stamp 
Program benefits.
    Estimated number of Respondents: 51 State agencies per year under 
nationwide EBT implementation.
    Estimated number of Responses per respondent: One.
    Estimated annual number of responses: 51.
    Estimated Total Annual Burden on Respondents: 38.25 hours.

Executive Order 12988

    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform. This rule is intended to have preemptive effect with 
respect to any State or local laws, regulations or policies which 
conflict with its provisions or which would otherwise impede its full 
implementation. This rule is not intended to have retroactive effect 
unless so specified in the ``Dates'' paragraph of this preamble. Prior 
to any judicial challenge to the provisions of this rule or the 
application of its provisions, all applicable administrative procedures 
must be exhausted. In the FSP, the administrative procedures are as 
follows: (1) For Program benefit recipients--State administrative 
procedures issued pursuant to section 11(e)(1) of the FSA (7 U.S.C. 
2020(e)(1)) and regulations at 7 CFR 273.15; (2) for State agencies--
administrative procedures issued pursuant to Section 14 of the FSA (7 
U.S.C. 2023) and regulations at 7 CFR 276.7 (for rules related to non-
quality control (QC) liabilities) or 7 CFR Part 283 (for rules related 
to QC liabilities); and (3) for Program retailers and wholesalers--
administrative procedures issued pursuant to Section 14 of the FSA (7 
U.S.C. 2023) and 7 CFR 278.8.

Public Law 104-4

    Title II of the Unfunded Mandate Reform Act of 1995 (UMRA), Public 
Law 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on state, local, and tribal 
governments and the private sector. Under section 202 of the UMRA, the 
Food and Nutrition Service (FNS) generally must prepare a written 
statement, including a cost-benefit analysis, for proposed and final 
rules with the ``Federal mandates'' that may result in expenditures to 
State, local, or tribal governments in the aggregate, or to the private 
sector, of $100 million or more in any one year. When such a statement 
is needed for a rule, section 205 of the UMRA generally requires FNS to 
identify and consider a reasonable number of regulatory alternatives 
and adopt the least costly, more cost-effective or least burdensome 
alternative that achieves the objectives of the rule.
    This rule contains no Federal mandates (under the regulatory 
provisions of Title II of the UMRA) for State, local, and tribal 
governments or the private sector of $100 million or more in any one 
year. Thus, the rule is not subject to the requirements of sections 202 
and 205 of the UMRA.

Public Comment

    Public Law 106-171 authorizes Federal reimbursement, in accordance 
with regulations promulgated by the Secretary of Agriculture, of the 
costs incurred by State agencies for switching and settling interstate 
transactions after the date of enactment (February 11, 2000) and before 
October 1, 2002, for State agencies which use standards of 
interoperability and portability adopted by a majority of State 
agencies and for such costs incurred after September 30, 2002 for State 
agencies using the standards adopted in this rulemaking. These 
regulations establish uniform standards to facilitate interoperability 
and portability already adopted by a majority of State agencies and lay 
out the funding provisions and administrative procedures for State 
agencies to receive payment. In order for funding to be made available 
for this fiscal year, these rules must be made effective as soon as 
possible. If the Department were to use the standard rulemaking 
process, issuing a proposed rule to solicit comments prior to making 
the rule effective, it would be unlikely that a rule would be made 
effective prior to the end of this fiscal year and funds could not then 
be obligated for this year. For this reason, it has been determined for 
good cause, pursuant to 5 U.S.C. 553, that notice and prior public 
comment on this rule are impracticable and contrary to the public 
interest. The Department nevertheless is seeking public comment in 
order to improve the administration of the rule. All comments received 
will be analyzed, and any appropriate changes to the rule will be 
incorporated into the subsequent publication of the final rule.

Background

    In this rule, the U.S. Department of Agriculture (Department) Food 
and Nutrition Service (FNS) is revising Food

[[Page 49721]]

Stamp Program (FSP) regulations to require interoperability of all 
State Food Stamp Electronic Benefit Transfer (EBT) Systems and 
portability of all electronically-issued benefits. This requirement is 
in accordance with the Electronic Benefit Transfer Interoperability and 
Portability Act of 2000, Public Law 106-171, (hereinafter ``Public Law 
106-171'' which mandates nationwide interoperability of FSP EBT systems 
and portability of electronically-issued benefits and directs the 
Secretary to establish standards to accomplish this. In accordance with 
the regulations promulgated by the Secretary, the Department will pay 
one hundred percent of the costs incurred by a State agency for 
switching and settling transactions, up to an annual limit of $500,000 
nationwide.

Electronic Benefit Transfer Issuance System Approval Standards--7 
CFR 274.12

EBT Interoperability Requirements

    Pursuant to section 7(i) of the FSA, all State agencies must 
implement EBT systems for the issuance of FSP benefits by October 1, 
2002. Currently, the majority of State agencies have implemented EBT 
systems and most others are in some stage of planning. State agencies 
contract individually for EBT systems with EBT service providers. These 
contracts vary in duration. In addition to food stamp benefits, State 
agencies also contract for EBT systems which deliver benefits for 
several cash programs, such as Temporary Assistance for Needy Families 
(TANF) and State cash benefit programs. One State also uses EBT for the 
delivery of benefits of the Special Supplemental Nutrition Program for 
Women, Infants, and Children (WIC). Among State-administered benefit 
programs, only the FSP requires that State agencies change from paper 
to EBT systems and only the FSP has regulations addressing EBT.
    Regulations promulgated April 1, 1992 (57 FR 11218) require food 
stamp EBT system interoperability between States only to the extent 
necessary to provide retailer access to recipients along State borders. 
The Personal Responsibility and Work Opportunity and Reconciliation Act 
of 1996 (PRWORA), Public Law 104-193, encouraged the development of 
interoperable EBT systems but did not require it. As EBT systems 
evolved, some State agencies opted to require that their contractors 
provide interoperability within regional consortiums, but not 
necessarily nationwide.
    On February 11, 2000, Public Law 106-171 was enacted to require 
State agencies to provide nationwide interoperable functionality in 
their EBT systems and portability for electronically-issued food stamp 
benefits. The purpose of this new requirement, among other things, is 
to enhance the flow of interstate commerce involving electronic 
transactions for food stamp benefits under a uniform national standard 
of interoperability and portability, thus enhancing service to benefit 
recipients. Section 7(k)(4) of the FSA, as added by Public Law 106-171, 
stipulates that, effective 30 days after these regulations are 
promulgated, any State agency entering into a new EBT contract must 
include provisions to implement interoperability and portability by 
October 1, 2002. This section further directs the Department to issue 
regulations which implement these provisions and establish standards to 
achieve interoperability and portability in order to qualify for one 
hundred percent federal funding subject to the $500,000 annual 
authorization level. Specific federal funding participation 
requirements are discussed in the ``funding'' section of this 
regulation.
    The majority of State systems currently in use could be 
interoperable for both food stamps and cash by making some minor 
technical changes to their systems. However, most State agencies did 
not negotiate the cost of nationwide interoperability in their 
contracts. Therefore, if the law were to require interoperability 
midway through a contract for all State agencies, State and Federal 
governments could incur costs to retrofit existing EBT systems for 
interoperability. In order to avoid this, Public Law 106-171 amended 
the FSA to add section 7(k)(5), which exempts those State agencies with 
existing EBT system contracts that do not expire before October 1, 
2002. At the same time, the statute does not preclude State agencies 
from modifying their contracts prior to their expiration dates to 
include interoperability and receive one hundred percent federal 
funding as specified in the ``funding'' section of this regulation. 
There are additional waiver provisions for State agencies with 
technical barriers to implementing interoperability by October 1, 2002, 
including those State agencies that operate Smart Card (off-line) EBT 
systems. The implementation section of the preamble provides more 
details on these waiver provisions.

System Standards for Interoperability

    Public Law 106-171 directs the Secretary to establish a uniform 
national standard of interoperability and portability that is based on 
the standards used by a majority of State agencies. The required 
Departmental standards in this rule are based on the ``Quest Operating 
Rules'' (QUEST), which have already been adopted by a majority of State 
agencies. The QUEST rules set forth requirements to distribute 
government benefits under the QUEST service mark and form the basis for 
contractual agreements between the various stakeholders for State 
agencies that choose to adopt these rules. These rules were developed 
by the National Automated Clearing House Association (NACHA), a not-
for-profit trade association that develops operating rules for various 
kinds of electronic payments.
    In order to develop minimum standards that would be compatible with 
QUEST rules, the Department reviewed the QUEST rules thoroughly to 
determine which components of these rules were essential to ensure 
interoperability and portability of FSP EBT systems, without demanding 
unnecessary requirements of State agencies that have opted not to adopt 
the QUEST rules. The Department has determined that the following 
technical and non-technical standards are necessary to accomplish this 
goal: (1) Requiring the 8583 message format to standardize the 
information included in an EBT transaction message so that all EBT POS 
transaction messages are universally understood; (2) instituting Issuer 
Identification Number (IIN) requirements for EBT cards to facilitate 
transaction routing to the appropriate State authorization system, 
regardless of its point of origin; and (3) establishing minimum 
transaction sets for interoperable systems to ensure that specific 
types of transactions can be processed across State borders. In 
addition, language adapted from the QUEST rules is included in this 
interim rule to standardize the roles and responsibilities of State 
agencies or their prime contractors, designated agents, and third 
parties or terminal operators in the EBT system. There are also 
programmatic requirements which need to be adapted for interoperable 
circumstances. The specific standards are discussed below.

8583 Message Format

    In an effort to facilitate EBT implementation for State agencies 
and other stakeholders, the Department developed a technical 
specification for

[[Page 49722]]

EBT food stamp transactions from a Point-Of-Sale (POS) terminal in 
October 1995. The purpose in creating this specification was to provide 
one standard POS/EBT system interface that retailers could use in 
multi-state retail operations. The specification was also essential to 
facilitate interstate transactions. The majority of State agencies 
operating EBT systems have already adopted this message format. The EBT 
specification is based on the International Organization for 
Standardization (ISO) 8583 which incorporates the specific requirements 
of an EBT system. It also serves to standardize the information that 
must be contained in the message format, a key piece of information 
being the FNS retailer authorization number.
    For purposes of interoperability, standardization is critical to 
effectuating communications between a State agency's issuer and 
retailer/third party messages from sources outside the State EBT system 
area. If a standard message format is not adopted, a State agency or 
its designated agent(s) would have to maintain connections with all FNS 
retailers or their third parties across the country in order to 
accommodate interstate transactions. In October 1995, these 
specifications were published in draft form as part of the American 
National Standards Institute's (ANSI) standards and are available from 
the American Bankers' Association. The Department is requiring this 
standard message format for all EBT systems. This interim rule amends 
current regulations at 7 CFR 274.12(h) which require the State agency 
to ensure that EBT systems comply with POS technical standards 
established by the ANSI or the International Organization for 
Standardization (ISO) where applicable.

Issuer Identification Number (IIN) Requirements

    In order for interoperability to occur, transactions must be routed 
to the appropriate State system for authorization, regardless of the 
transaction's point of origin. It is impractical from a system 
processing and cost perspective to require retailers or their third 
parties/transaction acquirers to have a direct connection to multiple 
State EBT systems. A system which prompts multiple connections for 
retailers and third parties would also be a departure from the 
commercial infrastructure model, which allows a transaction acquirer, 
as the entity which owns, operates, or controls the POS terminal(s), to 
manage their connections to the network based on maximizing 
efficiencies for their system traffic. Therefore, the Department is 
requiring that the Primary Account Number (PAN) on the State-issued EBT 
card be standardized to include State routing information. Many State 
agencies have already implemented this in order to allow interoperable 
transactions within a consortium of State EBT systems. Each State 
agency must obtain a number assigned by the American Bankers 
Association that identifies the State for purposes of transaction 
interchange. This number is commonly referred to as the IIN. The State 
agency or their prime contractor shall include the IIN as the first six 
digits of the PAN. The State agency or its prime contractor and other 
designated agents and terminal operators within the State EBT system 
must be able to recognize all State IIN numbers so that transactions 
are routed accordingly.

Interoperable Transaction Set Requirements

    Current regulations at 7 CFR 274.12(h)(9) require that all EBT 
systems include the following minimum transaction capabilities: 
authorization or rejection of purchases, refunds or customer credits, 
voids or cancellations, key entered transactions, balance inquiries and 
settlement or close-out transactions. The Department is modifying this 
section to specify that the system must be able to complete these 
transactions across State borders nationwide in accordance with the 
standards specified in this interim rule at Sec. 274.12 (h)(10).
    The Department considered requiring manual transactions nationwide 
as well. In order to accomplish this, substantial standards beyond what 
are currently in the QUEST rules would need to be in place for handling 
manual vouchers. Even if standards are established for voucher 
processing, it will be very difficult to administer this across State 
borders. The critical issue is how retailers will obtain an 
authorization number for the transaction. There would most likely be an 
increased burden on training and help desk functions of EBT systems, 
since retailers would need to interface with virtually all State 
systems in order to obtain authorization information nationwide. Few, 
if any, third party processors currently support interoperable manual 
vouchers. When balancing the small percentage of these types of 
transactions that would occur against the burden to State agencies and 
retailers to implement this requirement, the Department has determined 
that it is neither necessary nor cost effective to require 
interoperable manual transactions nationwide at this time, except where 
necessary for border store access.
    In addition to these specific technical standards, there are 
certain responsibilities delineated in the QUEST rules that are 
integral to interoperability. These responsibilities have been 
incorporated into the current regulations at 7 CFR 274.12(h). While the 
regulations assign these responsibilities to the State agency, State 
agencies may delegate these responsibilities to their EBT prime 
contractor, a designated agent of the prime contractor, or third 
parties/retailers as appropriate.

Other Associated Regulation Changes

    There are also regulation changes needed to adapt FSP specific 
requirements to an interoperable EBT environment. These changes will 
ensure the integrity of EBT transactions in authorized FNS retailers 
for in-state transactions as well as interstate transactions, and 
update the border store and conversion policies for interoperability. 
Specific changes are as follows:
    Use of the FNS REDE System: Current regulations at 7 CFR 
274.12(e)(4) require that State agencies maintain a current listing of 
authorized FNS retailers in their EBT systems so that FSP clients can 
only redeem benefits at authorized retailers. In order to accomplish 
this, State agencies or their designated agents must obtain retailer 
authorization information provided by FNS in a timely fashion and 
follow up on actions taken regarding any disqualification or withdrawal 
by an authorized food retailer from the FSP within two business days 
after receipt. This had previously been a manual process. FNS Field 
Offices used telefaxing or e-mail to send store data to State agencies 
or their system operators. These manual procedures were subject to 
errors and cumbersome to manage. In addition, manual procedures were 
not conducive to an interoperable environment where multiple vendors 
must be alerted of retailer participation changes on a daily basis. 
Therefore, an automated system, referred to as Retailer Electronic 
Benefit Transfer (EBT) Data Exchange (REDE), was developed to improve 
the accuracy and efficiency of retailer operations overall. A detailed 
State-specific file, containing store name, address, firm type, and 
ownership information is provided by FNS so that the State agency or 
its EBT system operator can update retailer status information in its 
system and make the necessary equipment and connectivity arrangements. 
Additionally, REDE provides a complete national list of FNS

[[Page 49723]]

authorized stores to facilitate interstate transactions.
    The Department is requiring that State agencies or their designated 
agent access and use REDE so that the files of FNS retailers are 
updated on a daily basis. The EBT operator in turn would activate or 
deactivate retailers' EBT connections in accordance with required 
timeframes, install or remove Point of Sale (POS) devices as 
appropriate, and make other necessary information changes to the 
retailer authorization listing. Use of REDE is required for all State 
EBT systems, regardless of whether the system is interoperable, in 
order to maximize the efficiency of retailer data exchange between FNS 
and the State agency. Most State agencies have already adopted use of 
the REDE files. In accordance with current regulations at 7 CFR 
276.2(b)(7), the State agency is strictly liable for any benefits that 
are improperly issued as a result of failure to meet the requirements 
of this provision.
    Border Store Requirements: In current regulations at 7 CFR 
274.12(g)(4)(C), State agencies are required to equip retailers in 
border States with POS devices if client shopping patterns demonstrate 
that these stores are necessary for food stamp household access to food 
stamp retailers. In accordance with these regulations, State agencies 
review redemption patterns for benefit recipients bordering the EBT 
system area to determine if any out-of-state retailers are necessary 
for household access. POS equipment is deployed when necessary. These 
retailers must also be able to participate in the neighboring State EBT 
system via a manual voucher process in situations where the system is 
down or equipment is not deployed to the store due to a waiver.
    These border store requirements continue to apply for all State 
agencies. State agencies are required to examine household shopping 
patterns in order to determine if there is a need for border store 
equipment; however, the need for such equipment should be significantly 
less with interoperability. In order to avoid confusion, the Department 
is clarifying the current regulations at 7 CFR 274.12(g)(4)(C) to more 
explicitly identify State agency responsibilities for border stores. In 
an interoperable EBT environment, where all FNS retailers are equipped 
with POS devices, the need to deploy equipment outside the State is 
limited to neighboring states that are not interoperable due to 
exemptions for technological barriers or temporary waivers. State 
agencies are required to deploy equipment in these situations if there 
are border stores necessary for client access. State agencies will also 
need to make accommodations for retailers in interoperable border 
States deemed necessary for client access by ensuring that procedures 
are in place to process manual vouchers in instances when the system is 
down or for those retailers that do not have POS equipment.
    Benefit Conversion: Current regulations at 7 CFR 274.12(f)(6) 
require State agencies to convert electronic benefits to paper coupons 
for those households leaving the State. Nationwide interoperability and 
portability would eliminate the need for this requirement. However, 
there may be some instances where interoperability is not implemented 
and benefit conversion will still be necessary to provide clients 
access to their benefits if they relocate. Therefore, the Department is 
modifying this requirement so that benefit conversion is only required 
when a household is relocating to a State that is not interoperable 
with and where electronic benefits are not portable from the 
household's current State of residence.

Funding Provisions

    Current regulations at 7 CFR 274.12(k) detail the funding 
arrangements and limitations of federal financial participation for FSP 
EBT systems. The Department is amending this section so that State 
agencies may receive one hundred percent federal funding for the costs 
incurred by a State agency for switching and settling all food stamp 
interstate transactions.
    The total amount of one hundred percent funding available annually 
nationwide is limited to $500,000. Public Law 106-171 established this 
limit based on a study of interoperability fees conducted by NACHA. 
Fees were estimated based on knowledge of the pricing structure for 
various regional network gateway fees. While the statute does not give 
the Secretary authority to set fees for this service, an assessment of 
``reasonableness'' would be part of the Department's review of a State 
agency's EBT contract. Such an assessment is in accordance with 
Departmental regulations at 7 CFR 3015.61(f) which states that 
``Established procedures shall be used for determining the 
reasonableness, allowability and allocability of costs in accordance 
with cost principles. . . .'' The Department would expect these costs 
to be the incremental charges associated with the State agency's system 
operator for switching and settling transactions between States.
    In accordance with Public Law 106-171, the Department will pay 100 
percent of the costs incurred by a State agency for switching and 
settling transactions. In order to qualify for this enhanced funding, 
the State agency's EBT system must meet certain standards of 
interoperability and portability. The law makes the following 
distinction between two sets of standards for the short-term and long-
term respectively: (1) State agencies must adhere to the standard of 
interoperability and portability adopted by a majority of State 
agencies to receive enhanced funding for the period from February 11, 
2000 through September 30, 2002; and (2) State agencies must adhere to 
the standard of interoperability and portability adopted in this 
regulation to receive funding for interoperability costs incurred after 
September 30, 2002. Therefore, those State agencies that have adopted 
the QUEST operating rules are automatically eligible for the enhanced 
funding retroactive to enactment of the Pub. L. 106-171 on February 11, 
2000. At the same time, several State agencies, while not members of 
QUEST, have adopted standards which establish identical or equivalent 
provisions to those established under the QUEST rules for their EBT 
operations. Therefore, if a State agency has not adopted the QUEST 
rules but has adopted comparable standards by another name which 
facilitate interoperability and portability of electronic benefits, FNS 
will review these standards to determine whether the State agency is 
eligible for retroactive funding and funding prior to October 1, 2002. 
Retroactive interoperability costs are eligible for enhanced funding 
with the caveat that State agencies cannot be reimbursed for such costs 
with funding obligated in subsequent fiscal years, because 
appropriations laws stipulate that funding for interoperability costs 
must be obligated to State agencies in the same fiscal year as such 
costs are incurred. After September 30, 2002, all State agencies that 
comply with the standards adopted in this regulation would be eligible 
for the one hundred percent funding, subject to the nationwide cap of 
$500,000 for each fiscal year.
    In order to receive enhanced funding, State agencies must sign and 
submit to the Department an Interoperability Funding Agreement on an 
annual basis, indicating that the State agency agrees to comply with 
the administrative procedures established by the Department. The 
administrative

[[Page 49724]]

procedures will be issued by the Department under separate guidance.
    The signed agreement will serve as the obligating document, which 
will enable the Department to set aside the funds needed to pay for 100 
percent funding of interoperability costs incurred by State agencies 
during the fiscal year. The agreement should be submitted to the 
Department only if the State agency intends to request enhanced funding 
and must be submitted before or concurrent with the State agency's 
first request for payment, but no later than the last day of the fiscal 
year in which the interoperability costs are incurred. For example, for 
the first fiscal year, FY 2000, any State agency that wishes to request 
retroactive funding for costs incurred from February 11, 2000 through 
September 30, 2000 must submit the Funding Agreement before September 
30, 2000. However, requests for payment may be submitted after this 
date, according to the quarterly schedule established by the Department 
at 7 CFR 274.12(K)(6)(iv) and described in the next paragraph.
    State agencies approved to receive the enhanced funding through a 
contract modification approval must submit payment requests on a 
quarterly basis. Correspondingly, State agencies will be paid for their 
interoperability costs on a quarterly basis. Furthermore, because there 
is limited enhanced funding, it is important that requests for payments 
be based on actual costs. Requests for payments, therefore, must be 
submitted after the end of each quarter in which the interoperability 
costs were incurred. The due dates are February 15 (for the period 
October through December), May 15 (January through March), August 15 
(April through June), and November 15 (July through September). If a 
request for payment is submitted at any time after the required date 
for the quarter in which the costs were incurred, the request will 
still be considered. However, because requests for payments will be 
processed only once every quarter, late requests will not be considered 
until all other requests submitted by the next required date are 
scheduled to be processed. If the $500,000 limitation is exceeded, 
federal financial participation would revert to the standard fifty 
percent program reimbursement rate and procedure. Since these 
interoperability costs and requests for payments are subject to audit, 
State agencies should maintain supporting documentation for these 
costs, including contractor bills and interoperability transaction 
records, for a minimum of three years in accordance with Departmental 
regulations at 7 CFR 3015.21 on record retention requirements.

Implementation

    This rulemaking is effective September 14, 2000. Any new contract 
executed after October 16, 2000, must have provisions for 
interoperability and portability which include an implementation date 
for this functionality no later than October 1, 2002. State agencies 
entering into contracts before October 16, 2000, are not required to 
re-negotiate their EBT services contract to include interoperability 
and portability, even if the contract expires after the October 1, 2002 
deadline; such State agencies are exempt from the requirement until 
they re-negotiate to extend the contract or re-procure a new EBT 
contract. However, this does not preclude a State agency from modifying 
their contract to include interoperability and portability prior to the 
end of their contract. In addition, Smart Card systems are exempt from 
the requirements of this regulation until such time as the Department 
determines a practicable technological method is available for 
interoperability with on-line EBT systems. State agencies with ongoing 
contracts or that operate Smart Card systems do not need to submit a 
waiver request to receive the exemption.
    At the request of a State agency, the Department may provide one 
waiver to temporarily exempt the State agency from complying with the 
requirements of this regulation if the State agency adequately 
demonstrates that: (1) There are unusual technological barriers to the 
implementation of interoperability and portability; and (2) it is in 
the best interest of the food stamp program to grant the waiver. Any 
approved waivers must specify a date by which the State agency will 
achieve interoperability.
    If the State agency has adopted standards for interoperability and 
portability adopted by a majority of State agencies prior to the 
effective date of this rulemaking, enhanced funding for 
interoperability costs is retroactive to the date of enactment of 
Public Law 106-171, which was signed into law on February 11, 2000 or 
the date of implementation of such standards, whichever is later.

List of Subjects

7 CFR Part 272

    Alaska, Civil Rights, Food Stamps, Grant Programs-social programs, 
Reporting and recordkeeping requirements.

7 CFR Part 274

    Administrative practice and procedure, Food stamps, Fraud, Grant 
programs-social programs, Reporting and recordkeeping requirements, 
State liabilities.


    Accordingly, 7 CFR parts 272 and 274 are amended as follows:
    1. The authority citation for 7 CFR parts 272 and 274 continues to 
read as follows:

    Authority: 7 U.S.C. 2011-2036.

PART 272--REQUIREMENTS FOR PARTICIPATING STATE AGENCIES

    2. In Sec. 272.1, paragraph (g)(162) is added to read as follows:
* * * * *
    (g) Implementation. * * *
    (162) Amendment No. 384. The provisions of Amendment No. 384 are 
effective September 14, 2000, and must be implemented as follows:
    (i) Any new contract executed after October 16, 2000, must have 
provisions for interoperability and portability which include an 
implementation date for this functionality no later than October 1, 
2002, except under the following circumstances:
    (A) State agencies with contracts entered into before October 16, 
2000, are not required to re-negotiate their EBT services contract to 
include interoperability and portability, even if the contract expires 
after the October 1, 2002 deadline; such State agencies are exempt from 
the interoperability requirement until they re-negotiate or re-procure 
their EBT contract.
    (B) Smart Card systems are not required to be interoperable with 
other State EBT systems until such time that the Department determines 
a practicable technological method is available for interoperability 
with on-line EBT systems.
    (ii) Enhanced funding is available for interoperability costs 
incurred after February 11, 2000, and before October 1, 2002, for State 
agencies which have implemented standards of interoperability and 
portability adopted by a majority of State agencies, and for such costs 
incurred after September 1, 2002, for State agencies that have adopted 
standards for interoperability and portability in accordance with this 
regulation at 7 CFR 274.12.

PART 274--ISSUANCE AND USE OF COUPONS

    3. In Sec. 274.12,
    a. Paragraph (e)(4)(i) is revised;
    b. Paragraph (f)(6)(i) is amended by removing the first sentence 
and adding in its place two new sentences;
    c. Paragraph (g)(4)(ii)(C) is amended by adding three sentences 
after the third sentence;

[[Page 49725]]

    d. Paragraph (h) introductory text is amended by adding a new 
sentence after the first sentence;
    e. Paragraph (h)(9) is amended by adding a new sentence after the 
last sentence;
    f. New paragraphs (h)(10) and (h)(11) are added; and
    g. A new paragraph (k)(6) is added.
    The revisions and additions read as follows:


Sec. 274.12  Electronic Benefit Transfer issuance system approval 
standards.

* * * * *
    (e) * * *
    (4) * * *
    (i) Convey retailer authorization information provided by FNS to 
the system operator using the Retailer Electronic Benefit Transfer 
(EBT) Data Exchange (REDE) system. The State agency must access the 
REDE files to ensure that the FNS retailer files used to authorize 
valid EBT Food Stamp transactions are updated on a daily basis. Follow-
up on actions taken regarding any disqualification or withdrawal by an 
authorized food retailer from the Food Stamp Program must occur within 
two business days after receipt;
* * * * *
    (f) * * *
    (6) * * *
    (i) Households leaving an EBT State must be able to use their 
electronic benefits upon relocation. A State agency must convert these 
electronic benefits to paper coupons if a household is relocating to a 
State that is not interoperable and where electronic benefits are not 
portable from the household's current State of residence. * * *
* * * * *
    (g) * * *
    (4) * * *
    (ii) * * *
    (C) * * * The need to deploy equipment outside the State is limited 
to neighboring States that are not interoperable due to exemptions for 
technological barriers or temporary waivers. State agencies will also 
need to make accommodations for border stores in interoperable States 
that are deemed necessary for client access. To do so, State agencies 
must ensure that procedures are in place to process manual vouchers in 
instances when the system is down or for those retailers that do not 
have POS equipment. * * *
* * * * *
    (h) * * * This includes the draft EBT ISO 8583 Processor Interface 
Technical Specifications contained in the ANSI standards, which 
delineates a standard message format for retailers and third parties. * 
* *
* * * * *
    (9) * * * The system must be capable of completing this transaction 
set across State borders nationwide in accordance with standards 
specified in paragraph (h)(10) of this section.
    (10) Interoperability. State agencies must adopt uniform standards 
to facilitate interoperability and portablilty nationwide. The term 
``interoperability'' means the EBT system must enable a coupon issued 
in the form of an EBT card to be redeemed in any State. The term 
``portablity'' means the EBT system must enable a coupon issued in the 
form of an EBT card to be used in any State by a household to purchase 
food at a retail food store or a wholesale food concern approved under 
the Food Stamp Act of 1977. The standards must include the following:
    (i) EBT System Connectivity. State agencies are responsible for 
establishing telecommunications links, transaction switching facilities 
and any other arrangements with other State agencies necessary for the 
routing of interoperable transactions to such other State EBT 
authorization systems. State agencies are also responsible for 
facilitating the settlement of such interoperable transactions and the 
handling of adjustments. These connections need not be direct 
connections between State authorization systems but may be facilitated 
through agreements and linkages with other designated agents or third 
party processors. All State agencies must agree to the timing and 
disposition of disputes, error resolution, and adjustments in 
accordance with Department regulations at Sec. 273.13(a), 
Sec. 273.15(k) and paragraph (f) of this section. State agencies or 
their designated agents must draw funds from State food stamp accounts 
for food stamp benefits transacted by that State's food stamp 
recipients, regardless of where benefits were transacted.
    (ii) Message Format. Each authorization system must use the 
International Organization for Standards (ISO) 8583 message format, 
modified for EBT, in a version mutually agreed to between the 
authorization agent and the party connected for all transactions. Each 
authorization system must process each financial transaction as a 
single message financial transaction, except for pre-authorized 
transactions and reversals, processed as paired transactions.
    (iii) Card Primary Account Number (PAN) Requirements. Track 2 on 
each card shall contain the PAN. Each Government entity must obtain an 
Issuer Identification Number (IIN) from the American Banker's 
Association (ABA). The IIN should be included as the first six digits 
of the Primary Account Number. The PAN must comply with International 
Organization for Standards (ISO) 7812, Identification Cards--Numbering 
System and Registration Procedures for Issuer Identifiers. Each State 
agency must be responsible for generating, updating, and distributing 
IIN files of all States to each retailer, processor, or acquirer that 
is directly connected to the State's authorization system. Each 
terminal operator that uses a routing table for routing acquired 
transactions must, within seven calendar days of receiving an IIN 
routing table update, modify its routing tables to reflect the updated 
routing information.
    (iv) Third Party Processor Requirements. Each Third Party Processor 
or terminal operator must have primary responsibility and liability for 
operating the telecommunications and processing system (including 
software and hardware) through which transactions initiated at POS 
terminals it owns, operates, controls or for which it has signed an 
agreement to accept EBT transactions, are processed and routed, 
directly or indirectly, to the appropriate State authorization system. 
Each terminal operator must maintain the necessary computer hardware 
and software to interface either directly with a State authorization 
system or with a third party service provider to obtain access to one 
or more State authorization systems. Each terminal operator must 
establish a direct or indirect telecommunications connection for the 
routing of transactions to the State authorization system or to a 
processor directly or indirectly connected to the State authorization 
system.
    (v) REDE File. The State agency must ensure that their EBT system 
verifies FNS retailer numbers for all interstate transactions against 
the National REDE file of all FNS EBT retailers to validate these 
transactions.
    (11) Waivers. The State agency may request a waiver from the 
Department for a temporary exemption from compliance with the 
requirements for interoperability and portability, as found in this 
section, if they can adequately demonstrate that: (1) There are unusual 
technological barriers to the implementation of interoperability; and 
(2) it is in the best interest of the FSP to grant the waiver. All 
waivers must specify a date by which the State agency

[[Page 49726]]

will achieve interoperability and portability.
* * * * *
    (k) * * *
    (6) State agencies may receive one hundred percent federal funding 
for the costs they incur for switching and settling all food stamp 
interstate transactions. For purposes of this section, the term 
``switching'' means the routing of an interstate transaction that 
consists of transmitting the details of a transaction electronically 
recorded through the use of an EBT card in one State to the issuer of 
the card that is in another State; and the term ``settling'' means 
movement, and reporting such movement, of funds from an EBT card issuer 
located in one to a retail food store, or wholesale food concern, that 
is located in another State, to accomplish an interstate transaction. 
The total amount of one hundred percent funding available annually is 
limited to $500,000 nationwide. Once the $500,000 limitation is 
exceeded, federal financial participation reverts to the standard fifty 
percent program reimbursement rate and procedure. In order to qualify 
for this funding, the State agency must:
    (i) adhere to the standard of interoperability and portability 
adopted by a majority of State agencies for interoperability costs 
incurred for the period from February 11, 2000 through September 30, 
2002;
    (ii) meet standards of interoperability and portability under 
subsections (e) and (h) for costs incurred after September 30, 2002;
    (iii) sign and submit, in each fiscal year for which a State agency 
requests enhanced funding, an Interoperability Funding Agreement to 
comply with the administrative procedures established by the 
Department. The State agency must submit the signed agreement to the 
Department before the end of the fiscal year in which costs are 
incurred in order to qualify for payment for that fiscal year; and
    (iv) submit requests for payment on a quarterly basis after the end 
of the quarter in which interoperability costs are incurred, in 
accordance with the Department's administrative procedures. Requests 
for payments shall be due February 15 (for the period October through 
December), May 15 (January through March), August 15 (April through 
June), and November 15 (July through September). Requests for payment 
submitted after the required date for a quarter shall not be considered 
until the following quarter, when such requests for payments are 
scheduled to be processed.
* * * * *

    Dated: August 7, 2000.
Samuel Chambers, Jr.,
Administrator, Food and Nutrition Service.
[FR Doc. 00-20543 Filed 8-14-00; 8:45 am]
BILLING CODE 3410-30-U