[Federal Register Volume 67, Number 29 (Tuesday, February 12, 2002)]
[Proposed Rules]
[Pages 6437-6444]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-3344]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 67, No. 29 / Tuesday, February 12, 2002 / 
Proposed Rules  

[[Page 6437]]



SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

RIN 3245-AE84


Small Business Size Regulations; Petroleum Refineries

AGENCY: Small Business Administration (SBA).

ACTION: Proposed rule.

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

SUMMARY: The Small Business Administration (SBA) proposes to modify the 
small business size standard for petroleum refiners for purposes of 
Federal Government procurement. SBA proposes to increase the capacity 
component of the size standard from 75,000 barrels per day (bpd) to 
155,000 barrels per calendar day (bpcd); to define the capacity measure 
in bpcd; and to measure a refiner's total Operable Atmospheric Crude 
Oil Distillation Capacity. The proposed revision is a better definition 
of the size of business in this industry that SBA believes should be 
eligible as small refiners for Federal procurement programs.

DATES: SBA must receive comments on or before March 14, 2002. SBA will 
make all public comments available to any person or concern upon 
request.

ADDRESSES: Address all comments concerning this proposed rule to Gary 
M. Jackson, Assistant Administrator for Size Standards, Office of Size 
Standards, 409 3rd Street, SW., Washington, DC 20416, or via e-mail to 
[email protected].

FOR FURTHER INFORMATION CONTACT: Carl Jordan, Office of Size Standards, 
at (202) 205-6618. You may also e-mail [email protected].

SUPPLEMENTARY INFORMATION:

Introduction

    SBA proposes to modify the small business size standard for 
Petroleum Refineries (North American Industry Classification System 
[NAICS] 324110) for purposes of Federal Government procurement. SBA 
proposes (1) to increase the capacity component of the standard from 
75,000 barrels per day (bpd) to 155,000 barrels per calendar day 
(bpcd); (2) to clarify that the capacity component is measured in bpcd 
as defined by the U. S. Department of Energy, Energy Information 
Administration (EIA), rather than bpd; and (3) to clarify that the 
capacity component is a measure of a refiner's total Operable 
Atmospheric Crude Oil Distillation Capacity, as used by EIA.
    The current small business size standard for NAICS 324110, 
Petroleum Refineries (formerly Standard Industrial Classification [SIC] 
2911, Petroleum Refining), is 1,500 employees.\1\ The 1,500 employee 
size standard applies to all Federal Government programs that provide 
benefits to concerns that qualify as a small business concern. SBA does 
not propose to modify the 1,500 employee size standard.
---------------------------------------------------------------------------

    \1\ Effective January 1, 1997, the Federal Government, for 
statistical purposes, replaced the SIC system with NAICS. For 
purposes of small business size standards, SBA adopted the 
definitions of NAICS for all industries effective October 1, 2000. 
NAICS is a new statistical system, and there were changes to the 
descriptions of many industry structures in the shift from SIC to 
NAICS. According to North American Industry Classification System 
United States, 1997, the entire SIC 2911 is related to NAICS 324110. 
NAICS 324110 ``comprises establishments primarily engaged in 
refining crude petroleum into refined petroleum. Petroleum refining 
involves one or more of the following activities: (1) Fractionation; 
(2) straight distillation of crude oil; and (3) cracking.'' The size 
standard for NAICS 324110, Petroleum Refineries, remains the same as 
it was for SIC 2911, Petroleum Refining.
---------------------------------------------------------------------------

    For purposes of Federal Government procurement, to qualify as a 
small business, there is an additional size standard component that 
specifies the maximum refining capacity of a small business. Footnote 4 
to the Table of Small Business Size Standards (13 CFR 121.201) states:

    NAICS code 324110--For purposes of Government procurement, the 
firm may not have more than 1,500 employees nor more than 75,000 
barrels per day capacity of petroleum-based inputs, including crude 
oil or bona fide feedstocks. Capacity includes owned or leased 
facilities as well as facilities under a processing agreement or an 
arrangement such as an exchange agreement or a throughput. The total 
product to be delivered under the contract must be at least 90 
percent refined by the successful bidder from either crude oil or 
bona fide feedstocks.

    SBA received a request from a small petroleum refiner to delete the 
bpd part of the size standard for Petroleum Refineries. The requestor 
has two concerns. First, the requestor is concerned about the apparent 
domination of the refining industry by large refiners. Over the past 
ten years, larger refiners have merged with and acquired other 
concerns, both large and small, and formed large joint ventures. The 
requestor complained that under the current 75,000 bpd size standard, 
many smaller refiners cannot grow, merge with or acquire other refiners 
without losing their small business status. In the event a small 
refiner does so, and thereby loses its small business status, it will 
remain very small compared to larger refiners. Without the opportunity 
to participate in Federal Government procurement as small businesses, 
it would still be too small to compete successfully for larger Federal 
contracts in the open market.
    Second, the requestor is concerned about the decline in small 
refiners' share of the U.S. total refining capacity. The requestor 
states that small refiners' share of the total U.S. capacity has 
declined from 7.8 percent in 1975, to 7.1 percent in 1984, to 6.7 
percent in 1990, and to 4.1 percent in 1999. In twenty-four years, this 
is a decline of almost 50 percent.
    Based on these concerns, SBA believes it should re-evaluate the 
capacity component of the Petroleum Refineries size standard as the 
small petroleum refiner requested. However, it does not agree that the 
refining capacity component should be eliminated from the size standard 
for Federal Government procurement. When SBA had proposed eliminating 
this component in 1991, comments strongly favored retaining it. Those 
commenters stated that there is no meaningful relationship between 
barrel capacity and the number of refinery employees. Thus, they 
claimed, eliminating the bpd requirement would not accurately reflect a 
small petroleum refiner. This was due to varying degrees of automation 
among refineries as well as the extent to which firms are engaged in 
non-refining activities. Based on SBA's industry analysis for this 
proposed rule, SBA believes that this remains the general opinion of 
most refiners.
    Furthermore, refinery capacity is a standard reference for 
measuring refiners among one another, and it is a measure that is 
unique to the refining industry. EIA has used this measure for many 
years, and SBA believes it

[[Page 6438]]

continues to be a useful and relevant size standard component for 
Federal procurement purposes. The 1,500 employee size standard applies 
to refiners for all other programs, but refinery capacity is directly 
related to refiners' ability to respond to Federal procurement of their 
petroleum products. Regardless of a refiner's number of employees, SBA 
does not believe that to qualify as a small refiner competing against 
other small refiners for Federal petroleum contracts that there should 
be no limit to its refining capacity.

History of the Size Standard

    SBA first established a small business size standard for Federal 
Government procurement of petroleum products in 1955. The size standard 
was 1,000 employees with a refining capacity not to exceed 30,000 bpd. 
With this size standard, small businesses accounted for 7.8 percent of 
the total U.S. refining capacity. By 1975, this small business share of 
total capacity had fallen to 5.1 percent. Therefore, SBA increased the 
size standard to 1,500 employees with a 50,000 bpd capacity. This 
restored small business share to 7.8 percent of total U.S. capacity. By 
1990, however, the small business share had again declined, to 6.7 
percent of the total U.S. refining capacity.
    On May 3, 1991, SBA proposed in the Federal Register to eliminate 
the 50,000 bpd component of the size standard entirely (56 FR 20832). 
SBA intended to simplify the size standard and make it the same as the 
single size criterion used for other industries and for other Federal 
Government programs. SBA believed that this would allow refining 
concerns that were slightly below the capacity limit to expand their 
refining facilities without losing their small business status. SBA 
received 24 comments to this proposal, 22 of which argued to retain the 
bpd component.
    Therefore, on January 7, 1992, SBA proposed in the Federal Register 
(57 FR 541) to increase the bpd component from 50,000 bpd to 75,000 
bpd. SBA received comments to this proposal that were mixed on the 
question of whether or not to increase the bpd component.
    On May 1, 1992, SBA published in the Federal Register (57 FR 18808) 
its final rule adopting the 75,000 bpd component of the size standard. 
SBA did not change the 1,500 employee size standard. SBA has not 
changed or proposed to change the petroleum refiner size standard since 
then.

Size Standards Methodology

    Congress grants SBA discretion on how to establish detailed small 
business size standards. The Agency's Standard Operating Procedure 
(SOP) 90 01 3, ``Size Determination Program,'' available on SBA's 
website at http://www.sba.gov/library/soproom.html, sets out four 
evaluation factors for establishing size standards:
    1. Industry structure and economic characteristics;
    2. The impact of different size standards on SBA programs and their 
objectives;
    3. Whether a size standard excludes businesses that are dominant in 
the industry; and,
    4. Other factors that SBA determines may also apply.
    SBA's research, public comments, industry uniqueness, or how or to 
what program(s) the size standard applies may require SBA to consider 
special factors or to modify how it generally assesses a particular 
size standard, but that is not the norm. If SBA does modify its 
methodology, it explains both the general methodology and how SBA 
assessed the size standard for the case at hand. SBA applies no 
formulas or weighting to the industry factors it analyzes. Below SBA 
explains how it analyzes the economic characteristics of an industry, 
the impact of a size standard on SBA programs, and how it evaluates 
whether a concern at or below a size standard could be considered 
dominant in the industry under review.

Industry Analysis

    The Small Business Act requires that size standards vary by 
industry to the extent necessary to reflect differing industry 
characteristics (U.S.C. 632(a)(3)). Two ``anchor size standards'' apply 
to most industries--500 employees for manufacturing industries and $5 
million for nonmanufacturing industries. Anchor size standards are 
presumed appropriate for an industry unless larger concerns are much 
more significant within that industry than the ``typical industry.''
    Since this rule is evaluating the capacity component of the 
Petroleum Refineries size standard, SBA cannot compare it to any other 
industry. The industry analysis will evaluate changes in the Petroleum 
Refineries industry over the last 10 years and their implications for 
the current 75,000 bpd size standard. SBA's analysis assesses data on 
the characteristics of the sixty-five refiners listed in Petroleum 
Supply Annual 2000, Volume 1, Table 40, published by EIA. The Petroleum 
Supply Annual 2000 is available on EIA's website, http://www.eia.doe.gov/. Table 40 ranks refiners by their total Operable Crude 
Oil Distillation Capacity, as of January 1, 2001. Virtually all data 
used to compare the relative sizes of refiners reflect refiners' 
capacity. The analysis will consist of the same factors as other size 
standard analyses.
    In 13 CFR 121.102 (a) and (b), SBA lists the primary evaluation 
factors that describe the structural characteristics of an industry--
average concern size, distribution of concerns by size, start-up costs 
and industry competition. SBA also analyzes the possible impact of a 
size standard revision on SBA programs. These five factors are the most 
important ones that SBA evaluates when establishing a size standard. 
However, SBA will also consider and evaluate other information that is 
relevant to determining a size standard for a particular industry. 
Public comments to proposed size standards are also an important source 
of additional information that SBA closely reviews before making a 
final decision on a size standard. Below is a brief description of each 
of the five evaluation factors.
    1. Average concern size. This is generally the total industry 
receipts, number of employees, or other measure of size divided by the 
number of concerns in the industry. The higher the average concern size 
the higher size standard that can be supported for the industry. For 
this proposed rule SBA has determined the average sized refiner from 
Table 40, ``Refiners' Operable Atmospheric Crude Oil Distillation 
Capacity as of January 1, 2001,'' from Petroleum Supply Annual 2000, 
Volume 1, published by EIA.
    2. Distribution of concerns by size. SBA usually examines the 
proportion of industry receipts, employment or other economic activity 
accounted for by concerns of different sizes in an industry. If the 
preponderance of an industry's economic activity is by smaller 
concerns, this tends to support adopting the anchor size standard. The 
opposite is the case for an industry in which the distribution of 
concerns indicates that economic activity is concentrated among the 
largest concerns in an industry. In this rule SBA compares the size of 
refiners based on their total petroleum refining capacity. To 
demonstrate industry changes from when SBA last changed this size 
standard in 1992, SBA also compares current data on the distribution of 
refiners by size with data from 1989 and 1990.
    3. Start-up costs. These affect a concern's initial size because 
entrants to an industry must have sufficient capital to start and 
maintain a viable business. To the extent that concerns entering an 
industry have greater financial

[[Page 6439]]

requirements than concerns in other industries, SBA considers a higher 
size standard. The requestor has stated that the bpd capacity 
constrains small refiners' growth and expansion. In this rule, rather 
than looking at refinery start-up costs, SBA considers refiners' 
ability to consolidate their resources. This proposed rule, if adopted, 
should assist them in expanding their resources, because they will be 
able to share and thereby reduce the concomitant capital costs of 
expansion.
    4. Industry competition. SBA normally assesses this by measuring 
the proportion or share of industry receipts obtained by concerns that 
are among the largest concerns in an industry. In this proposed rule, 
SBA compared the total capacity of the four and the eight largest 
refiners. These comparisons are generally referred to as ``four-firm'' 
and ``eight-firm'' concentration ratios. When a significant proportion 
of economic activity within the industry is concentrated among a few 
relatively large producers, SBA tends to set a higher size standard.
    5. Competition for Federal procurements and SBA Financial 
Assistance. SBA evaluates the possible impact of a size standard on its 
programs to determine whether small businesses defined under the 
existing size standard are receiving a reasonable level of assistance. 
This assessment most often focuses on the proportion or share of 
Federal contract dollars awarded to small businesses in the industry in 
question. In general, the lower the share of Federal contract dollars 
awarded to small businesses in an industry which receives significant 
Federal procurement revenues, the greater is the justification for a 
size standard higher than the existing one.
    SBA usually assesses the impact of a proposed size standard on 
other SBA programs to determine whether the current size standard may 
restrict the level of financial assistance to concerns in that 
industry. The bpd capacity limit that this proposed rule addresses 
applies only to the Federal Government's procurement of petroleum 
products. Therefore, this proposed change, if adopted in final form, 
will have no affect on SBA financial assistance or other programs.

Average Size Refiner and Refinery

    Based on data published by EIA from 1990 to 2000, there was a 
marked increase in the average refiner size, from 144,185 bpcd to 
254,029 bpcd (see Table 1, below). Similarly, average refinery size 
also increased significantly between these years, from 75,961 bpcd to 
104,506 bpcd. These changes reflect both fewer refineries and fewer 
refiners at the end of 2000 than in 1990 while total combined capacity 
has increased. Over the last 10 years, mergers, acquisitions, joint 
ventures, and shutdowns of refineries have resulted in fewer refiners. 
The increases in average refinery and refiner size support an increase 
to the current refinery capacity component of the size standard.

                                                     Table 1
----------------------------------------------------------------------------------------------------------------
                                                                       1990            2001       Percent change
----------------------------------------------------------------------------------------------------------------
Number of Refiners..............................................             108              65          (40.0)
Number of Operable Refineries...................................             205             158          (22.9)
Total U.S. Capacity (bpcd)......................................      15,571,966      16,511,871            6.0
Average capacity per refiner (bpcd).............................         144,185         254,029           76.2
Average capacity per refinery (bpcd)............................          75,961         104,506          37.5
----------------------------------------------------------------------------------------------------------------
Source: EIA, Annual Energy Review, Table 5.9, ``Refinery Capacity and Utilization, 1949-2000.''
Note: Table 1 data, and all further data in this proposed rule, are based on and refer to ``barrels per calendar
  day'' (bpcd), as EIA defines the term, rather than ``bpd,'' as used in SBA's existing size standard.

Distribution of Refiners and Refineries by Size

    The distribution of refiners by capacity since the last change to 
the size standard shows a significant trend towards larger refiners in 
the industry. Table 2, below, compares end of 1989 data used in the 
1992 size standard change with data as of January 1, 2001.

                                                                         Table 2
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Number of refiners             Number of refineries       Percent of total U.S. capacity
                          Bpcd                           -----------------------------------------------------------------------------------------------
                                                               1989            2001            1989            2001            1989            2001
--------------------------------------------------------------------------------------------------------------------------------------------------------
>1,000,000..............................................               3               4              22              29            24.7            34.9
500,001-1,000,000.......................................               6               9              29              42            27.7            36.7
200,001-500,000.........................................              12               7              36              19            23.9            13.8
100,001-200,000.........................................              12              10              25              17            11.3             8.8
50,001 to 100,000.......................................               9               6              13               7             4.2             1.8
30,001 to 50,000........................................              15               7              17              10             4.0             2.1
30,000.......................................              51              22              57              26             4.2             1.9
                                                         -----------------------------------------------------------------------------------------------
    Totals..............................................             108              65             199             150           100.0          100.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source for 2001 data: EIA, Annual Energy Review, Table 5.9, ``Refinery Capacity and Utilization, 1949-2000.''
Source for 1999 data: U.S. Department of Energy, Petroleum Supply Annual, 1989.

    Examining the distribution of refineries shows the same long-term 
trends. Refineries of 50,000 bpcd or less represent only 35.9 percent 
of total refineries in 2001 as compared to 53.8 percent in 1989 (see 
Table 3, below).

[[Page 6440]]



                                 Table 3
------------------------------------------------------------------------
                                             Percent of total operable
                                                    refineries
              Refinery size              -------------------------------
                                               1989             001
------------------------------------------------------------------------
Refineries > 100,000 bpcd...............            27.6            37.9
Refineries 50,001 to 100,000 bpcd.......            18.6            26.1
Refineries 10,001 to 50,000 bpcd........            34.7            26.1
Refineries  10,000 bpcd......            19.1             9.8
                                         -------------------------------
    Totals..............................           100.0          100.0
------------------------------------------------------------------------
Source: EIA, Petroleum Supply Annual 2000, Volume 1, Table 40.

    This increased share of capacity among large refineries is similar 
to the trend SBA observed when it last studied this industry for the 
1992 size standard change. Table 4, below, compares the 1979 to 1989 
changes with the 1989 to 2001 changes.

                                 Table 4
------------------------------------------------------------------------
                                            Changes in percent of total
                                                operable refineries
              Refinery size              -------------------------------
                                             1979-1989       1989-2001
------------------------------------------------------------------------
Refineries > 100,000 bpcd...............               8             5.5
Refineries 50,001 to 100,000 bpcd.......             -16             8.1
Refineries 10,001 to 50,000 bpcd........             -43           -42.0
Refineries  10,000 bpcd......             -63          -60.5
------------------------------------------------------------------------
Source for 1989-2001 data: EIA, Annual Energy Review, Table 5.9,
  ``Refinery Capacity and Utilization, 1949-2000.''
Source for 1979-1999 data: U.S. Department of Energy, Petroleum Supply
  Annual, 1989.

    Small refiners, those who meet the current 75,000 bpcd size 
standard, represent a very small portion of total industry's U.S. 
capacity. Table 5, below, presents the percentages of total U.S. 
refining capacity for those refiners above and below the current 75,000 
bpd size standard in 2001. The current small refiner share of total 
industry capacity is 5.8 percent, well below the historical share of 
approximately 7.5 percent.

                                 Table 5
------------------------------------------------------------------------
                                                            Percent of
                Refiners                  Number of bpcd    total bpcd
------------------------------------------------------------------------
Total U.S. Capacity--65 refiners........      16,595,371           100.0
Total for the 30 refiners > 75,000 bpcd.      15,635,960            94.2
Total for the 35 refiners             959,411            5.8
 75,000 bpcd............................
------------------------------------------------------------------------
Source: EIA, Petroleum Supply Annual 2000, Volume 1, Table 40.

    Furthermore, there is significant disparity between the average 
capacity of all refineries owned and/or operated by the thirty largest 
refiners and the average capacity of refineries owned and/or operated 
by the thirty-five small refiners. Table 6, below, shows the 
differences between average capacities of small and large refiners in 
2001.

                                 Table 6
------------------------------------------------------------------------
                                          Average Number     Number of
                 Refiner                      of bpcd       refineries
------------------------------------------------------------------------
Total U.S. Capacity--65 refiners........         107,067             155
Average for the 30 refiners > 75,000             146,130             107
 bpcd...................................
Average for the 35 refiners            19,388             48
 75,000 bpcd............................
------------------------------------------------------------------------
Source: EIA, Petroleum Supply Annual 2000, Volume 1, Table 40.

    SBA concludes that these continuing trends towards larger refiners 
in the industry and the reduced small refiner share of industry 
capacity support an increase to the capacity component of the petroleum 
refineries size standard.

Industry Concentration

    The refining industry in the U.S. has undergone substantial 
restructuring since SBA last increased the size standard. The result 
has been fewer but larger refiners with fewer but larger refineries. At 
the same time total U.S. refining capacity is greater. With this 
industry realignment and increased U.S. petroleum refining capacity, 
the total U.S. refining capacity has become increasingly concentrated 
among a few of the largest refiners. Since 1989, the top four and top 
eight refiners have increased their share of total industry refining 
capacity (see Table 7, below). The increasing trend of industry 
concentration further supports an

[[Page 6441]]

increase to the current capacity size standard.

                                 Table 7
------------------------------------------------------------------------
                                             Percent of U.S. refining
                                             capacity as of January 1
                Refiners                 -------------------------------
                                               1990            2001
------------------------------------------------------------------------
Four largest............................            31.0            34.9
Eight largest...........................            49.1           54.3
------------------------------------------------------------------------
Source: EIA, Petroleum Supply Annual 2000, Volume 1, Table 40.

Capital Costs

    The Petroleum Refineries industry is one of the most capital 
intensive industries in the economy. In recent years, increasing 
environmental regulations (such as those required by the Clear Air 
Amendments of 1990) have required refiners to make substantial 
investments in new equipment. For example, the Environmental Protection 
Agency (EPA) has estimated that its regulations pertaining to sulfur 
content in gasoline will require refiners, on average, to spend 
approximately $44 million to remove sulfur during the refining process 
and an additional $16 million per refinery for operating costs 
associated with desulfurization unit (see 65 FR 6776, dated February 
10, 2000). EPA is also considering significant reductions in the use of 
methyl tertiary butyl ether that will require additional capital 
investments (see Oil and Gas Journal, dated March 27, 2000).
    Environmental requirements have led, in part, to the consolidations 
resulting in a fewer number of small refiners in the industry over the 
last 10 years. Refiners have increased operations to spread the cost of 
environmental compliance across large volumes and to lower costs 
through operating efficiencies. The expected environmental demands on 
the industry and the ability of small refiners to spread investment 
costs across large volumes is another indicator that SBA should 
increase its refining capacity size standard.
    To reduce costs larger refiners have formed downstream mergers and 
joint ventures, including some with non-U.S. producers. They thereby 
reduce their overall investment costs in their refineries. By doing so, 
they join not only their refining operations, but their marketing 
operations as well. Joint ventures allow refiners to share these costs 
without the problems associated with mergers and acquisitions. The 
small refiners closest to the current size standard, that is those 
small refiners with capacities not far below 75,000 bpcd, cannot enter 
into the same type of agreements without jeopardizing, and likely 
losing, their small business size status. SBA believes that increasing 
the bpcd capacity limit will allow these refiners to form joint 
ventures for similar purposes without losing their small business 
status for Federal procurement programs.

Federal Government Procurement Since 1990

    Small refiners' share of Federal Government procurements of 
petroleum has moderately decreased since 1989. Federal Procurement Data 
Center (FPDC) data for 1989, which SBA analyzed prior to revising the 
size standard in 1992, indicated that small businesses received about 
16 percent of those procurements. For fiscal years 1998-2000, small 
business share declined to as low as 10.5 percent in FY 1999, while 
averaging 13.8 percent for the three years (see Table 8, below). 
Although the decline in share of Federal petroleum contracts to small 
refiners has not been large, an increase to the size standard will 
likely maintain the share of small refiners or restore it to previous 
levels.

                                                     Table 8
----------------------------------------------------------------------------------------------------------------
                                                 Total federal petroleum    Small business      Small business
                                                  procurements  ($,000)     amount  ($,000)    amount  (Percent)
----------------------------------------------------------------------------------------------------------------
1998...........................................               $2,123,529            $327,478                15.4
1999...........................................                1,902,269             199,994                10.5
2000...........................................                2,979,095             438,073                14.7
                                                ----------------------------------------------------------------
Three year total...............................                7,004,893             965,545  ..................
Three year average.............................                2,334,964             321,848               13.8
----------------------------------------------------------------------------------------------------------------
 Sources: EIA, Petroleum Supply Annual 2000, Volume 1, Table 40; EIA, Petroleum Supply Annual 1999, Volume 1,
  Table 40; and EIA, Petroleum Supply Annual 1998, Volume 1, Table 40.

SBA's Proposals To Revise the Size Standard

    SBA is proposing to increase the 75,000 bpd component of the size 
standard to 155,000 bpcd for purposes of Federal Government 
procurement. SBA is proposing this increase for the following reasons. 
Refineries with 155,000 bpcd or less in petroleum capacity account for 
7.6 percent of total U.S. petroleum refining. This size standard 
restores the share of small refiners to approximate the same level that 
resulted from the 1992 increase to 75,000 bpd. As stated above (see 
Table 3, above), small refiners currently account for 5.8 percent of 
total U. S. capacity.
    Currently defined small refiners will be able to grow, merge, joint 
venture or create other forms of consortia, and at the same time retain 
their small business status. The proposed increase to 155,000 bpcd is 
slightly more than double the current size standard refining capacity 
component. At this level, a small refiner could operate a refinery 
equal to the size of the average refinery of the 30 large refiners in 
the industry January 1, 2001 (see Table 6, above). The proposed level 
should enable small refiners to expand to

[[Page 6442]]

achieve operational efficiencies needed to accommodate increasing 
environmental requirements. An increase to a lower capacity, while also 
allowing expansion, may be too limiting for small refiners to achieve 
meaningful operating efficiencies.
    Any refiner at or below 155,000 bpcd and with less than 1,500 
employees will qualify as a small refiner. Refiners that have more than 
1,500 employees or have capacities over 155,000 bpcd generally have 
significant operations outside of petroleum refining.
    SBA proposes to clarify the capacity measure for determining small 
business size status by replacing the term ``barrels per day'' with the 
term ``barrels per calendar day.'' SBA believes the term ``barrels per 
day'' does not reflect the precise intent of the regulation, and can 
raise questions about whether SBA means ``barrels per calendar day'' or 
``barrels per stream day.'' SBA proposes to accept and use ``Barrels 
per Calendar Day'' as EIA has most recently defined it in the glossary 
to Petroleum Supply Annual 2000, Volume 1. EIA defines ``barrels per 
calendar day'' as follows:

    Barrels Per Calendar Day. The maximum number of barrels of input 
that can be processed during a 24-hour period after making 
allowances for the following limitations:
    The capability of downstream facilities to absorb the output of 
crude oil processing facilities of a given refinery. No reduction is 
made when a planned distribution of intermediate streams through 
other than downstream facilities is part of a refinery's normal 
operation;
    The types and grades of inputs to be processed; the types and 
grades of products expected to be manufactured;
    The environmental constraints associated with refinery 
operations;
    The reduction of capacity for scheduled downtime such as routine 
inspection, mechanical problems, maintenance, repairs, and 
turnaround; and
    The reduction of capacity for unscheduled downtime such as 
mechanical problems, repairs, and slowdowns.

    SBA proposes to clarify further the capacity measure for 
determining small business size status by adding to footnote 4 the 
phrase ``total Operable Atmospheric Crude Oil Distillation Capacity'' 
as EIA uses the term in Petroleum Supply Annual 2000, Volume 1. EIA 
defines ``Operable Capacity'' as follows:

    Operable Capacity. The amount of capacity that, at the beginning 
of the period, is in operation; not in operation and not under 
active repair, but capable of being placed in operation within 30 
days; or not in operation but under active repair that can be 
completed within 90 days. Operable capacity is the sum of the 
operating and idle capacity and is measured in barrels per calendar 
day or barrels per stream day.

    EIA defines Atmospheric Crude Oil Distillation'' as follows:

    Atmospheric Crude Oil Distillation. The refining process of 
separating crude oil components at atmospheric pressure by heating 
to temperatures of about 600 deg. to 750 deg. F (depending on the 
nature of the crude oil and desired products) and subsequent 
condensing of the fractions by cooling.

    By stating ``155,000 bpcd of total Operable Atmospheric Crude Oil 
Distillation Capacity,'' it will be clear that the size standard 
includes both a concern's operating and its idle capacity. This is 
consistent with EIA that uses the total of operating and idle 
capacities in Petroleum Supply Annual 2000, Volume 1, Table 40, 
``Refiners'' Operable Atmospheric Crude Oil Distillation Capacity,'' 
and in earlier years as well.

Dominant in Field of Operation

    Section 3(a) of the Small Business Act (15 U.S.C. 632(a)) defines a 
small concern as one that is (1) independently owned and operated, (2) 
not dominant in its field of operation and (3) within detailed 
definitions or size standards established by SBA Administrator. SBA 
considers as part of its evaluation of a size standard whether a 
business concern at or below a proposed size standard would be 
considered dominant in its field of operation. This assessment 
generally considers the market share of firms at the proposed or final 
size standard, or other factors that may show whether a firm can 
exercise a major controlling influence on a national basis in which 
significant numbers of business concerns are engaged.
    SBA has determined that no firm at or below the proposed size 
standards for petroleum refiners would be of a sufficient size to 
dominate its field of operation. The largest firm at the proposed size 
standard level generates less than 0.9% of total U. S. refining 
capacity. This level of market share effectively precludes any ability 
for a refiner at or below the proposed size standard to exert a 
controlling effect on this industry.

Alternatives to 155,000 Bpcd That SBA Considered

    SBA considered three alternatives to its proposal. Each of these is 
discussed below.
    1. Delete the capacity requirement, the request for which prompted 
SBA's examination of the size standard. The introduction to this rule 
explain the reasons why SBA has elected to increase the capacity 
component rather than eliminating it. SBA, however, welcomes comments 
on the advantages and disadvantages of retaining or eliminating the 
capacity component.
    2. Propose a capacity between 75,000 bpcd and 155,000 bpcd. SBA 
estimates that capacity below 155,000 bpcd would not restore small 
businesses to the level they had before the size standard was last 
increased since no refiners would gain small business status. A 155,000 
bpcd capacity limit includes all refiners that have 1,500 employees or 
less. At 155,000 bpcd, two additional refiners would qualify as small. 
Further, a capacity limit below 155,000 bpcd may be insufficient to 
allow small refiners to grow, merge, or otherwise share resources, 
without losing their small business size eligibility. This would defeat 
the main purpose of increasing the size standard.
    3. Propose higher capacity limits. SBA considered capacities above 
155,000 bpcd. SBA believes that 155,000 bpcd capacity is sufficient to 
enable small refiners to merge or form alliances and thereby reduce 
their costs while increasing the profitability of their activities. 
Further, SBA estimates that a higher bpcd capacity would enable no more 
refiners to become eligible as small businesses, because refiners with 
capacities above 155,000 bpcd have, to the extent SBA could determine, 
more than 1,500 employees.

Comments Requested

    SBA requests comments on its proposal to increase the capacity 
component of the size standard from 75,000 bpd to 155,000 barrels per 
calendar day (bpcd) total Operable Atmospheric Crude Oil Distillation. 
While SBA proposes this numerical capacity limit for small refiners to 
qualify as small businesses, SBA will consider the other alternatives 
as well, including the elimination of a bpcd limit, if comments warrant 
SBA's doing so. SBA also requests comments on its proposals to clarify 
the size measure by adopting the more precise term of ``barrels per 
calendar day'' in place of ``barrels per day.'' SBA also requests 
comment on its proposal to measure in bpcd a refiner's total Operable 
Atmospheric Crude Oil Distillation capacity. Specifically, SBA requests 
comments on the following issues:
    1. Whether SBA should eliminate the capacity component, as 
requested, and the reasons why having no capacity limit as a component 
of the standard would be better for small refiners than retaining one.
    2. Whether 155,000 bpcd is sufficient capacity for refiners to 
grow, merge, consolidate or otherwise share resources for Federal 
Government procurement,

[[Page 6443]]

without losing their small business eligibility.
    3. Whether SBA should adopt a capacity that is higher or lower than 
155,000 bpcd. Commenters who recommend an alternative bpcd limit should 
also provide reasons why they believe their recommended capacity would 
be a more appropriate size for this industry for purposes of Federal 
Government procurement.
    4. Whether SBA's estimate of the number of additional refiners that 
may gain eligibility as small refiners, as well as SBA's estimate of 
their capacity, accurately reflects the possible result of this 
proposed change.
    5. Whether an increase to 155,000 bpcd would have any adverse 
affects on currently defined small refiners.
    6. Whether SBA's proposal to adopt ``barrels per calendar day'' to 
replace ``barrels per day'' is acceptable.
    7. Whether SBA's proposal to adopt as a uniform measurable capacity 
a refiner's total Operable Atmospheric Crude Oil Distillation as used 
by EIA is acceptable.
    8. Whether SBA should establish the 155,000 bpcd and 1,500 
employees size standards to all Federal programs using a small business 
definition for a small petroleum refiner instead of just to Federal 
Government procurement. If SBA receives favorable comments on this, SBA 
will consider issuing a separate proposed rule on the issue.

Compliance With Executive Orders 12866, 12988, and 13132, the 
Paperwork Reduction Act (44 U.S.C. Ch. 35.) and the Regulatory 
Flexibility Act (5 U.S.C. 601-612)

    The Office of Management and Budget (OMB) has determined that the 
proposed rule is a ``significant'' regulatory action for purposes of 
Executive Order 12866. The rule affects Federal Government agencies 
purchasing refined petroleum products and the businesses that compete 
in selling petroleum products to the Federal Government. Increasing the 
75,000 bpcd size standard to 155,000 bpcd will enable small refiners to 
expand their refining operations or to merge with other small refiners 
and continue to compete for Federal petroleum procurements set aside 
for small businesses or for the 8(a) and HUBZone Empowerment 
Contracting Programs, as well as those awarded through full and open 
competition after application of the HUBZone or small disadvantaged 
business price evaluation preference or adjustment. Also, two refiners 
may obtain small business status under the proposed size standard 
allowing them to compete for set-aside petroleum procurements. Federal 
agencies could benefit from the higher size standards if the newly 
defined and expanding small refiners compete for more set-aside 
petroleum procurements. The larger base of small refiners would likely 
increase competition and lower the prices on set-aside petroleum 
procurements. A higher size standard may also influence Federal 
agencies to set aside more petroleum procurements. If procurements 
switch from competition among all sources to competition among only 
small businesses, prices could increase to the Federal Government. SBA 
believes that price increases associated with set-aside procurements 
would be minimal since set-asides must be award at fair and reasonable 
prices. The increased size standard will allow, and possibly encourage, 
small refiners to increase their operational efficiencies without 
jeopardizing their small business status. Theses expanding small 
refiners would become more competitive and thereby result in lower 
prices to the Federal Government and to private sector customers.
    The higher size standard may have distributional effects among 
large and small refiners. Although the actual outcome of the gains and 
loses among small and large refiners cannot be estimated with 
certainty, several trends are likely to emerge. The newly defined and 
expanding small refiners may obtain petroleum contracts from what would 
have been awarded to currently defined small refiners. If Federal 
agencies were to set aside more procurements for small businesses, this 
could allow currently defined small refiners to compete for more 
petroleum procurements and offset potential losses to the newly defined 
and expanding small refiners on other set-aside procurements. Large 
refiners would lose some Federal petroleum contracts to small refiners 
if Federal agencies decide to set aside more petroleum procurements. 
The potential loss of contracts to large businesses would be limited to 
the amount of petroleum the newly defined and expanding small refiners 
were willing and able to sell to the Federal Government. Small 
nonmanufacturers may also obtain additional petroleum contracts as a 
result of a higher petroleum size standard. On set-aside petroleum 
procurements, a small nonmanufacturer must supply the product of a 
small petroleum refiner. With a larger base of small refiners, 
nonmanufacturers would have access to a larger supply of petroleum 
products from small refiners. The potential gain of contracts to small 
nonmanufacturers would be limited to the amount of petroleum the newly 
defined and expanding small refiners were willing and able to supply 
through a third party as opposed to selling directly to the Federal 
Government.
    The proposed rule, however, does not create a serious inconsistency 
or otherwise interfere with another agency's action; materially affect 
the budgetary impact of entitlements, grants, user fees or loan 
programs or the rights and obligations of recipients; or raise novel, 
legal or policy issues arising out of legal mandates, President's 
priorities, or the principles set forth in EO 12866.
    For purposes of Executive Order 12988, SBA has determined that this 
rule is drafted, to the extent possible under standards in Section 3 of 
the order.
    For purposes of Executive Order 13132, SBA has determined that this 
rule does not have any federalism implications warranting the 
preparation of a Federalism Assessment.
    For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA 
has determined that this rule does not impose any new reporting or 
recordkeeping requirements.
    Under the Regulatory Flexibility Act (RFA) SBA has determined that 
this rule as drafted, including the alternatives to the proposed 
standard, will not have a significant impact on a substantial number of 
small entities. Immediately below, SBA sets forth an initial regulatory 
flexibility analysis (IRFA) of this rule addressing (a) the reasons and 
objectives of the rule; (b) SBA's description and estimate of the 
number of small entities to which the rule will apply; (c) the 
projected reporting, record keeping, and other compliance requirements 
of the rule; (d) the relevant Federal rules which may duplicate, 
overlap or conflict with the rule; and (e) alternatives considered by 
SBA.

(a) Reasons for This Action

    As discussed in the supplemental information, this rule, if 
adopted, will better define a small refiner for purposes of Federal 
Government procurement of refined petroleum. It will include in the 
definition as small all U.S. refiners that have 1,500 employees or 
less. It will also increase the small refiners' share of the U.S. total 
refining capacity to approximately the level it was after SBA's last 
two increases to this standard. It will allow small refiners to respond 
to larger Federal Government procurement opportunities. At the same 
time they will be able to expand and grow by forming joint ventures and 
similar resource sharing arrangements

[[Page 6444]]

without losing their small business eligibility for Federal Government 
procurement.

(b) Objectives and Legal Basis for the Proposed Rule

    SBA's objective is to define ``small refiner'' better and to enable 
small businesses to participate in more and larger Federal Government 
procurement opportunities. Section 3(a) of the Small Business Act (15 
U.S.C. 632(a)) gives SBA the authority to establish and change size 
standards.

(c) Description and Estimate of the Number of Small Entities To Which 
the Rule Will Apply

    SBA estimates that there will be no more than two newly designated 
small businesses. Because SBA does not propose to change the 1,500 
employee size standard, refiners will only gain eligibility if they 
have less than 155,000 bpcd as well as no more than 1,500 employees. 
With regard to refiners that have capacities in excess of 75,000 bpcd, 
SBA described in the supplementary information that it based its 
estimate of number of employees on 10Ks filed with the Securities and 
Exchange Commission, Annual Reports and other information available to 
the public.
    Refiners that currently have less than 75,000 bpd capacities are 
unaffected by this proposed rule, except to the extent that they may 
take advantage of opportunities arising from this rule. Also, SBA does 
not believe there will be significantly increased competition that 
could harm small or other than small business refiners. On the 
contrary, small businesses will be able to bid on more and larger 
Federal procurements in a fashion much like the largest refiners, 
though on a smaller scale, proportionate to their sizes.
    Federal procurement programs are voluntary, and this proposed rule, 
if adopted, will not impose any significant costs on any small business 
companies participating in Federal procurement programs. Further, the 
rule will, if adopted, not affect the amount of refined petroleum 
purchased by the Federal Government. Federal Government procurement 
dollars are expected to remain about the same. Since SBA estimates that 
no more than two refiners, not now small, could become eligible, they 
would have little impact on the distribution of total Federal 
procurement dollars. Furthermore, the two refiners are not currently 
participating in Federal procurement, according to FPDC data. In 
addition, since more smaller refiners will be able to share resources, 
they will be eligible for more Federal procurement dollars. However, 
given that all small refiners combined will still only account for 7.7 
percent of total U.S. refining capacity, the impact on larger refiners 
will be negative but negligible, though it will be a positive and 
significant one on small refiners.

(d) Imposition of Additional Reporting or Recordkeeping Requirements on 
Small Businesses

    This rule does not impose any new information collection 
requirements on small refiners or other small businesses, and therefore 
will impose none that could require approval by OMB under the Paperwork 
Reduction Act of 1980, 44 U.S.C. 3501-3520. The proposed new size 
standard does not impose any additional reporting, record keeping or 
compliance requirements on small entities. Increasing the petroleum 
refiners' capacity size standard expands access to Federal Procurement 
programs that assist small businesses, but does not impose a regulatory 
burden as they neither regulate nor control business behavior.

(e) Relevant Federal Rules That May Duplicate, Overlap or Conflict With 
This Rule

    This rule does not duplicate, overlap or conflict with any other 
Federal rules. This rule applies to the Federal Government's 
procurement of refined petroleum products only, and does not apply to 
any other Federal program for which a refiner would have to qualify as 
a small business.

(f) Alternatives That SBA Considered

    SBA considered three alternatives to this rule, namely deleting the 
capacity requirement in its entirety, and capacities above and below 
155,000 bpcd. SBA explains in the supplementary information above why 
it opted to propose 155,000 bpcd rather than another amount or none at 
all. SBA specifically asks for comments on each of these alternatives, 
however, and will consider an alternative if public comments support 
one of them in lieu of the proposed 155,000 bpcd.

List of Subjects in 13 CFR Part 121

    Administrative practice and procedure, Government procurement, 
Government property, Grant programs-business, Loan programs-business, 
Reporting and recordkeeping requirements, Small businesses.

    For the reasons stated in the preamble, SBA proposes to amend 13 
CFR part 121 as follows:

PART 121--SMALL BUSINESS SIZE REGULATIONS

    1. The authority citation for Part 121 is revised to read as 
follows:


    Authority: Pub L. 105-135 sec. 601 et seq., 111 Stat. 2592; 15 
U.S.C. 632(a), 634(b)(6), 637(a), 638, 644(c), and 662(5); and Sec. 
304, Pub. L. 103-403, 108 Stat. 4175, 4188.

    2. In Sec. 121.201, under Subsector 324, the entry for NAICS Code 
324110 is republished and footnote 4 is revised to read as follows:


Sec. 121.201  What size standards has SBA identified by North American 
Industry Classification System Codes?

* * * * *

------------------------------------------------------------------------
                                                                  Size
                                                                standard
                                                               in number
                                                                   of
        NAICS codes           NAICS description (N.E.C. = not  employees
                                   elsewhere classified)           or
                                                                millions
                                                                   of
                                                                dollars
------------------------------------------------------------------------
 
                  *        *        *        *        *
324110.....................  Petroleum Refineries............   \4\1,500
 
                 *        *        *        *        *
------------------------------------------------------------------------
Footnotes
*        *        *        *        *
\4\ NAICS code 324110--For purposes of Federal Government procurement,
  the petroleum refiner must be a concern that has no more than 1,500
  employees nor more than 155,000 barrels per calendar day total
  Operable Atmospheric Crude Oil Distillation capacity. Capacity
  includes owned or leased facilities as well as facilities under a
  processing agreement or an arrangement such as an exchange agreement
  or a throughput. The total product to be delivered under the contract
  must be at least 90 percent refined by the successful bidder from
  either crude oil or bona fide feedstocks.
*        *        *        *        *


    Dated: November 1, 2001.
Hector V. Barreto,
Administrator.
[FR Doc. 02-3344 Filed 2-11-02; 8:45 am]
BILLING CODE 8025-01-P