This administrative action is governed by the provisions of Sections 556 and 557 of Title 5 of the United States Code and therefore is excluded from the requirements of Executive Order 12866.

These proposed amendments have been reviewed under Executive Order 12988, Civil Justice Reform. This rule is not intended to have a retroactive effect. If adopted, this proposed rule will not preempt any state or local laws, regulations, or policies, unless they present an irreconcilable conflict with this rule.

The Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), provides that administrative proceedings must be exhausted before parties may file suit in court. Under Section 608c(15)(A) of the Act, any handler subject to an order may request modification or exemption from such order by filing with the Department a petition stating that the order, any provision of the order, or any obligation imposed in connection with the order is not in accordance with the law. A handler is afforded the opportunity for a hearing on the petition. After a hearing, the Department would rule on the petition. The Act provides that the district court of the United States in any district in which the handler is an inhabitant, or has its principal place of business, has jurisdiction in equity to review the Department's ruling on the petition, provided a bill in equity is filed not later than 20 days after the date of the entry of the ruling.

In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ), the Agricultural Marketing Service has considered the economic impact of this action on small entities and has certified that this proposed rule will not have a significant economic impact on a substantial number of small entities. For the purpose of the Regulatory Flexibility Act, a dairy farm is considered a small business if it has an annual gross revenue of less than $750,000, and a dairy products manufacturer is a small business if it has fewer than 500 employees. For the purposes of determining which dairy farms are small businesses, the $750,000 per year criterion was used to establish a production guideline of 500,000 pounds per month. Although this guideline does not factor in additional monies that may be received by dairy producers, it should be an inclusive standard for most small dairy farmers. For purposes of determining a handler's size, if the plant is part of a larger company operating multiple plants that collectively exceed the 500 employee limit, the plant will be considered a large business even if the local plant has fewer than 500 employees. In October 2001, there were 11,120 producers pooled on and 40 handlers regulated by the Mideast order. Based on these criteria, the vast majority of the producers and handlers would be considered small businesses. The adoption of the amended pooling standards serve to revise and establish criteria that ensure the pooling of producers, producer milk, and plants that have a reasonable association with, and are consistently serving, the fluid milk needs of the Mideast milk marketing area. Criteria for pooling milk are established on the basis of performance standards that are considered adequate to meet the Class I fluid needs of the market, and determine those that are eligible to share in the revenue that arises from the classified pricing of milk. Criteria for pooling are established without regard to the size of any dairy industry organization or entity. The criteria established are applied in an equal fashion to both large and small businesses. Therefore, the Department has determined that proposed amendments will not have a significant economic impact on a substantial number of small entities.

A review of reporting requirements was completed under the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was determined that these proposed amendments would have little or no impact on reporting, recordkeeping, or other compliance requirements because they would remain identical to the current requirements. No new forms are proposed and no additional reporting requirements would be necessary.

This tentative decision does not require additional information collection that requires clearance by the Office of Management and Budget (OMB) beyond currently approved information collection. The primary sources of data used to complete the forms are routinely used in most business transactions. Forms require only a minimal amount of information, which can be supplied without data processing equipment or a trained statistical staff. Thus, the information collection and reporting burden is relatively small. Requiring the same reports for all handlers does not significantly disadvantage any handler that is smaller than the industry average.

No other burdens are expected to fall on the dairy industry as a result of overlapping Federal rules. This rulemaking proceeding does not duplicate, overlap, or conflict with any existing Federal rules.

Notice of Hearing: Issued September 21, 2001; published September 28, 2001 (66 FR 49571).

Notice is hereby given of the filing with the Hearing Clerk of this tentative final decision with respect to proposed amendments to the tentative marketing agreement and the order regulating the handling of milk in the Mideast marketing area. This notice is issued pursuant to the provisions of the Agricultural Marketing Agreement Act and the applicable rules of practice and procedure governing the formulation of marketing agreements and marketing orders (7 CFR part 900).

Interested parties may file written exceptions to this decision with the Hearing Clerk, Room 1081, South Building, U.S. Department of Agriculture, 14th & Independence Avenue, SW., Washington DC 20250, by the 60th day after publication of this decision in the Federal Register . Four (4) copies of the exceptions should be filed. All written submissions made pursuant to this notice will be made available for public inspection at the office of the Hearing Clerk during regular business hours (7 CFR 1.27(b)).

The hearing notice specifically invited interested persons to present evidence concerning the probable regulatory and informational impact of the proposals on small businesses. While no evidence was received that specifically addressed these issues, some of the evidence encompassed entities of various sizes.

The amendments set forth below are based on the record of a public hearing held at Wadsworth, Ohio, on October 23-24, 2001, pursuant to a notice of hearing issued September 21, 2001, and published September 28, 2001 (66 FR 49571).

The material issues on the record of the hearing relate to:

1. Pooling standards of the marketing order.

a. Standards for pool plants.

b. Standards applicable for producer milk.

2. Rate of partial payments to producers by handlers.

3. Conforming changes to the order.

4. Determining whether emergency marketing conditions exist that would warrant the omission of a recommended decision and the opportunity to file written exceptions.

The following findings and conclusions on the material issues are based on evidence presented at the hearing and the record thereof:

A proposal seeking to increase one of the distributing plant pooling standards and providing for the seasonal adjustment of the standard should not be adopted. Published in the hearing notice as Proposal 1, this proposal specifically sought to raise the minimum amount of the total quantity of fluid milk products physically received by a distributing plant and disposed of as route disposition, or transferred in the form of packaged fluid milk products, by 5 percentage points (from 30 to 35 percent) for the months of May through July, and by 10 percentage points (from 30 to 40 percent) for the months of August through April.

Several amendments to the supply plant pooling provisions of the Mideast order should be adopted immediately. Certain inadequacies of the supply plant pooling provisions, together with unneeded features contained in the current provision, are resulting in disorderly marketing conditions and unwarranted erosion of the blend price received by those producers who are providing milk to satisfy the fluid milk demands of the Mideast marketing area. Specifically, the following amendments to the supply plant pooling standards should be adopted immediately: (1) Eliminate automatic pool plant status during the 6-month period of March through August for certain supply plants; (2) eliminate the volume of milk shipments made by supply plants to distributing plants regulated by another Federal milk marketing order as a qualifying shipment for the purpose of meeting the Mideast supply plant shipping standard; (3) eliminate the feature of providing for a “split plant”; (4) exclude from receipts diversions made by a pool plant to a second pool plant from the calculation of the diversion limitation established for pool plants; and (5) provide a “net shipment” standard for supply plant (and supply plants operated by a cooperative association) deliveries to the order's distributing plants for the purpose of meeting the Mideast supply plant shipping standard. These amendments to the pool plant pooling standards were largely represented by, and in testimony related to, Proposal 2 and Proposal 5.

A proposal that would, in part, establish a 6-month re-pooling delay, Proposal 8, whenever a pool supply plant elects not to meet the supply plant pooling standards for the month should not be adopted. However, this decision adopts that portion of the proposal that would have August as the beginning month for meeting the pool supply plant shipping standard. The adoption of this feature of Proposal 8 makes it identical to the adoption of the same feature in Proposal 2.

Four proposals seeking to modify the pooling standards for pool plants of the Mideast order were considered in this proceeding. The record evidence makes clear that the proponents of these four proposals, described and discussed further below, are of the opinion that the current pooling provisions of the order are not accurately identifying those producers and the milk of those producers consistently serving the fluid needs of the marketing area. Part of the pooling standards of the Mideast order are contained in the Pool plant provision of the order. Published in the hearing notice as Proposals 1, 2, 5, and 8, these proposals offered various changes to specific components of the current pooling standards for supply plants and distributing plants.

Proposals 1, 2, and 5 were proposed by Dairy Farmers of America (DFA), Continental Farms Cooperative, Inc., Michigan Milk Producers, Inc., and Prairie Farms Cooperative, Inc. Hereinafter, this decision will refer collectively to these proponents as the “Cooperatives.” These organizations are cooperatives owned by dairy-farmer members that supply a significant portion of the milk needs of the Mideast marketing area and whose milk is pooled on the Mideast order.

Proposal 8 was proposed by Dean Dairy Products Company, Schneider's Dairy Inc., Turner Dairy Farms, Inc., Marburger Farm Dairy, Inc., Fike's Dairy, Inc., United Dairy, Inc., Carl Colteryahn Dairy, Inc., Smith Dairy Products Company, Superior Dairy, Goshen Dairy, and Reiter Dairy. Hereinafter, this decision will refer collectively to these organizations as the “Handlers.” These organizations receive milk from dairy farmers and cooperatives and distribute fluid milk and other dairy products within the marketing area. They are regulated under the terms of the order.

Proposal 1, offered by the Cooperatives, seeks to amend the pool plant definition by increasing the minimum amount of milk that would, in part, cause a distributing plant to become pooled on the Mideast order. Proposal 1 would provide that 35 percent or more of the total quantity of fluid milk products physically received at a distributing plant be disposed of as route disposition or transferred in the form of packaged fluid milk products to other distributing plants for the months of May through July. Proposal 1 would also increase this same minimum standard to 40 percent for the months of August through April. The order currently provides a minimum standard of 30 percent and, unlike the proposal, makes no seasonal adjustments. Proposal 1 does not seek to change this provision's current exclusion of concentrated milk received from another plant for other than Class I use.

Proposal 2, offered by the Cooperatives, seeks to amend three features of the supply plant provision of the order as follows: change certain details that currently provide for the automatic pooling of supply plants; not consider milk shipments from a Mideast supply plant to a distributing plant regulated by another Federal milk order as a qualifying shipment in meeting the performance standards for becoming a pool plant on the Mideast order; and count on a “net receipts” basis all supply plant shipments, including milk that is transferred or diverted and physically received by distributing plants regulated by the order. The “net receipts” criteria would exclude from a supply plant's qualifying shipment any transfer or diversions of bulk fluid milk products made by a distributing plant receiving a qualifying shipment. In this regard, the concept of a “net receipt” is similar to what is also commonly referred to as a “net shipment.” The difference between the two terms is that a “net receipt,” as presented in this proceeding, applies to distributing plants receiving milk. The term “net shipment,” as referred to in the record of this proceeding, applies to supply plants shipping milk to distributing plants. The intended use of these terms is clear, and herein after, this tentative final decision will refer to this feature of Proposal 2 as “net shipments” because the proposed change would amend how the order applies pooling performance standards to supply plants shipping milk to distributing plants. The Mideast order currently has no “net shipment” provision.

The order currently provides automatic pool plant status during the months of March through August, provided the supply plant met the applicable performance standards for pool supply plants during each of the immediately preceding months of September through February. Additionally, the order currently considers shipments of milk to a distributing plant regulated by another Federal order as qualifying shipments in meeting the performance standards of the Mideast order.

Proposal 8, offered by the Handlers, seeks to change the months in which the pool plant standard is applicable for supply plant shipments to distributing plants from September through February to August through February. In this regard, Proposal 8 is similar to Proposal 2. However, Proposal 8 also seeks to provide that in the event a supply plant opts not to be a pool plant during the month, the plant will not be eligible to regain pool plant status for a period of six months.

Proposal 5, offered by the Cooperatives, seeks to eliminate what is often referred to as the “split plant” provision. This provision provides for designating a portion of a pool plant as a nonpool plant, provided that the nonpool portion of the plant is physically separate and operated separately from the regulated or pool side of the plant.

A DFA witness, representing the Cooperatives, testified that two primary benefits of the Federal order program are allowing producers to benefit from the orderly marketing of milk and the marketwide distribution of revenue that results mostly from Class I milk sales. Orderly marketing influences milk to move to the highest value use when needed, and for milk to clear the market when not used in Class I, said the Cooperatives. The witness noted that marketwide pooling allows qualified producers to equitably share in the returns from the market and in a manner that provides incentives for supplying the market in the most efficient manner. The witness insisted that the pooling of milk which does not service the Class I market is inconsistent with Federal order policy.

The Cooperatives' witness was of the opinion that the new Class I pricing structure, implemented under Federal order reform, together with the pooling provisions found in each order, resulted in changes in the marketplace for milk pooled on Federal milk orders, including the Mideast order. The link between performance and pooling, said the witness, was altered by these reforms and needs review. The Cooperatives noted that many entities, including DFA, moved quickly to take advantage of these changes in order rules. The witness indicated that as a participant in a competitive dairy economy, one must make pooling decisions that aim to increase returns or risk their competitive position.

The Cooperatives' witness was of the opinion that the principles underlying the economic models that formulated the Class I price surface established during Federal order reform assumed that supplies of milk associated with a demand point were aggregated into a single market and were actually shipped from the counties that were located in the population centers where demand points were fixed. There were no provisions in the mathematical equations for those models allowing for milk to be associated with a market if it did not actually ship to or supply the market, said the witness. The current pooling practices, say the Cooperatives, clearly exploit the price surface, and if we are to retain it, pooling standards need to be restructured to parallel the model.

Pooling standards are universal in their intention, stressed the Cooperatives, requiring a measure of commitment to a market marked by the ability and willingness to supply the Class I fluid needs of that market. The witness noted that pooling standards are individualized in their application and each market requires standards that work for the conditions that apply in that individual market. The witness quoted the Final Decision of milk order reform: “The pooling provisions for the consolidated orders provide a reasonable balance between encouraging handlers to supply milk for fluid use and ensuring orderly marketing by providing a reasonable means for producers with a common marketing area to establish an association within the fluid market.”

The Cooperatives' witness also relied on, and drew heavily from, the order reform Final Decision detailing the primary criteria used to form the boundaries of the consolidated orders, including the consolidated Mideast order. The Cooperatives' witness emphasized the first and most important criteria of Federal order consolidation as the area of overlapping route distribution of Class I milk. Also taken from the Final Decision, the Cooperatives' witness noted that, “The pooling of milk produced within the same procurement area under the same order facilitates the uniform pricing of producer milk,” concluding that milk procurement areas were also considered as a criteria in establishing the consolidated marketing area boundaries. The witness also noted other criteria used, including the number of handlers within a market, naturally occurring boundaries, cooperative association service areas, features or regulatory provisions common to existing orders, and milk utilization in common dairy products.

The Cooperatives' witness continued to rely on, and drew heavily from, the Final Decision of milk order reform by relating the decision's geographical description of the Mideast order and how the aforementioned criteria were applied to form the boundaries of the Mideast marketing area. In this regard, the witness indicated that the consolidated Mideast marketing area was the result of combining the pre-reform orders of the Ohio Valley, Eastern Ohio-Western Pennsylvania, Southern Michigan, and Indiana Federal milk orders, plus Zone 2 of the Michigan Upper Peninsula Federal milk order, and most of the then unregulated counties in Michigan, Indiana, and Ohio. The witness stressed that the order reform Final Decision concluded that nearly all milk produced within the area would be pooled on the consolidated Mideast order.

The Cooperatives' witness was of the opinion that “open pooling” is not appropriate for the Mideast order. When milk shares in a pool's proceeds but does not service the Class I needs of the market or help to balance the market, the witness indicated, there is cause for concern. The witness emphasized that the cost of providing service to the Class I market always falls back on the local milk supply. To allow the pooling of milk which does not provide such services to the Class I needs of the market only lowers returns of those dairy farmers whose milk is actually supplying the local Class I market, concluded the witness.

The Cooperatives' witness presented evidence which reviewed the various Federal order performance standards, concluding that while all the standards differ, they nevertheless address the importance of performance to the market by serving the Class I needs of the market as a condition for milk to be pooled and receive the order's blend price.

According to the Cooperatives' witness, a new phenomenon is occurring in the area of performance standards. Several entities have solicited milk located in the marketing area in order to pool milk located outside of the marketing area, said the witness. Their deliveries of this local supply to distributing plants, said the Cooperatives' witness, provide the opportunity to pool much more milk located outside the marketing area. This practice, the Cooperatives' witness said, does not bring any new milk to be actually received at pool plants, and the milk located outside of the marketing area is not available and does not demonstrate any consistent or actual service to meeting the fluid milk needs of the market.

This practice of pooling milk located far outside the Mideast marketing area, said the Cooperatives' witness, is accomplished through a feature of current pool plant performance standards which allows a supply plant to use direct deliveries from farms to satisfy up to 90 percent of its performance standard by diversions. This standard, said the witness, is a good standard for milk located inside the marketing area, but is not an appropriate standard for milk supplies located outside of the area.

The use of direct deliveries from inside the marketing area to qualify supply plants and milk supplies located far outside the marketing area should be greatly limited if allowed at all, said the Cooperatives' witness. The witness stated that allowing direct shipped milk from the farm to qualify a supply plant was intended to provide economic efficiency in moving milk, for example, thereby saving the reload in and pump-over costs for the sole purpose of meeting a pooling standard. However, this feature is now being used to qualify milk supplies physically located far outside of the Mideast. This, emphasized the witness, runs counter to the initial intent of the provision and has resulted in disorderly marketing conditions.

The Cooperatives' witness provided evidence indicating that the Mideast order has the second largest volume of Class I use in the Federal Order system. According to the witness, the performance standards for the Mideast order should assure meeting this demand by specifying a performance standard that results in actual serving of the market's Class I needs as a condition to receive the order's blend price.

Along this theme, the Cooperatives' witness relied on data showing that the volume of Class I and II milk used in the Mideast changed little in the (then) 21 months since implementation of Federal order reform. However, noted the witness, the amount of reserve milk, represented by Class III and IV use, had grown dramatically. The witness concluded from the data that it is difficult to justify the need to have pooling standards which have allowed pooling some 250 percent of additional milk on the Mideast order when that milk does not service the Class I needs of the market. The witness indicated that additional milk pooled on the order was produced in states far from the marketing area, including the States of Illinois, Iowa, Kansas, Minnesota, New York, North Dakota, South Dakota, and Wisconsin.

The witness also faulted the Mideast order's lack of having a performance standard for pool supply plants during the months of March through August as another way to pool milk on the Mideast order from other marketing areas that have lower blend prices. The evidence for this observation, said the Cooperatives' witness, is exhibited by data indicating that producers located in Wisconsin and South Dakota began pooling large volumes of their milk beginning in March 2000. The Cooperatives' witness, relying on the same statistics, observed that the volume of milk pooled on the order during this 21-month time period, but produced on farms located far outside the marketing area, increased by 395.66 percent, or by 430,222,762 pounds.

A witness appearing on behalf of Land O'Lakes (LOL) expressed support for Proposal 1 because it seeks to promote pooling standards that are based on performance. The LOL witness was of the strong opinion that pooling standards should not be based on the physical location of milk alone, stressing that standards should be “performance oriented” rather than “location oriented.”

Additional support for Proposals 1 and 2 was offered by Prairie Farms Dairy, Inc. (Prairie Farms). Prairie Farms operates three pool distributing plants regulated by the Mideast order. Their milk is supplied by their 176 producer members located in Indiana, Michigan, and Ohio.

The Prairie Farms witness stated that certain provisions of the Mideast order have made it too easy to pool milk without the milk actually servicing the Class I needs of the market. Federal orders should not be written so restrictive that pooling any milk supplies beyond normal basic Class I needs is impossible, said the Prairie Farms witness. However, continued the witness, orders should not be written so liberally that pooling milk becomes an end unto itself rather than a standard that assures milk is actually serving the fluid needs of the market. As the Mideast milk order regulations are currently written, added the witness, the pooling of milk far beyond the day-to-day needs of the market can and does occur.

According to the Prairie Farms witness, Class I use by Mideast order distributing plants has been relatively stable since implementation of order reform, but the amount of Class III and Class IV milk pooled on the order has increased markedly. The witness indicated the additional quantities of milk pooled on the order only lower the returns to its members and others who actually do serve the Class I needs of the market every day.

A witness from Foremost Farms who appeared on behalf of the Mideast Milk Marketing Agency (MEMA), testified in support of Proposals 1 and 2. The MEMA is an new organization resulting from the union of three previous milk marketing agencies that served milk processors by arranging for milk supplies in the pre-reform milk orders consolidated to form the current Mideast milk marketing area. The MEMA witness indicated that the needs of their customers and variations in production cause them to have an occasional need to secure additional volumes of milk, citing the opening of schools as an example of when additional milk supplies are needed. The witness also indicated that the supply and demand situation in spring months shows increased production and decreased Class I demands that generally begin in late April and continue through mid-July. During this time of the year, the MEMA witness indicated, they assume responsibility to sell milk not required by their customers. Most often these sales are to manufacturing plants located in the marketing area and to plants located as far away as Wisconsin and Minnesota, the witness said. Often, noted the witness, such sales are below the minimum class prices of the order and the costs of disposing of surplus milk are borne by MEMA members.

The MEMA witness noted that sufficient raw milk is secured through its member cooperatives and other suppliers within the marketing area to service its customers on a year-round basis, with the fall months being the only exception. In light of this supply and demand situation, the witness could find no reason why the Mideast marketing order should provide for the pooling of two to three times the milk supply actually needed to serve the Class I needs of the market.

A witness appearing on behalf of the Michigan Milk Producers Association (MMPA) also testified in support of Proposals 1 and 2. MMPA is a dairy farmer owned-and-operated cooperative engaged exclusively in the marketing of milk and dairy products on behalf of 2,600 of their member dairy farmers in Michigan, Ohio, northern Indiana, and northeast Wisconsin.

The MMPA witness testified that each of the five predecessor orders merged into the consolidated Mideast order had more demanding pool plant qualification standards. The witness stressed that pooling provisions are not intended to create barriers to pooling. However, the witness indicated, it is reasonable to expect that a market with a fluid demand as large as the Mideast warrants a higher level of performance than in markets with lower Class I use.

The MMPA witness stated that adequate supplies of milk exist within the order to satisfy the requirements of at least the Michigan portion of the marketing area. The witness noted that during the past 24 months, Class I sales in Michigan had declined 7 percent. Also, the witness noted that milk production in Michigan has been increasing and indicated that local supplies have increased 7 percent since 1998. The MMPA witness was of the opinion that with declining fluid sales and increasing milk production, pooling standards that result in pooling additional quantities of milk supplies cannot be justified.

The MMPA witness noted that nearly all of the increased volume of milk pooled on the Mideast order since order reform was used at Class III or IV manufacturing plants, which the witness concluded has only served to lower producer pay prices. In their opinion, this occurred because the current performance standards required for pool qualification are too lenient. These performance standards have resulted in an inequitable distribution of proceeds from this market's pool, stressed MMPA, while the proceeds from the fluid market were improperly shared with producers who did not service the Class I needs of the market. The MMPA witness was of the strong opinion that this situation should be treated as an emergency by the Department and a Recommended Decision should therefore be omitted.

In addition to supporting the testimony given by the DFA witness on behalf of the Cooperatives regarding Proposal 2, the MMPA witness offered a modification to Proposal 2. The MMPA modification would specifically limit the practice of using pooled milk located inside of the marketing area to qualify milk of a plant located outside of the marketing area for pooling its milk receipts on the order. According to the witness, a one-time delivery of the milk of a producer located outside the marketing area qualifies a “distant” producer as a producer under the Mideast order and, in turn, qualifies the milk of a “distant” producer to thereafter be diverted to nonpool plants. Most often, stressed the witness, these plants are also located at a great distance from the marketing area and this milk need never meet the order's performance standards. The MMPA witness concluded that the pooling standards should not allow such milk to be part of the Mideast pool. The witness stressed that eliminating the ability to pool milk in this manner would not affect the efficiencies afforded by direct-shipped milk from farms located within the marketing area. The MMPA witness added it would also prohibit an abuse of pooling principles that never intended to qualify milk for pooling under the order without an actual relationship to the order's supply plants in supplying the Class I needs of the market.

A witness from Dean Foods (Dean) testified in support of a portion of Proposal 2. They supported eliminating the feature of the current pool supply provision which does not establish a performance standard during the months of March through August. They were also in agreement with other witnesses that the Department should treat this proceeding on an emergency basis. The Dean witness reasoned that the economic damage to the producers whose milk actually serves the Class I needs of the market should be resolved as soon as possible.

A witness appeared on behalf of Suiza Foods (Suiza) in general support of Proposals 1 and 2. The witness reasoned that once performance becomes a monthly requirement to pool milk, both processors and producers will be better able to plan deliveries based upon the need for milk during the fall months when milk supplies are generally less plentiful. The witness also stated that August should be the initial month when higher performance standards should apply because of increased demand caused by the opening of schools occurring at the same time as generally declining overall milk supplies.

The Suiza witness also was of the opinion that the adoption of a net shipment provision for supply plants should also be applicable for plants operated by a cooperative association—another type of pool plant provided for in the Mideast order. In their post-hearing brief, Suiza emphasized that in the interest of fairness and equitable regulatory treatment, providing a net shipment provision applicable to this type of pool plant would be appropriate. According to Suiza, not providing for a net shipment feature for supply plants operated by a cooperative association would merely change the incentives for cooperatives that operate supply plants to become a pool plant under this provision applicable for cooperative associations. Although not a part of the direct testimony by the proponents of Proposal 2, or its supporters, all parties agreed that a net shipment provision should also be provided for plants operated by cooperative associations.

A witness representing Scioto County Cooperative Milk Producers Association (Scioto) testified in support of Proposals 1 and 2. Scioto has dairy farmer members in southern Ohio and northern Kentucky whose milk is pooled on the Mideast order.

The Scioto witness noted that during the period of 2000-2001, the amount of producer milk pooled on the Mideast market increased by nearly 42 percent. Virtually all of this increase can be attributed to producers in States not included as part of the Mideast marketing area, while the amount of the Class I use in the Mideast order remained relatively constant, maintained the witness. In light of the increased amount of milk pooled on the Mideast order, Scioto indicated their support for proposals which would establish higher pooling standards. Scioto indicated this would also ensure that the revenue generated by Class I sales are properly shared with those producers and pool plants which actually perform service to the Class I market.

The Scioto witness also indicated support for the addition of August as a month when additional shipments should be made to distributing plants. However, Scioto opposed establishing performance standards for the remaining months which currently have none. The witness concurred that the hot days of August have a significant impact on milk production and noted more schools are starting as early as middle August. Scioto said that this combined effect makes it more difficult to meet the fluid needs of the market and concluded that supply plant standards should be established to assure those needs.

Opposition to a part of Proposal 2 was offered by Scioto. The feature of specifying “net shipments” for supply plant deliveries to pool distributing plants should be not adopted, testified Scioto. The witness was of the opinion that performance standards should only require supply plants to ship milk when needed by the market and that performance standards should provide the flexibility to retain milk at local supply plants during the flush season when milk supplies are more plentiful.

Opposition to a portion of Proposal 2 by LOL was provided in their post-hearing brief. LOL indicated they do not support establishing a “net shipments” provision because it would effectively raise the supply plant shipping standards above the indicated pool supply plant performance standard. The LOL brief indicated that virtually all distributing plants have some transfers or diversions resulting from decreased demand on weekends and holidays for Class I milk. According to LOL, this should be considered so that supply plants are not penalized by being viewed as not performing in supplying the fluid market during such situations.

Proposal 8, offered by the Handlers, seeks, in part, to change the months during which pool supply plant shipping standards would be applicable—to begin in August and continue through to February. Proposal 8 also seeks to establish a 6-month re-pooling delay whenever a pool supply plant elects to not meet the pool plant standards for the month. According to the Handlers, a 6-month delay in being able to return to the order as a pool plant would eliminate the ability of handlers to participate in the pool only when it was advantageous and to not participate in the pool when it was not.

A witness from Dean Foods, appearing on behalf of the Handlers, testified that the current pool supply plant provisions permitting handlers to pool and de-pool milk causes market instability. The witness noted the occurrence of a class-price inversion (when the blend price is lower than the Class III price) as an example of when supply plants have the economic incentive to opt out of pooling their milk supplies. Nevertheless, the Dean witness was of the opinion that a 6-month re-pooling delay would serve to assure consistent and reliable association of milk with the marketing area and in meeting the market's Class I demands.

Opposition to Proposal 8 was raised by DFA. DFA was of the opinion that class-price inversions are a function of the order providing advanced pricing to handlers for Class I and II milk. The witness indicated advanced pricing is a needed and good provision of Federal milk marketing orders. However, if the Class I sector of the market were not provided advanced pricing, reasoned the DFA witness, depooling might never occur. Nevertheless, noted the DFA witness, there should be no reason why Class III and IV handlers should ever have to equalize class-use values with the blend price by paying this difference into the pool for the benefit of Class I handlers simply because of price inversion. Imposing a 6-month re-pooling delay may cause Class III and IV handlers to pay into the pool only to retain pool status, but doing so can result in causing financial damage to the reserve and balancing sectors of the market, maintained the DFA witness.

Proposal 5, offered by the Cooperatives, seeks to eliminate what is commonly referred to as the “split plant” provision from the Mideast order. A split plant designates a portion of the plant as the “pool” side and another portion of the plant as the “nonpool” side.

According to the Cooperatives, this provision was initially used to accommodate a plant's use of both Grade A and Grade B milk while providing for diversion from the pool plant side of the plant to the nonpool side for use in manufactured products. This designation was provided, said the witness, for orders with lower Class I differentials and low Class I use. However, the witness noted that its purpose seems to have been broadened to also afford a supply plant to gain economic efficiencies by avoiding incurring costs for transporting milk solely to meet pool standards.

The Cooperatives' witness argued that the split plant provision continues to have validity in low Class I use and low Class I differential orders, but does not have a legitimate role to play in a higher differential, higher utilization order like the Mideast. This provision, said the witness, serves no purpose for the Mideast order, stressing that none of the Mideast's predecessor orders provided for it and that no plant located within the Mideast marketing area makes use of the provision. Rather, it has only become a tool to pool distant milk on the market which is not serving the Class I milk needs of the market, maintained the witness.

Citing data provided by the Mideast Market Administrator, the Cooperatives observed that increasing volumes of milk pooled from distant areas began in June 2000. The amount of distant milk pooled then was about 16 million pounds and grew dramatically to some 480.5 million pounds by June 2001. The total pounds of milk pooled through split plants ranged from 69 to 179 million pounds for the months of January through August 2001, noted the witness. The witness indicated that this statistic represents a significant percentage of the total milk pooled on the order. Diversions of distant milk by pool distributing plants, added the witness, were similarly significant. However, the witness stressed that actual physical deliveries used to qualify the additional volumes of milk pooled through split plants were as little as 50,000 pounds. These statistics, said the Cooperatives' witness, clearly prove that the current pooling standards are allowing milk to be pooled without demonstrating reasonable relationship, or providing actual service, to the market's fluid needs. According to the witness, using split plants to pool milk in this way can only be viewed as an abuse of an accommodation not intended when originally adopted for the Mideast order.

Scenarios were presented by the Cooperatives' witness as examples for illustrating the harm being caused by the split plant provision. One example depicted how milk currently being pooled on the order, but located far from the marketing area, would not likely seek to be on the Mideast order without a split plant provision. According to the Cooperatives' witness, this is because the cost of transportation would exceed the gain of receiving the Mideast's blend price. Another example demonstrated the negative impacts of split plants to the Mideast market because of the lack of diversion limits.

According to the Cooperatives' witness, the pool side of the split plant is being used to establish an “outpost” that serves no other purpose than to qualify milk for pooling from other marketing areas where blend prices are lower. By meeting the minimal one-day delivery standard for becoming a producer on the order, the milk of producers located far from the marketing area, but whose milk is actually delivered to an “outpost” pool plant nearer their farms, may qualify milk for pooling on the Mideast order. Further, stressed the witness, the milk of these producers can thereafter be diverted to manufacturing plants nearer their farms without ever again being delivered to pool plants located in marketing area. This milk can hardly be viewed as servicing the market, the Cooperatives' witness asserted. Additionally, concluded the witness, the daily, weekly, and seasonal supplying of fluid milk, and meeting the balancing needs of the market are consistently being borne by the local producers who are only having their blend price diluted from the pooling of milk that does not consistently provide these services.

A witness representing Suiza testified in support of Proposal 5. This witness stressed that the split plant provision did not exist in all marketing orders prior to order reform and is not used today for the purpose for which it was originally intended. The Suiza witness concluded that the split plant provision is clearly not needed nor justifiable under the Mideast order.

MMPA also testified in support of Proposal 5. The witness similarly observed that pooling milk through the split plant provision only serves to depress prices for producers who actually supply the market. The witness maintained that a principle responsibility of the Federal milk order program is to preserve the proceeds from the fluid market for those producers who demonstrate an ability and willingness to serve that market. Since the split plant provision does not serve this end, concluded the witness, it should be eliminated from the order.

The witness representing Scioto expressed doubt that adopting Proposal 5 would solve the pooling problem presented by split plants. In this regard, the witness proposed a limit on the maximum amount of producer milk that could be associated with a pool supply plant during the months when no performance standard is applicable. The witness offered that 110 percent of the daily average producer receipts, pooled during the months specifying a performance standard, is a reasonable alternative performance standard for such months. According to the Scioto witness, amending the split plant feature in this way would recognize normally higher production levels during the spring and summer months as compared to generally lower production levels during the fall and winter months. It would still allow supply plants from outside the marketing area to participate in the Class I returns of the market for the entire year, noted the witness, but would prevent plants from abusing the market by only pooling milk during the spring and summer months with milk that does not service the market.

Post-hearing briefs submitted by LOL expressed opposition to the adoption of Proposal 5. The split plant provision, indicated LOL, has historically recognized commingled Grade A and Grade B milk in procurement areas and has provided a way for Grade A milk to be diverted to the non-pool plant for manufacturing uses. Removing this pooling feature, concluded LOL in their brief, would result in the need for full plant accountability, including determining milk shrinkage and overage, in the manufacturing (nonpool) portion of a plant. LOL is of the opinion that this would be very burdensome and would result in the need for costly record keeping by both handlers and the Market Administrator's office, while providing no benefit to producers or handlers.

The record contains testimony clearly indicating general support for increasing and seasonally adjusting the distributing plant pooling standard offered by Proposal 1. The proposal would increase minimum standards for triggering pool plant status for a distributing plant and therefore become regulated under the terms of the Mideast milk marketing order. Beyond statements indicating general support for the adoption of Proposal 1, the record contains little, if any, evidence that indicates why this pooling standard should be increased. To the extent that excess milk is being pooled on the order through distributing plants, this decision attributes the pooling of excess milk to inadequacies in other pooling standards of the order. Specifically, the record reveals that the lack of diversion limits during certain times of the year provides the ability for distributing plants to pool milk on the Mideast order (the issue of diversions and diversion limits are discussed later in this decision) far beyond the legitimate reserve supply of milk for the plant. Therefore, in the absence of other evidence, the record does not support a finding that distributing plants should meet a higher standard by increasing the amount of milk receipts disposed of as route disposition, or transferred in the form of packaged fluid milk products, as a condition for designation as a pool plant.

The record of this proceeding strongly supports concluding that the various features of the Mideast order's supply plant pooling standards are either inadequate or unnecessary. Because the order currently contains inadequate pooling standards for supply plants, much more milk is able to be pooled on the order than can be considered properly associated with the Mideast market. This milk does not demonstrate a reasonable level of performance necessary to conclude that it provides a regular and reliable service in satisfying the Class I milk demands of the Mideast marketing area. Therefore such milk should not be pooled on the order.

The pooling standards of all milk marketing orders, including the Mideast order, are intended to ensure that an adequate supply of milk is supplied to meet the Class I needs of the market and to provide the criteria for identifying those who are reasonably associated with the market for sharing in the Class I proceeds. Pooling standards of the Mideast order are represented in the Pool Plant , Producer , and the Producer milk definitions of the order. Taken as a whole, these definitions set forth the criteria for pooling. The pooling standards for the Mideast order are based on performance, specifying standards that, if met, qualify a producer, the milk of a producer, or a plant to enjoy the benefits arising from the classified pricing of milk.

Pooling standards that are performance based provide the only viable method for determining those eligible to share in the marketwide pool. It is primarily the Class I use of milk that adds additional revenue, and it is reasonable to expect that only those producers who consistently supply the market's fluid needs should be the ones to share in the distribution of pool proceeds. Pool plant standards, specifically standards that provide for the pooling of milk through supply plants, also need to be reflective of the supply and demand conditions of the marketing area. This is important because pooling this milk ensures the receipt of the market's blend price.

Similarly, supply plant pooling standards should provide for those features and accommodations that are reflective of the needs of proprietary handlers and cooperatives in providing the market with milk and dairy products. When a pooling feature's use deviates from its intended purpose, and its use results in pooling milk that is not serving the fluid needs of the market, it is appropriate to re-examine the need for continuing to provide for that feature as a necessary component of the pooling standards of the order. One of the objectives of pooling standards is to ensure an adequate supply of fluid milk for the marketing area. A feature which results in pooling milk on the order that does not provide such service should be considered as unnecessary for that marketing area. Similarly, another objective of pooling standards is for the proper identification of the milk of those producers who are providing service in meeting the Class I needs of the market. If a pooling provision does not reasonably accomplish this end, the proceeds that accrue to the marketwide pool from fluid milk sales are not properly shared with the appropriate producers. The result is the lowering of returns to those producers whose milk is serving the fluid market.

The record provides sufficient evidence to conclude that several features of the supply plant definition are not being used for the reasons they were originally intended. Other shortcomings of the Mideast order's pooling standards, specifically as they relate to producer milk, also contribute to inappropriately pooling the milk of producers who are not a legitimate part of the Mideast marketing area. Here too, the impact is an unwarranted association of milk on the order. Milk is classed at lower prices—a decrease in the relative Class I utilization of the market—which results in a lower blend price to those producers who do supply the Class I needs of the market.

This decision finds that the milk of some producers is benefitting from the blend price of the Mideast order while not reasonably demonstrating a service to the Class I needs of the Mideast marketing area. This finding is attributable to faulty pooling standards. The pooling provisions provided in the Final Decision of milk order reform, implemented on January 1, 2000, established pooling standards and pooling features that envisioned the needs of the market participants resulting from the consolidation of those pre-reform orders. The reform Final Decision, as it related to the Mideast marketing area, did not intend or envision that the pooling standards adopted would result in the sharing of Class I revenues with those persons, or the milk of those persons, who do not provide a reasonable measure of service in providing the Class I needs of the market. The reform Final Decision examined and discussed the various pooling standards and features of the pre-reform orders for their applicability in a new, larger, consolidated milk order. The pooling standards and features adopted for the Mideast order were designed to reflect and retain those standards and features of the pre-reform orders so as to not cause a significant change, and indeed to provide for, the continued pooling of milk that had been pooled by those market participants. The record of this proceeding reveals that the combination of the standards and features adopted for pool plants, especially those that apply to pool supply plants, are not the appropriate or reasonable standards for a much larger milk marketing area.

Accordingly, this decision finds basic agreement in the evidence presented by the proponents of Proposal 2 and Proposal 5, and those entities who expressed their support for adopting these proposals, that certain pool plant provisions should be eliminated from the Mideast order. These include: (1) The provision of the order that currently provides for automatic pool plant status during the 6-month period of March through August for certain pool supply plants; (2) the provision that currently counts supply plant shipments to distributing plants regulated by another Federal milk marketing order as a qualifying shipment for meeting supply plant performance standards of the Mideast order; and (3) the provision of the order that provides for “split plant” recognition.

Supply plant deliveries of milk to a distributing plant regulated by another Federal milk marketing order should no longer be considered as a qualifying shipment for meeting the supply plant performance standards of the Mideast order. While such milk is providing some servicing of the fluid needs of another marketing area, such milk provides no service to the Class I needs of the Mideast order. Pooling standards for the Mideast marketing area, in part, provide for determining those producers and the milk of those producers who are serving the Class I needs of the Mideast marketing area and thereby receive the blend price of the Mideast order. It is reasonable, in light of this objective, to conclude that serving the fluid needs of another market provides no service to the Mideast market. Accordingly, such milk should not be considered as a qualifying shipment for meeting the supply plant performance standard of the Mideast order.

The modification of Proposal 2, offered by MMPA, intended to provide a pooling standard that assists in the proper identification of the milk of those producers who actually provide a service to the order's Class I market, should also be adopted immediately. However, the proposed amendatory language has been modified by the Department and is presented below. Safeguards are added to the supply plant provision allowing that up to 90 percent of a supply plant's qualifying shipments to distributing plants be directly from farms of producers by diversion. The intent of this pooling feature for supply plants was to provide flexibility and offer efficiency in transporting milk, and thereby be less burdensome, for those market participants of the pre-reform orders who would continue to be pooled on the larger consolidated Mideast order. This feature was not intended to be used as a mechanism to pool milk on the order that was not providing a reasonable measure of service in supplying the Class I needs of the Mideast marketing area.

The intent of the modification of Proposal 2 by MMPA sought reasonable safeguards so that milk pooled by handlers from sources distant from the marketing area, resulting from the pooling of milk from within the marketing area, would end. The reasons for modifying Proposal 2 are well supported by evidence contained in the record of this proceeding. Currently, plants located far from the marketing area can use diversion of near-in milk for up to 90 percent of the distant plant's qualifying deliveries. Supply plants qualified in this manner do not provide milk to the marketing area that can be shown to be a service in meeting the Class I needs of the Mideast marketing area. Therefore, there is no reasonable basis to conclude that such milk should be pooled on the order and thereby receive the order's blend price. This modification would establish that supplemental milk supplies actually perform a reasonable measure of service in supplying the fluid needs of the Mideast marketing area.

Finally, the evidence of this proceeding supports adopting a “net shipment” provision, a feature of Proposal 2. As intended by the proponents, a net shipment feature would not include transfers or diversions of bulk fluid milk products of a supply plant's qualifying shipments to a distributing plant by any amount of bulk milk transfers or diversions made from the distributing plant. Providing such a feature for the pooling standards for the Mideast order supply plants is reasonable, notwithstanding the objections to its adoption by Scioto and LOL. It is true that distributing plants have some transfers and diversions resulting from variations in demand stemming from weekend days and holidays. However, the current supply plant performance standard is below the Mideast market's Class I use of milk, even with the pooling of milk inappropriately associated with the market due to faulty pooling standards. This decision finds it unlikely that transfers and diversions by distributing plants on such occasions would involve a sufficient volume of milk to cause a supply plant to lose pool status. Additionally, given other changes to the order's pooling standards adopted in this decision (discussed below), placing a limit on diversions that can be made by any pool plant to a nonpool plant should provide the necessary safeguards that would make it even more unlikely that a supply plant would lose its pool status. This decision finds that adoption of a net shipment feature in the pooling standards for Mideast supply plants will aid in properly identifying the milk of those producers who actually supply milk to meet the fluid needs of the market.

A brief submitted by Suiza emphasized the need for providing a net shipment provision for a supply plant operated by a cooperative association. The brief indicated that it would provide for fair and equitable regulatory treatment of two similar types of supply plants. This decision agrees with the need to apply the same net shipment provision to supply plants operated by a cooperative association. Both supply plant and cooperative supply plant performance standards are, for all intents and purposes, identical. Therefore it is reasonable to adopt the same standard in considering the actual, or net, shipments made to distributing plants by a plant operated by a cooperative association.

Providing a 6-month re-pooling delay whenever a supply plant opts not to meet the pooling standards for the month would not tend to provide for orderly marketing conditions in the Mideast marketing area. The record indicates that handler interests seek every assurance for a steady and reliable milk supply as the order can reasonably provide. Providing pooling standards that may cause a supply plant to consider the longer-term implications of dropping off the pool may also tend to ensure the desired outcome of assuring reliable deliveries of milk to fluid handlers. However, the need for a provision which denies a supply plant the ability to rejoin the pool through proper performance after a 6-month delay is not supported by the record.

Milk marketing orders are instruments for promoting stability in the marketing relationship between producers and handlers. In this regard, and considering the marketing conditions of the Mideast marketing area, promoting stability in this manner is not appropriate or needed. The record indicates that fluid milk handlers have not had significant difficulties in securing milk supplies since the implementation of milk order reform. To the extent that handlers fear the potential disruption to the market that may arise from depooling, that fear to date is only speculative.

The most important evidence provided on the record that provides any justification for adopting a 6-month re-pooling delay rests on the possible occurrence of a class-price inversion. Handlers see the issue of opting off-and-on the pool as rushing to join the pool to secure the advantages of price protection and dropping from the pool when prices for Class III and IV milk are higher than the order's blend price. Further, handlers worry that during such times, their ability to obtain needed milk supplies is diminished. The DFA witness is of the opinion that penalizing supply plants, often cooperative owned, may cause financial damage to be borne by the manufacturing sectors of the market. Additionally, DFA does not endorse the notion that producers should incur any penalty because of price outcomes which, they conclude, are the result of the order program providing for the advance pricing of Class I and II milk that serves the interest of handlers.

This decision makes no finding on whether advance pricing is a cause or contributor to class-price inversions. Neither does this decision make any findings regarding the damage that may result to cooperatively owned manufacturers by being prevented from rejoining the pool. These are both far beyond the scope of this proceeding. However, this decision does find that the amendments to the pooling standards adopted by this decision, taken as a whole, strengthen the effectiveness of the order for the benefit of both producers and handlers and will restore orderly marketing conditions and a consistent supply of milk to Class I handlers.

The proposal seeking to change certain standards and features of the Producer milk provision of the order should be adopted immediately. The following amendments include:

(1) Increasing the number of days of milk production of a producer to be delivered to a pool plant before the milk of the producer is eligible for diversion during each of the months of August through November, or “touch base” is increased to 2-days' milk production. In this regard, August is an addition to the touch base period. Additionally, the amended touch base provision establishes a 2-day touch base standard for new producers coming on the Mideast market during each of the months of December through July. The 2-days' milk production touch base standard will be applicable only if the producer has not been part of the Mideast market during each of the previous months of August through November. Adoption of a 2-day touch base standard therefore concludes that the higher standards of either 3 or 4 days, supported by handlers and Scioto, is not adopted.

(2) Establishing diversion limits for all pool handlers in each month of the year. Additionally, diversion limits will be seasonally adjusted. For each of the months of August through February, the diversion limit shall be 60 percent. For each of the months of March through July, the diversion limit shall be 70 percent.

(3) Eliminating the ability of a pool plant to increase diversions to nonpool plants by diverting milk to a second pool plant.

Proposal 7, which sought to add the months of August and March to the current diversion limit standard of 60 percent for each of the months of September through February, should not be adopted.

Proposals 3, 7, and 9 seek to modify the order's standards for determining the eligibility to pool the milk of a producer on the order. The standards for determining this are described in the Producer milk provision of the order. These three proposals are similar in the changes proposed and the specific details of each proposal are discussed in greater detail below. As explained earlier in this decision, the collective references of the proponents as the “Cooperatives” and “Handlers” continues. Proposal 3 was offered by the Cooperatives, Proposal 9 by the Handlers, and Proposal 7 by the Independent Dairy Producers of Akron (IDPA), an association of dairy farmers whose milk is pooled on the Mideast order.

A proposal, published in the hearing notice as Proposal 6, did not receive testimony at the hearing and is considered by this decision to be abandoned. This proposal called for providing year-round diversion limits as did Proposal 3, but offered slightly differing seasonal adjustments. No further reference will be made in this proceeding to Proposal 6.

Published in the hearing notice as Proposal 3, the Cooperatives seek changes in the number of days the milk of a dairy farmer must be physically received at a pool plant, and in what months the standards should apply (commonly referred to as a “touch base” provision), before being eligible for diversion to nonpool plants. Additionally, Proposal 3 would establish diversion limits for producer milk in months where no limit is currently provided by the order and would seasonally adjust these limits.

(1) Touch base. Proposal 3 would change the touch base feature of the Producer milk provision by raising the current standard from one day's milk production to two days' milk production of a producer in each of the months of August through November. Additionally, Proposal 3 also includes a proviso that, in the event a handler did not cause at least two days' milk production of a producer to touch base during each of the months of August through November, at least two days' production would need to touch base in each of the months of December through July before milk is eligible for diversion to nonpool plants. Proposal 7, proposed by the IDPA, seeks a 4-day touch base provision only for each of the months of August through March.

(2) Diversion limits. Proposals 3 and 9 seek diversion limits that would be applicable year round but differ on the level proposed for the spring and summer months. Under Proposal 3, a 60 percent limit would be applicable in each of the months of August through February, and a 70 percent limit would be applicable in each of the months of March through July. Alternatively, Proposal 9 would specify a 60 percent limit in each of the months of August through February, but an 80 percent limit for each of the months of March through July. Proposal 7 seeks only to change the months in which a diversion limit would be provided from the current 60 percent during each of the months September through February and have the 60 percent limit be applicable during each of the months of March through August.

The witness representing the Cooperatives testified that the current provisions of the Mideast order do not adequately define the potential amount of milk that can be pooled on the order and attributed this shortcoming, in part, to the lack of adequate diversion limits. The witness also indicated that establishing a limit on the amount of producer milk that a pool plant can divert to a nonpool plant where none are now specified would correct these deficiencies of the order's pooling standards. The witness also cited the current touch base standard as contributing to the improper pooling of the milk of producers not actually serving the Class I needs of the market. The new 2-day touch base standard offered by Proposal 3, indicated the witness, would need to be met before additional milk would be eligible for diversion to nonpool plants.

Continental Dairy Products (Continental), a cooperative of dairy farmers with members whose milk is marketed and pooled on the Mideast order, indicated their support for amending the touch base standard as well as providing year-round diversion limits on producer milk. They noted that producer blend prices in the Mideast marketing area have been reduced by as much as $8 million in a single month because of inappropriate pooling standards. The pooling standards in the Mideast order do not currently require a physical and economic association with the marketing area, noted the witness, and therefore an enormous amount of milk has been pooled on the Mideast order.

A witness from Prairie Farms, representing the positions of the Cooperatives, testified in support of Proposal 3. The witness testified that increasing the touch base provision would ensure that enough milk would be available to cover the day-to-day fluid needs of the market along with providing for adequate milk reserves. At the same time, said the witness, the proposal would reduce the ability to pool milk on the order that is not serving the markets fluid needs. The witness noted that their dairy farmer members have been financially harmed by the unwarranted additional supplies of milk being pooled on the order. The Cooperatives' witness stressed that pooling additional volumes of milk only serves to lower returns to Mideast producers and supplemental suppliers who are actually serving the fluid needs of the market every day.

A witness appearing on behalf of MEMA also testified in support of Proposal 3.The MEMA witness related that in responding to changes in customer needs, in addition to variations in production, their need to secure additional volumes of milk for the fall months actually begins in August and continues through November. This, noted the witness, is because as schools return to session the demand for milk tends to increase.

A witness appearing on behalf of MMPA testified in support of Proposal 3. The MMPA witness offered that increasing the touch base standard to 2-days' production better reflects the higher fluid needs of the market that exist during specific months of the year. The increase in demand for fluid milk attributed to school openings was also offered by the witness as an example of such increased demand beginning in August.

MMPA also indicated support for the proviso in Proposal 3 that would establish a two-day touch base standard for each of the months of December through July for producer milk which did not meet the touch base standard in the preceding months of August through November. According to the witness, this feature of the touch base standard supports the concept that pooling standards be performance oriented and more accurately identify the milk of those producers which actually service the fluid needs of the market.

A witness from Dean also testified in general support of Proposal 3. However, Dean offered a modification to Proposal 3 by endorsing a 3-day touch base standard for producer milk. The witness provided an analysis on the effects of “non-historic” milk pooled on the Mideast order over the period of January 2001 through August 2001. This analysis concluded that the Mideast's Producer Price Differential (PPD) had been reduced by an average of 55 cents per hundredweight during this 8-month time period. The witness stressed that this loss of revenue is being borne by the producers who actually and regularly supply the fluid needs of the market. Accordingly, indicated the Dean witness, the pooling provision standards regarding producer milk need changing.

A witness appearing on behalf of Suiza expressed similar general support for Proposal 3 and endorsed the Dean modification calling for a 3-day touch base standard. Suiza was of the opinion that without a meaningful touch base standard, individual producer-suppliers do not actually have to perform by physically delivering milk to the Mideast market as a condition for pooling. Meaningful touch base provisions, noted Suiza, also provide handlers with reasonable assurance of performance while simultaneously ensuring that the milk of dairy farmers that actually serves the market is protected against lower returns caused by pooling unneeded milk. Additionally, the Suiza witness testified in support of specifying August as a month when lower diversion limits should be applicable. The witness also cited the opening of schools and the stresses on production from summer as reflections of increasing demand for Class I milk occurring during a time of generally lower milk production.

A witness representing Scioto expressed general support for Proposal 3 but offered a 4-day touch base standard for each of the months of August through November and a 2-day touch base standard for each of the months of December and January.

Testifying in support of Proposal 7, the IDPA witness stressed that increasing the touch base standard to 4 days' production should be applicable for each of the months of August through March and providing a 60 percent diversion limit for each of these same months would be beneficial to Mideast producers. The witness indicated that a physical delivery of milk to the order's pool plants is a key indicator of milk being a legitimate part of the market. The witness expressed support of the need for an emergency decision because their returns are being lowered by pooling milk that should not be considered as part of the Mideast market.

Proposal 9, offered by the Handlers, seeks to limit the amount of milk that could be diverted from a pool plant to a nonpool plant. The proposal would set a 60 percent limit during each of the months of August through February and an 80 percent limit during each of the months of March through July. This proposal was abandoned by its proponents. Instead, the proponents agreed to support Proposal 3 offered by the Cooperatives. While the Handlers indicated support for Proposal 3, they were of the opinion that adopting a 3-day touch base standard instead of a 2-day touch base standard would be best. They indicated a 3-day touch base standard would contribute to a more accurate identification of the milk of producers that actually supply the fluid milk needs of the Mideast marketing area.

The witness representing Scioto testified in support of Proposal 9. Proposal 9 limits diversions to a percentage of the milk physically received at a plant, noted the witness. The concept of allowing diversions based on milk physically received is logical, said the witness, and is preferred by most of the dairy industry. The witness was also of the opinion that August should be included as a month that provides for a lower level of diversions to nonpool plants. The combination of schools opening in the middle of August together with the typically hot days of the summer season, cited the witness, has negative impact on milk production and therefore the order should have lower limits on the amount of milk that can divert to nonpool plants. Diversion limits of 60 percent during each of the months of August through February and 80 percent during each of the months of March through July would also assure consumers and fluid milk processing plants that their needs will be met, concluded the Scioto witness.

All milk marketing orders, including the Mideast, provide some standard for identifying those producers who supply the market with milk. To qualify as a producer on most orders, including the Mideast, a producer can be associated with a market by making a delivery to a market's pool plant. Additionally, other standards need to be met before the milk of that producer is eligible to be diverted to a nonpool plant and have that diverted milk pooled and priced under the terms of the order. Currently, the Mideast order's standard is that one day's production of milk of a producer be delivered to a pool plant before that plant can divert the milk of the producer to a nonpool plant.

The touch base standard of an order establishes an initial association by the producer and the milk of the producer with the market. Markets that exhibit a higher percentage of milk in fluid use generally have touch base standards specifying more frequent physical milk deliveries to pool plants. In this way, the touch base provision serves to maintain the integrity of the order's performance standards. When a touch base standard is too low, the potential for disorderly marketing conditions arises on two fronts. First, pool plants are less assured of milk supplies. Second, and most important for the Mideast marketing area, an inadequate touch base standard provides the means for the milk of producers, not providing a service in meeting the fluid needs of the market, to be pooled on the order. This reduces the order's blend price paid to producers who are providing service to the Class I market.

The record of this proceeding indicated various opinions about what the proper touch base standard for the Mideast order should be and when it should be applicable. These opinions ranged from 2 days' to as much as 4 days' milk production of a producer. All agree that August would be a more appropriate beginning month for its applicability. The more compelling observation is that all participants in this proceeding recognized the need for, and supported increasing, the touch base standard. The issue for the Department is reduced to deciding which standard best serves the needs of the Mideast order.

On the basis of the evidence, this decision supports adopting a 2-day touch base standard and having this standard be applicable beginning in August. While a higher standard would tend to further maintain the integrity of the order's performance standards, adopting a higher touch base standard may result in the uneconomic movement of milk solely for the milk of producers to meet a pooling standard. Additionally, the Mideast order currently provides that the Market Administrator may adjust the touch base standard in the same way the order provides for the Market Administrator to adjust the performance standards for supply plants and the diversion limits for all pool plants. Other changes adopted in this decision will also serve to more accurately identify the milk of producers who should be pooled on the order. Together with the Market Administrator's authority to administratively change the touch base standard, sufficient safeguards are provided to accomplish both needs.

Provisions for diverting milk are a desirable and needed feature of an order because they facilitate the orderly and efficient disposition of the market's milk not used for fluid use. When producer milk is not needed by the market for Class I use, its movement to nonpool plants for manufacturing, without loss of producer milk status, should be provided for. Preventing or minimizing the inefficient movement of milk solely for pooling purposes need also be reasonably accommodated. However, it is just as necessary to safeguard against excessive milk supplies becoming associated with the market through the diversion process.

A diversion limit establishes the amount of producer milk that may be associated with the integral milk supply of a pool plant. With regard to the pooling issues of the Mideast order, it is the lack of diversion limits to nonpool plants that significantly contributes to the pooling of milk on the order that does not provide service to the Class I market. Such milk is not a legitimate part of the reserve supply of the plant.

Milk diverted to nonpool plants is milk not physically received at a pool plant. However, it is included as a part of the total producer milk receipts of the diverting plant. While diverted milk is not physically received at the diverting plant, it is nevertheless an integral part of the milk supply of that plant. If such milk is not part of the integral supply of the diverting plant, then that milk should not be associated with the diverting plant. Therefore, such milk should not be pooled.

Associating more milk than is actually part of the legitimate reserve supply of the diverting plant unnecessarily reduces the potential blend price paid to dairy farmers. Additionally, pooling milk far in excess of reasonable needs of the market due to the lack of diversion limits only provides for the association of milk with the market by what is often described as “paper-pooling” and not by actual service in meeting the Class I needs of the market. Without a diversion limit, the order's ability to provide for effective performance standards and orderly marketing is weakened.

The lack of a diversion limit standard applicable to pool plants opens the door for pooling much more milk and, in theory, an infinite amount of milk on the market. While the potential size of the pool should be established by the order's pooling standards, the lack of diversion limits renders the potential size of the pool as undefined. With respect to the marketing conditions of the Mideast marketing area evidenced by the record, this decision finds that the lack of year-round diversion limits on producer milk has caused more milk to be pooled on the order than can reasonably be considered as properly associated with the market.

The lack of a diversion limit standard applicable for diversions to nonpool plants has also resulted in the pooling of milk that does not provide a service in meeting the Class I needs of the Mideast marketing area. Proposal 7 offers reasonable diversion limit standards that would be adjusted seasonally to reflect the changing supply and demand conditions of the Mideast marketing area. Therefore, a 60 percent diversion limit standard for each of the months of August through February and a 70 percent diversion limit standard for each of the months of March through July should be adopted immediately. To the extent that these diversion limit standards may warrant adjustments, the order already provides the Market Administrator with authority to consider and act to adjust these diversion standards as marketing conditions may warrant by the Market Administrator.

As mentioned above, the Mideast order currently provides for the diversion of milk from a pool plant to a second pool plant. However, the order does not consider such diversions in the total diversion limit established for pool plants. It is through this shortcoming of the order's pooling standards that the intent to only pool the milk of producers who are consistently serving the Class I demands of the market are circumvented. In this regard, a pool plant is able to increase its milk diversions to a nonpool plant through diversions to a second pool plant. The amendment provided below in the Producer milk definition of the order provides the necessary technical correction that will include diversions to other pool plants in the manner no differently than diversions to nonpool plants.

Several changes to the pooling standards contained in the Producer milk definition of the order are needed to maintain the integrity of the other amendments made in this decision affecting the performance standards for supply plants. As indicated earlier, the record indicates that certain pooling provisions of the Mideast order are either inadequate or unnecessary. With respect to the pooling standards of the order as they are contained in the Producer milk provision, this decision finds that certain features of the provision are inadequate. These include:

(1) The touch base standard currently requiring one-days' milk production of a producer be delivered to a pool plant is not providing a sufficient standard in identifying those producers and the milk of those producers who are serving the fluid needs of the market.

(2) The lack of year-round diversion limits for all pool plants has resulted in the ability to pool far more milk than can be reasonably part of the reserve supply of the plants pooling such milk. The lack of a diversion limit for each and every month of the year has left the potential size of the marketwide pool undefined. This inadequacy of the Mideast order has resulted, too, in pooling the milk of producers who are not providing a service to the Class I needs of the market. This inadequacy contributes to the unnecessary erosion of the order's blend price caused by pooling additional volumes of milk used in lower priced classes which, in turn, reduces the market's Class I utilization percentage of milk.

(3) The lack of limiting the ability of a pool plant to divert milk to a second pool plant in the same manner as diverted milk to a nonpool plant contributes and magnifies the impact of pooling the milk of producers who provide no service to the Class I needs of the market. The receipt of a lower blend price to those producers who are serving the Class I needs of the market is found to be unwarranted and contributes to disorderly marketing conditions in the Mideast marketing area.

Proposal 4, seeking to increase the rate of partial payment for milk, should not be adopted. This proposal, offered by DFA, would increase the rate of partial payment to producers and cooperative associations for milk delivered during the first 15 days of a month to 110 percent of the previous month's lowest class price.

The intent of this proposal, according to the DFA witness, is to improve the cash flow of dairy farmers pooled on the Mideast order. According to DFA, a partial payment that more closely equals the final payment for milk would more accurately reflect the true value of the milk delivered to handlers during the first 15 days of the month. The DFA witness testified that the partial payment rate, as a share of the total payment for milk, has widened since the formation of the consolidated Mideast marketing area. The witness stressed that producers need a more consistent cash flow than they are currently experiencing and adopting a higher partial payment rate would meet this need.

The DFA witness provided data and an analysis they maintain indicates that since the implementation of order reform on January 1, 2000, the amount of the partial payment received by producers relative to the total payment for milk each month has been reduced when compared to the pre-reform orders. The analysis consisted of approximating a weighted average blend price as a proxy for a comparable order from the pre-reform orders' information. The witness indicated that data for a 36-month period, from January 1997 through December 1999, was compared to the current Mideast order data of 17 months—the number of months then available for which data existed.

Since the current Mideast order provides 4 classes of milk use, the DFA witness indicated they used the pre-reform order's Class III-A price as a proxy for the lowest class price so that a comparison could be made between the pre-reform and post-reform partial payment relationships to the total price for the month. The result of this analysis, concluded the DFA witness, clearly indicates that by using the lowest class price of the previous month as the rate of partial payment, the relationship between the partial and total payment for milk during the month has widened since the implementation of order reform.

Three other witnesses testified in support of amending the partial payment provision. These witnesses included an Ohio dairy farmer, a representative of MMPA, and Scioto. All three witnesses testified that their cash flow, or the cash flow of their members, has deteriorated since the implementation of order reform.

Opposition by handler interests for increasing the rate of partial payment was significant. However, handler interests did not counter the expressed need for improvement in producers' cash flow positions. Rather, handler interests focused on presenting the impact to milk processors if a higher partial payment rate was adopted.

A representative of Leprino Foods (Leprino), a national cheese-processing firm which purchases and pools milk on the Mideast order, testified that disparity between the partial and final payments is a combination of a failure to blend the pool's higher use values into the partial payment and using the lowest class price of the previous month. The witness argued that increasing the rate of partial payment would merely transfer the burden of producers' cash flow concerns to processors. The Leprino witness was also of the opinion that increasing the rate of partial payment would violate minimum pricing principles used by Federal milk orders. In this regard, the witness noted that Class III and IV products compete for sales in a national market, unlike milk used in Class I products. The witness maintained that the resulting differences in the rate of partial payment between orders would cause disparate economic positions for handlers competing for sales in areas where the rate of partial payment is lower.

A witness representing the Handlers also testified in opposition to increasing the rate of partial payment. The witness provided an analysis that evaluated the financial impact on handlers based on the economic principle of the time value of money. In the analysis, the Handlers' witness presented the financial impacts to handlers that would likely result by advancing or delaying the partial payment. Notwithstanding the desire or need of producers to improve their cash flow positions, the witness was of the opinion that the cash flow problem of producers would better be addressed through adoption of other proposals under consideration in this proceeding.

Because of initial confusion in the data presented at the hearing regarding appropriate historical prices and the months for which they were applicable, the Department reconstructed noticed data that recreated the intended analysis presented by witnesses. The Department's reconstruction relied, in part, on the partial payment provisions of the pre-reform orders. The Department used the previous month's Class III price of the pre-reform orders as the lowest class price because the Class III price was used then to set the rate of partial payment. In this regard, comparing partial payment relationship outcomes using actual historical provisions provided for comparing pre- and post-reform partial payment relationships as to the total payment for milk in a month.

Even with the limited amount of data available since the implementation of order reform, the Department's comparison of pre- and post-reform partial payment relationships to total payments does appear to support the observations made by the DFA witness. However, this initial observation alone is not sufficient basis for changing the rate of the partial payment. Some significant differences in certain key assumptions were made by the proponents of Proposal 4 from those assumptions used by the Department in comparing pre- and post-reform time periods.

Also of concern is the limitations inherent in comparing a 36-month period to one of only 17 months. Additionally, the 36-month time period shows price trends rising and falling, while the 17-month time shows a period of generally an upward trend in prices. This may suggest that there has not yet been a sufficient period of elapsed time to infer the impact of downward trends in prices and the possible effect on the relationship between the partial and final payments to producers.

With regard to Leprino's concern about uniformity of partial payment rates between orders, the current milk orders have a variety of partial payment rates. Several orders use a partial payment rate based on a percent of the previous month's blend price, and the Florida order, for example, provides for two partial payments. Additionally, the Western and Arizona-Las Vegas orders, both of which pool significant volumes of milk used in cheese, provide for partial payment rates of 120 and 130 percent, respectively, of the previous month's lowest class price.

There may be times when the rate of partial payment exceeds the balance due for the month. In this regard, handler interests point to this outcome as requiring them to pay more for milk for part of the month than its actual value for the month. It is appropriate to note that this exact outcome occurred several times during the pre-reform 36-month period used by DFA. Thus, it is determined that the concerns of handlers in this regard are unpersuasive.

The DFA witness noted that deductions authorized by producers are normally made in the final payments for milk. There could be times when the amount deducted from the final payment exceeds the amount of the final payment. If the deductions are high enough for this to happen, it would be reasonable to conclude that producers desiring to even out their cash flow would opt to allow a portion of their deductions to be made with receipt of the partial payment, as the order allows.

The partial payment provision in Federal orders is a minimum requirement placed on handlers to pay producers for milk delivered. It is important to note that cooperatives and handlers are not restricted to paying only one partial payment at the rate specified in the order; partial payments for milk can be made more often. Additionally, cooperatives and handlers are also at liberty to negotiate agreements for more frequent billings for milk and in payments for milk above the minimum established by the order. As made evident by the record, more flexible partial payment options are available to both producers and handlers than relying solely on changing the minimum payment provision.

As the Leprino witness noted, DFA's proposal does not incorporate or blend the higher-valued uses of milk in their analysis. In response to this observation, the Department compared the relationships between the partial and total payment using 90 percent of the previous month's Mideast blend price. Interestingly, if the desired objective is to more closely approximate the partial payment rate using the 36-month period before order reform, a 90 percent rate of the previous month's blend price seems to accomplish this. Nevertheless, the same limitations and concerns mentioned above prevent a finding that the Mideast order's rate for partial payment should be increased.

This decision finds general agreement with the Handlers' opinion that the cash flow concerns of producers would be better served by the adoption of other proposals considered in this proceeding. Other amendments adopted in this decision affecting the pooling of milk in the Mideast order will likely end the unnecessary erosion in the blend price received by Mideast producers. Higher expected blend prices will result from more accurately identifying those producers and the milk of those producers who actually serve the Class I needs of the market. Similarly, the relationship between the partial payment and the total price received by producers may change by the adoption of these pooling standard amendments. Accordingly, a finding that the rate of partial payment to producers by handlers should be increased is not supported by the evidence contained in the record of this proceeding.

One conforming change is made to the pool plant definition of the order. Words to implement the consolidated order were needed when the order first became effective on January 1, 2000. Since the order has become effective such wording is no longer needed to effectuate the implementation of the order. The removal of the wording presented below is self explanatory.

Evidence presented at the hearing establishes that the pooling standards of the Mideast order are inadequate and result in the erosion of the blend price received by producers who are serving the Class I needs of the market and should be changed on an emergency basis. The unwarranted erosion of such producers' blend price stems from improper performance standards as they relate to pool supply plants and the lack of diversion limits for pool plant diversions to pool and nonpool plants. These shortcomings of the pooling provisions have allowed milk to be pooled on the order that does not provide a reasonable or consistent service to meeting the needs of the Class I market as a standard for enjoying the pricing benefits arising from Class I sales in the Mideast marketing area. Consequently, it is determined that emergency marketing conditions exist and the issuance of a recommended decision is therefore being omitted. The record clearly establishes a basis as noted above for amending the order on an interim basis and the opportunity to file written exceptions to the proposed amended order remains.

In view of this situation, an interim final rule amending the order will be issued as soon as the procedures are completed to determine the approval of producers.

Briefs and proposed findings and conclusions were filed on behalf of certain interested parties. These briefs and the evidence in the record were considered in making the findings and conclusions set forth above. To the extent that the suggested findings and conclusions filed by interested parties are inconsistent with the findings and conclusions set forth herein, the requests to make such findings or reach such conclusions are denied for the reasons previously stated in this decision.

The findings and determinations hereinafter set forth supplement those that were made when the Mideast order was first issued. The previous findings and determinations are hereby ratified and confirmed, except where they may conflict with those set forth herein.

(a) The interim marketing agreement and the interim order, as hereby proposed to be amended, and all of the terms and conditions thereof, will tend to effectuate the declared policy of the Act;

(b) The parity prices of milk as determined pursuant to section 2 of the Act are not reasonable in view of the price of feeds, available supplies of feeds, and other economic conditions which affect market supply and demand for milk in the marketing area, and the minimum prices specified in the interim marketing agreement and the order, as hereby proposed to be amended, are such prices as will reflect the aforesaid factors, insure a sufficient quantity of pure and wholesome milk, and be in the public interest; and

(c) The interim marketing agreement and the interim order, as hereby proposed to be amended, will regulate the handling of milk in the same manner as, and will be applicable only to persons in the respective classes of industrial and commercial activity specified in a marketing agreement upon which a hearing has been held.

Annexed hereto and made a part hereof are two documents, an Interim Marketing Agreement regulating the handling of milk, and an Interim Order amending the order regulating the handling of milk in the Mideast marketing area, which have been decided upon as the detailed and appropriate means of effectuating the foregoing conclusions.

It is hereby ordered that this entire tentative decision and the interim order and the interim marketing agreement annexed hereto be published in the Federal Register .

The month of October, 2001 is hereby determined to be the representative period for the purpose of ascertaining whether the issuance of the order, as amended and as hereby proposed to be amended, regulating the handling of milk in the Mideast marketing area is approved or favored by producers, as defined under the terms of the order as hereby proposed to be amended, who during such representative period were engaged in the production of milk for sale within the aforesaid marketing area.

It is hereby directed that a referendum be conducted and completed on or before the 30th day from the date this decision is issued, in accordance with the procedure for the conduct of referenda (7 CFR 900.300-311), to determine whether the issuance of the order, as amended and as hereby proposed to be amended, regulating the handling of milk in the Mideast marketing area is approved by producers, as defined under the terms of the order (as amended and as hereby proposed to be amended), who during such representative period were engaged in the production of milk for sale within the aforesaid marketing area.

The representative period for the conduct of such referendum is hereby determined to be October, 2001.

The agent e agent of the Department to conduct such referendum is hereby designated to be David Z. Walker, Market Administrator.

This interim order shall not become effective unless and until the requirements of § 900.14 of the rules of practice and procedure governing proceedings to formulate marketing agreements and marketing orders have been met.

The findings and determinations hereinafter set forth supplement those that were made when the order was first issued and when it was amended. The previous findings and determinations are hereby ratified and confirmed, except where they may conflict with those set forth herein.

(a) Findings. A public hearing was held upon certain proposed amendments to the tentative marketing agreement and to the order regulating the handling of milk in the Mideast marketing area. The hearing was held pursuant to the provisions of the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), and the applicable rules of practice and procedure (7 CFR part 900).

Upon the basis of the evidence introduced at such hearing and the record thereof, it is found that:

(1) The said order as hereby amended, and all of the terms and conditions thereof, will tend to effectuate the declared policy of the Act;

(2) The parity prices of milk, as determined pursuant to Section 2 of the Act, are not reasonable in view of the price of feeds, available supplies of feeds, and other economic conditions which affect market supply and demand for milk in the aforesaid marketing area. The minimum prices specified in the order as hereby amended are such prices as will reflect the aforesaid factors, insure a sufficient quantity of pure and wholesome milk, and be in the public interest; and

(3) The said order as hereby amended regulates the handling of milk in the same manner as, and is applicable only to persons in the respective classes of industrial or commercial activity specified in, a marketing agreement upon which a hearing has been held.

It is therefore ordered, that on and after the effective date hereof, the handling of milk in the Mideast marketing area shall be in conformity to and in compliance with the terms and conditions of the order, as amended, and as hereby amended, as follows:

The authority citation for 7 CFR part 1033 continues to read as follows:

Until recently, savings associations could not effect securities transactions for customers directly unless they registered with the SEC as a broker-dealer. Under an interim final rule issued by the SEC, savings associations are now treated as banks under the definitions of “broker” and “dealer” in sections 3(a)(4) and (a)(5) of the Securities Exchange Act of 1934 (Exchange Act). 66 FR 27760 (May 18, 2001). 1 As a result, a savings association may perform certain broker-dealer activities without registering with the SEC as broker-dealers.

The OCC, Federal Deposit Insurance Corporation (FDIC), and Federal Reserve Board (FRB) regulations include recordkeeping and confirmation requirements for securities transactions effected by banks. Until the recent SEC rule, OTS did not need similar requirements. Today's proposal affords savings association customers the same protections and disclosures provided to bank customers. Proposed part 551 establishes recordkeeping and confirmation requirements for a savings association that effects securities transactions. Proposed part 551 is based on the recordkeeping and confirmation requirements of the other federal banking agencies. 2 Where appropriate, however, OTS has modified the proposed requirements to reflect SEC regulatory requirements for registered broker-dealers. A section-by-section description of the proposed recordkeeping and confirmation regulations follows.

Proposed § 551.10 states that part 551 establishes recordkeeping and confirmation requirements for a savings association that effects securities transactions for customers. The new part would apply to all savings associations.

Proposed § 551.20 sets out the scope of part 551. Generally, any savings association effecting a securities transaction for a customer must comply with part 551, unless the transaction is specifically excepted.

Proposed § 551.20(b) contains five exceptions to this general rule. Four of the five proposed exceptions—for an institution that effects a small number of securities transactions, 3 for certain government securities transactions, for certain municipal securities transactions, and for transactions conducted at a foreign branch of a savings association—are found in all of the other federal banking regulators' requirements. The OCC and FDIC regulations also include a fifth exception for a transaction effected for a bank by an SEC-registered broker-dealer who provides a confirmation directly to the customer. OTS agrees this is an appropriate exception and has included it in the proposed rule.

This last exception would apply to transactions effected by a savings association employee who also acts as an employee of an SEC-registered broker-dealer (dual employee), if the dual employee works for and is under the control of a registered broker-dealer when he or she effects the transaction. However, if the dual employee works for and is under the control of the savings association when he or she effects the transaction, the proposed exception would not apply.

A savings association may enter into various arrangements with a registered broker-dealer that permit the broker-dealer to operate on the association's premises. As noted above, proposed part 551 generally would not apply to securities transactions executed by these registered broker-dealers for their customers. As registered broker-dealers, they already are subject to the SEC's recordkeeping and confirmation rules. However, if the savings association effects a securities transaction for a customer, but uses the registered broker-dealer to perform purely administrative functions (e.g., clearing the transaction), proposed part 551 would apply because the savings association has executed the transactions.

OTS invites comment on these exceptions and whether they are appropriate in the context of the day-to-day operations of a savings association.

Proposed § 551.30 states that a savings association must effect all transactions, including excepted transactions, safely and soundly. Specifically, the savings association must maintain effective systems of records and controls that clearly and accurately reflect all appropriate information and provide an adequate basis for an audit. The other federal banking regulators have similar provisions.

Proposed § 551.30 contains the definitions of terms used in part 551. The proposed definitions of “asset-backed security,” “completion of the transaction,” “customer,” “debt security,” “government security,” “municipal security,” and “security” track definitions in the OCC, FDIC, and FRB regulations.

OTS's proposed rule cross-references the definition of “investment discretion” in its fiduciary powers rule at 12 CFR 550.40. By contrast, OCC established separate definitions of investment discretion for its recordkeeping and confirmation rule and its fiduciary rule. Although they are phrased slightly differently, the definitions of “investment discretion” in OCC's two rules are substantially similar. 4 In OTS's view, the two concepts are identical. As such, OTS has elected to use the same definition for both rules.

The proposed rule also defines “investment company plan.” This definition comes from SEC Rule 10b-10, the SEC's rule for confirmation of transactions by registered broker-dealers. See 17 CFR 240.10b-10(d)(6).

OTS, like FDIC, would define “sweep account” separately from “periodic plan.” Many sweep accounts differ from typical periodic plans such as dividend reinvestment plans and automatic investment plans. Accordingly, proposed § 551.30 includes a definition of “sweep account” based on the FDIC's regulation. See 12 CFR 344.3(c). The proposed definition of “periodic plan” is based on SEC Rule 10b-10. See 17 CFR 240.10b-10(d)(5). Finally, OTS has included a definition of “common or collective investment fund,” which cross-references applicable OTS and OCC rules.

Proposed § 551.50 describes the records a savings association must maintain for securities transactions. A savings association effecting securities transactions for customers must maintain, for at least three years, chronological records containing an itemized daily record of each purchase and sale of securities; account records for each customer; the memorandum (order ticket) of each order or any other instruction given or received for the purchase or sale of securities; and a record of all registered broker-dealers the association selected to effect transactions and the commissions paid or allotted to each registered broker-dealer during each calendar year. The savings association must also maintain copies of the written notice required under proposed subpart B, which is discussed below.

Proposed § 551.60(a) states that a savings association may maintain required records in any manner, form, or format, as long as the records clearly and accurately reflect the required information and provide an adequate basis for auditing the information.

Proposed § 551.60(b) is patterned after a recent SEC rule governing recordkeeping requirements by investment companies and investment advisers. 5 Under the proposed rule, a savings association or the person that maintains and preserves records for the association must arrange and index the records in a way that permits easy access and retrieval, separately store a duplicate copy of the records, and promptly provide, upon an examiner's or the association director's request, copies of the record in the medium in which the record is stored, a printout of the record, and means to access, view, and print the record.

Proposed paragraph (b) also addresses electronic records. A savings association would be required to establish procedures to maintain and preserve electronic records in a way that reasonably safeguards the records from loss, alteration, or destruction; to limit access to the records to authorized personnel, the association's directors, and OTS examiners; and to reasonably ensure that electronic copies of the non- electronic originals are complete, true, and legible.

Finally, proposed § 551.60(c) states that a savings association may contract with third party service providers to maintain records.

Under proposed § 551.70, whenever a savings association effects a securities transaction for a customer, the association must notify the customer by providing the customer with: (1) The registered broker-dealer confirmation; (2) a written notice; or (3) an alternate notice for certain types of transactions. These three types of notices are described in proposed §§ 551.80-100.

Under proposed § 551.80, a savings association may elect to provide the customer with a copy of the registered broker-dealer's confirmation. The registered broker-dealer may send the confirmation directly to the customer, or the savings association may send the customer a copy of the confirmation within one day of receiving it from the registered broker-dealer. If the registered broker-dealer sends the confirmation directly to the customer, the savings association would remain responsible for the timely delivery of confirmations and the accurate disclosure of the required information. Proposed § 551.80(b) requires additional disclosures if the association receives remuneration in connection with the transaction. In such a case, the association must provide the customer a statement of the source and amount of any remuneration. This information is generally required in a registered broker-dealer confirmation under SEC Rule 10b-10(a). 6

Under proposed § 551.90, the association may elect to provide a written confirmation disclosing certain information. These informational requirements are based on the SEC's rule on confirmation of transactions by registered broker-dealers, SEC Rule 10b-10. 7 Under proposed § 551.90(a) through (e), the written confirmation must indicate: (1) The savings association's and customer's name; (2) the capacity in which the savings association acted; (3) the date and time the transaction was executed (or a statement that the association will furnish this information upon written request), and the identity, price, and number of shares or units purchased or sold; (4) the person from whom the association purchased or to whom the association sold the security (or a statement that the association will furnish this information upon request); and (5) the amount and source of remuneration the association has received in connection with the transaction. Under proposed § 551.90(g), the association also must include a statement that the association is not a member of the Securities Investor Protection Corporation, if that is the case, unless the transaction involved shares of a registered open-end investment company or unit investment trust. Subparagraphs (f) and (g) are drawn from SEC Rule 10b-10, see 17 CFR 240.10b-10(a)(2)(i)(D) and (a)(9).

Paragraph (h) of proposed § 551.90 imposes additional disclosure requirements on certain transactions in debt securities. These additional requirements, which generally involve disclosing price and yield information about particular types of debt securities, are consistent with the recordkeeping requirements of the other federal banking regulators and SEC Rule 10b-10. 8 OTS has put these additional disclosure requirements in the form of a chart. If a transaction falls within more than one of the types of transactions listed in paragraphs (h)(1) through (5), the savings association must provide the information required for each type.

Under proposed § 551.100, a savings association may elect to provide alternate notices for certain types of transactions. These include transactions effected: (1) For or with the account of a customer under a periodic plan, sweep account, or investment company plan; (2) for or with the account of a customer in shares in certain open-ended management companies registered under the Investment Company Act of 1940 that hold themselves out as a money market fund and attempt to maintain a stable net asset value per share; (3) for an account for which the savings association does not exercise investment discretion and the customer has agreed in writing to an arrangement concerning the time and content of the notice; (4) for an account, other than common or collective investment funds, for which the savings association exercises investment discretion in other than an agency capacity; (5) for an account for which the savings association exercises investment discretion in an agency capacity; and (6) for a common or collective investment fund.

These categories are based on the alternate notice options provided by the other federal banking regulators and the SEC. 9 Most of the information requirements for all these accounts are based on the other federal banking agencies' rules. The information requirements for periodic plans and sweep accounts, however, are drawn from SEC Rule 10b-10(b), and the requirements for collective or common investment funds are drawn from FDIC regulation 12 CFR 344.6(e). OTS has set out the alternate notice requirements in a chart.

Proposed § 551.110 provides that a savings association may satisfy the written notice requirements in subpart B electronically. Proposed § 551.110 is based on a similar regulation in the OCC's rules at 12 CFR 12.102. A savings association may use electronic communications if the parties agree, the parties are able to print or download the notice, the system cannot automatically delete the notice, and both parties are able to receive electronic messages.

OTS has included a provision addressing whether a savings association may charge a fee for a required notice. Proposed § 551.120, which is based on a related OCC provision, 10 states that a savings association may not charge a fee for providing a notice required under proposed subpart B, except in three instances. A savings association may charge a reasonable fee for providing notice under proposed § 551.100(a) (notice for periodic plans, sweep accounts, or investment company plans), (d) (notice for fiduciary accounts), and (e) (notice for agency accounts).

Proposed § 551.130 establishes a settlement period of three days after the date of the transaction (“T+3”) for savings associations effecting securities transactions. This time frame is consistent with that of the other federal banking regulators and mirrors the SEC's T+3 settlement time frame. See SEC Rule 15c6-1, 17 CFR 240.15c6-1 (2001). The proposal also provides that the parties may expressly agree to another time frame at the time of the transaction, or use some other time period as the SEC may specify by rule.

OTS considered incorporating settlement rules by cross-referencing the SEC rule. However, many small institutions may not have access to SEC rules. As a result, OTS has concluded that the better practice is to set forth a settlement rule tracking the SEC rule. This is consistent with the OCC and FDIC rules.

Proposed § 551.140 requires a savings association that effects securities transactions to maintain and follow written policies and procedures addressing several areas of operation. This section is based on similar provisions in the other banking regulators' recordkeeping regulations.

Under the proposed rule, the association's policies and procedures must:

• Assign responsibility for the supervision of officers and employees engaged in various aspects of the trading process;

• Provide for the fair and equitable allocation of securities and prices to accounts when the savings association receives orders for the same security at approximately the same time and it places orders individually or in combination;

• Provide for the crossing of buy and sell orders on a fair and equitable basis; and

• Require certain officers and employees to make quarterly reports containing specific information on personal securities transactions.

Proposed § 551.140(d) describes who must file the quarterly reports and is similar to the reporting requirements of the other regulators. Under that paragraph, an officer or employee must file a report if he or she makes investment recommendations or decisions for the accounts of customers, participates in the determination of these recommendations or decisions, or, in connection with his or her duties, obtains information concerning which securities the savings association intends to purchase, sell, or recommend for purchase or sale. OTS has also relied on the SEC's reporting requirements for investment company personnel who engage in personal investment activities found at 17 CFR 270.17j-1(d).

Proposed § 551.150(a) details the contents of the quarterly report. For each transaction, an officer or employee described in proposed § 551.140(d) would be required to report: (1) The date of the transaction, the title and number of shares, the interest rate and maturity date (if applicable), and the principal amount of each security; (2) the nature of the transaction (i.e., purchase, sale, or other type of acquisition or disposition); (3) the price at which the transaction was effected; (4) the name of the broker, dealer, or other intermediary effecting the transaction; and (5) the date the officer or employee submitted the report. The report is due within ten days after the close of the calendar quarter.

The officer or employee would not be required to report: (1) A transaction if he or she has no direct or indirect influence or control over the account or over the securities held in the account; (2) a transaction in shares issued by an open-end investment company registered under the Investment Company Act of 1940; (3) a transaction in direct obligations of the United States government; or (4) a transaction in bankers' acceptances, bank certificates of deposit, commercial paper and high quality short term debt instruments, including repurchase agreements. In addition, the officer or employee would not be required to file a report if the aggregate amount of his or her purchases and sales is $10,000 or less during the calendar quarter.

When a savings association acts as an investment advisor to an investment company, paragraph (c) would permit an officer or employee to fulfill the filing requirement by filing the report required by SEC Rule 17j-1(d), 17 CFR 270.17j-1(d). SEC Rule 17j-1 applies whenever a savings association acts as an investment adviser to an investment company. Proposed part 551, by contrast, applies more broadly to the investment advisory activities of a savings association, whether the association provides the advice to an investment company or to any other customer. Savings associations should be aware when they may be conducting advisory activities that would subject them to both SEC and OTS reporting requirements. OTS specifically requests comment whether the rule should specifically address this point.

OTS also proposes amendments to its regulations governing the fiduciary powers of federal savings associations at 12 CFR part 550. The proposed rules codify a series of OTS legal opinions regarding the fiduciary powers of federal savings associations. This action also is consistent with the OCC's recent codification of a similar series of legal opinions regarding the fiduciary powers of national banks. 11 The rule would also streamline application procedures, clarify when a federal savings association may act in a fiduciary capacity without obtaining fiduciary powers from OTS, and make other minor or technical changes. These changes are discussed below.

A federal savings association's authority to exercise fiduciary powers derives from section 5(n) of the Home Owners' Loan Act (HOLA) (12 U.S.C. 1464(n)). Section 5(n)(1) of the HOLA states that OTS may authorize a federal savings association:

There is no case law specifically discussing the meaning of “located” in section 5(n). However, OTS has provided guidance regarding this term in a series of legal opinions. 12 OTS has opined that a federal savings association will be located for trust purposes in those states where it has an office in which it conducts fiduciary activities. OTS has indicated that a trust office may be in the form of a brick and mortar office or a fiduciary presence in the state that is the functional equivalent of operating a brick and mortar trust office—a so-called de facto trust office. To determine whether an association is operating an actual or de facto trust office in a particular state, OTS has looked at the nature of activities performed in the state. OTS has distinguished between fiduciary activities (such as executing documents, providing investment advice, making investments, and approving new accounts), which would establish location for trust purposes, and mere marketing activities, which would not. For example, OTS has concluded that a federal savings association is not located where its only activities are marketing its fiduciary services and performing specified incidental duties pursuant to its appointment as testamentary trustee or trustee holding real estate.

OTS has incorporated these interpretations in today's proposed rule. For the purposes of section 5(n), the proposed rule interprets “location” as the state in which a federal savings association “conducts fiduciary activities.” Specifically, proposed § 550.135(a) provides that the state laws that apply to federal savings associations under section 5(n) of the HOLA are the laws of the state in which the association conducts fiduciary activities. 13 For each individual state, the proposed rule would state that a federal savings association may conduct fiduciary activities in the four fiduciary capacities specifically authorized by the HOLA (trustee, executor, administrator, or guardian), and in any other fiduciary capacity the state permits for state banks, trust companies, or other corporations that compete with federal savings associations in that state. Consistent with OTS opinions, the proposed rule indicates that a federal savings association conducts fiduciary activities where it accepts a fiduciary appointment, executes documents accepting a fiduciary appointment, provides investment advice regarding fiduciary assets, or makes discretionary decisions regarding investment or distribution of fiduciary assets. See proposed § 550.60.

The proposed rule also provides that for each fiduciary relationship, the state referred to in section 5(n) of the HOLA is the state(s) in which the federal savings association conducts fiduciary activities for that relationship. We have not included a provision similar to that of the OCC, providing that if the federal savings association acts in a fiduciary capacity for a particular relationship in more than one state, the association may designate in which state the association is acting in a fiduciary capacity. 14 Many commenters on the OCC's rule expressed concern that the provision might implicate state choice of law issues. We invite specific comment on whether such a provision is necessary and within the scope of section 5(n) of the HOLA.

OTS legal interpretations have also analyzed the extent to which a federal savings association may conduct multi-state fiduciary activities, market services to customers in multiple states, and establish offices in multiple states. These opinions have concluded that the HOLA places no geographic limitation on the ability of a federal savings association to exercise fiduciary authority on a multi-state basis. 15 Proposed § 550.130(a) codifies these opinions and provides that a federal savings association may conduct fiduciary activities in any state. 16

As noted above, OTS has determined that a federal savings association is not located for trust purposes in a state where it only conducts activities ancillary to its fiduciary business. 17 Accordingly, proposed § 550.130(b) clarifies that when a federal savings association conducts fiduciary activities in one state, it may market its fiduciary services to, and act as a fiduciary for, customers located in any state, and may act as a fiduciary for relationships that include property located in other states, or as a testamentary trustee for a testator located in another state. In conducting these ancillary activities, the federal savings association must generally comply with the laws of the state in which it is located. 18

The proposed rule further provides that a federal savings association may establish or utilize an office in another state to provide ancillary services. 19 Proposed § 550.60 describes examples of ancillary activities drawn from recent interpretive opinions. These activities would include advertising, marketing, soliciting fiduciary business, answering questions and providing information to customers related to their accounts, acting as liaison between the association and the customer (such as forwarding requests for distribution, changes in investment objectives, forms, or funds received from the customer), and inspecting or maintaining custody of fiduciary assets or holding title to real property. 20 If a federal savings association, however, also conducts fiduciary activities in a state, it would be located in that state.

The fiduciary operations of federal savings associations are subject to a complex interplay between federal and state law. As noted above, section 5(n) of the HOLA indicates that OTS must look to state law to determine the scope of the fiduciary powers that may be granted to a federal savings association. 21 The HOLA, however, also grants OTS plenary authority to regulate all aspects of the operations of federal savings associations, including fiduciary operations (12 U.S.C. 1464(a)), and expressly confers upon OTS the power to authorize federal savings associations to exercise fiduciary powers (12 U.S.C. 1464(n)).

OTS has issued a number of opinions addressing the interaction of these provisions. Specifically, OTS has opined that a federal savings association with OTS-authorized fiduciary powers does not need to obtain a license or permission from a state in order to conduct fiduciary activities in that state. 22 Further, consistent with its role as exclusive regulator of federal savings associations, OTS has issued detailed fiduciary regulations at part 550.

Other than with respect to those state laws specifically referenced in HOLA § 5(n), the fiduciary activities of federal savings associations are governed solely by federal law and OTS. This position is consistent with the oft-stated principle that OTS totally occupies the field of the regulation of federal savings associations. 23 Under this approach, a state law purporting, for example, to restrict the advertising or affect the recordkeeping practices of a federal savings association's fiduciary operations, would not apply to the association.

Accordingly, proposed § 550.135(b) states that, except for those particular state laws that apply to a federal savings association by virtue of section 5(n) of the HOLA, state laws that purport to regulate any other aspect of a federal savings association's fiduciary activities do not apply to a federal savings association's fiduciary operations.

In this rulemaking, OTS also proposes to revise the application and notice requirements applicable to fiduciary operations. Under existing rules, a federal savings association must obtain prior approval from the OTS before exercising fiduciary powers, unless its activities are exempt under subpart E. 12 CFR 550.70. Under current § 550.130, a federal savings association may exercise only those fiduciary powers specified in the OTS approval. In addition, unless otherwise provided in the approval, a federal savings association may exercise fiduciary powers only from those offices listed in the application. 24 As a result, if a federal savings association wishes to exercise fiduciary powers that are not specified in the OTS approval or exercise fiduciary powers from a new office, the federal savings association must generally seek additional OTS review.

When OTS reviews an initial application for fiduciary powers, it analyzes a number of factors including, among others, the federal savings association's financial and managerial resources, its history of regulatory compliance, and level of fiduciary expertise. See 12 CFR 550.100. In light of this initial review, OTS believes that a new application is not always necessary to ensure safe and sound fiduciary operations when a federal savings association with existing trust powers expands its operations.

Application and notice requirements under the proposed rule would distinguish between new activities that materially differ from previously approved fiduciary activities and other types of activities. A federal savings association would engage in materially different activities, for example, if the business plan supporting the approved trust application contemplated only personal trust services and the savings association proposed to expand its activities to manage employee benefit accounts.

When a federal savings association conducts fiduciary activities that differ materially from previously approved fiduciary activities, OTS believes that its review of a complete trust application is necessary to ensure that the proposed operations are consistent with the association's experience, resources, and expertise. Accordingly, the proposed rule would require a federal savings association with previously approved trust powers to submit a complete trust application and obtain prior OTS approval before it may conduct fiduciary activities that are materially different from activities approved in the initial trust application.

OTS does not believe that a federal savings association engages in materially different activities when it merely expands the geographic scope of previously approved activities. Accordingly, the proposed rule would not require a new application before the federal savings association commences such activities. However, to ensure that OTS is adequately informed when an association expands the geographic scope of its activities into a new jurisdiction, the proposed rule would require a federal savings association to notify the OTS within ten days after commencing such fiduciary activities in a new state. 25 A federal savings association would not be required to notify OTS, however, to move previously approved activities within a state. Similarly, no notice is required if the activities in a new state will consist only of activities ancillary to the exercise of the association's fiduciary business.

OTS has incorporated the application and notice requirements in a chart at proposed § 550.70. OTS would also make other technical revisions to existing part 550 to reflect the described changes.

Existing § 550.300 permits a federal savings association to deposit funds of a fiduciary account that are awaiting investment or distribution in self-deposits or in deposits with an affiliate. If the FDIC does not insure the entire amount of the self-deposit or the affiliate deposit, the association must set aside collateral as security. 12 CFR 550.310.

OCC has a similar rule at 12 CFR 9.10. OCC's rule, however, states that if the FDIC does not insure the funds deposited with the institution, the bank must set aside collateral as security for a self-deposit, but may set aside collateral for the deposit with an affiliate. The OCC has interpreted this section to mean that the collateral for fiduciary funds deposited with an affiliate may come from either the bank or its affiliate. 26

When it revised § 550.310 in 1997, OTS clearly expressed its intent to conform the substance of its rules to the OCC's rules. See 62 FR 39477 (July 23, 1997). Accordingly, OTS proposes to amend its rules to state that if FDIC does not insure the entire amount of an affiliate deposit, either the savings association or the affiliate must set aside collateral as security.

Existing § 550.580 describes when a federal savings association may conduct fiduciary activities without obtaining fiduciary powers from OTS. The purpose of this section is to exempt those fiduciary relationships authorized in section 5(l) of the HOLA, 12 U.S.C. 1464(l). Section 5(l) states:

Existing § 550.580(c), however, also exempts a federal savings association when it acts as trustee of a fiduciary account that involves no active fiduciary duties, provided that applicable law authorizes the savings association to act in that capacity. Several associations have attempted to rely on paragraph (c) to argue they do not need to obtain fiduciary powers when acting as a directed trustee for non-IRA accounts. Since these activities are beyond the scope of section 5(l) of the HOLA, OTS is proposing to delete § 550.580(c).

OTS also proposes to amend § 550.580 to clarify that a federal savings association conducting fiduciary activities in an exempt capacity may only invest the funds in the trust or account in the investments described in § 550.600. Finally, the proposal includes additional clarifying amendments to this section and § 550.600.

Section 722 of the Gramm-Leach-Bliley Act requires federal banking agencies to use “plain language” in all proposed and final rules published after January 1, 2000. OTS invites your comments on how to make this proposed rule easier to understand. For example:

Did we organize the material to suit your needs? For example, several of the proposed rules set out requirements in a chart, rather than in standard regulation text. See proposed §§ 550.70, 551.90 and 551.100. OTS specifically requests comment whether these charts are clearer and more helpful. If not, how could the material be better organized?

Do we clearly state the requirements in the rule? If not, how could the rule be more clearly stated?

Does the rule contain technical language or jargon that is not clear? If so, what language requires clarification?

Would a different format (grouping and order of sections, use of headings, paragraphing) make the rule easier to understand? If so, what changes to the format would make the rule easier to understand?

Would more (but shorter) sections be better? If so, what sections should be changed?

What else could we do to make the rule easier to understand?

When an agency issues a rulemaking proposal, the Regulatory Flexibility Act (RFA) requires the agency to “prepare and make available for public comment an initial regulatory flexibility analysis” which will “describe the impact of the proposed rule on small entities.” 5 U.S.C. 603(a). Section 605 of the RFA allows an agency to certify a rule, in lieu of preparing an analysis, if the proposed rulemaking is not expected to have a significant economic impact on a substantial number of small entities.

OTS has prepared an IRFA for part 551 but not for part 550. Most of the proposed changes to part 550 merely codify OTS existing regulatory interpretations regarding the scope of fiduciary powers, multi-state operations, and the impact of federal law. To the extent that proposed part 550 modifies existing requirements, the proposed rule would reduce burden by eliminating application requirements under certain circumstances, by substituting notices for applications in other circumstances, and by providing greater flexibility regarding the collateralization of deposits of fiduciary funds. The rule would also clarify the scope of activities that are exempt from part 550 under section 5( l ) of the HOLA. While the proposed rule would eliminate § 550.580(c), which exempts federal savings associations that act as trustees of fiduciary accounts that involve no active fiduciary duties, OTS is not aware of any small federal savings associations that rely on this provision. Accordingly, OTS certifies to the Chief Counsel of Advocacy of the Small Business Administration that the proposed changes to part 550 will not have a significant economic impact on a substantial number of small entities.

Because the recordkeeping and confirmation requirements are new for savings associations, OTS cannot determine whether the proposed addition of part 551 will have a significant impact on a substantial number of small entities. However, we have consulted supporting statements filed by the OCC for substantially identical requirements in connection with a 1999 submission under the Paperwork Reduction Act. Because savings associations are now considered “banks” for purposes of the broker-dealer registration requirements and because OTS has modeled the proposed rule on the OCC's recordkeeping and confirmation rules, OTS believes that OCC's estimated annual paperwork cost of complying with the regulations provides a reasonable starting point for OTS's analysis of the cost to small business entities to comply with the proposed rule. These estimates are discussed under section B—Requirements of the proposed rule.

A description of the reasons why OTS is considering this action, and a statement of the objectives of, and legal basis for, proposed part 551 are included in the supplementary material above.

Proposed part 551 would apply to savings associations that effect securities transactions for customers. OTS calculates that as of April 26, 2002, it regulates approximately 1,009 savings associations. Of these savings associations approximately 557 savings associations hold assets under $150 million. Small depository institutions are generally defined, for RFA purposes, as those with assets under $150 million.

In all likelihood, however, this number substantially overstates the number of small savings associations that may be effected by the rule. No savings associations are currently registered with the SEC as broker-dealers, although some provide such services to their customers through arrangements with a third party broker-dealer. Because the new SEC rule permitting savings associations to perform broker-dealer activities without registering is so recent, OTS has no information concerning how many of its savings associations, large or small, have commenced or are contemplating commencing these operations. Accordingly, OTS specifically seeks comment on the number and size of small savings associations that may be affected by this rule.

As described more fully in the supplementary information section, the proposed rule would require savings associations to retain records of securities transactions, send confirmation of the transactions to customers, settle securities transactions within certain timeframes, and establish and maintain specific written policies and procedures regarding securities transactions.

Subpart A of the proposed rule establishes the minimum recordkeeping requirements for savings associations concerning securities transactions with their customers. This provision requires that the savings association maintain essential records necessary to track securities transactions. This type of recordkeeping is a usual and customary process for a savings association. Consequently, most savings associations should be partially or fully prepared to meet the recordkeeping requirements. While we believe that this requirement should not impose significant burdens, savings associations may incur additional personnel (managerial, computer, and support staff), data storage, and other costs to the extent that existing resources are insufficient.

Subpart B would establish requirements for confirmation notices and subpart C would address the timing of settlement for securities transactions. To the extent that existing practices and available resources are insufficient, savings associations may need the assistance of legal and securities professionals and other personnel (managerial, computer, and support staff) to ensure that notices meet the content requirements and are provided within the time frames set forth in the regulation, and to ensure that securities transactions close within the times specified in the rule.

Finally, subpart D would require the savings association to establish and follow various policies and procedures to govern securities transactions. Savings associations commonly develop and implement policies and procedures in many of the areas addressed by the proposed rules (for example, the assignment of responsibility for the oversight of personnel). Accordingly, most savings associations should be partially prepared to meet these requirements. However, the development of policies and procedures on matters specific to securities transactions may require the assistance of legal and securities professionals. Compliance with these policies and procedures may require additional personal, training, and other costs.

Based on OCC estimates, OTS calculates that this rule will impose at least $264 in additional costs on small savings associations that begin to effect securities transactions on behalf of customers. 27 The development of policies and procedures, however, may require the assistance of legal or securities professionals which were not included in OCC's estimate. Accordingly, OTS has included additional costs of $305 to $403 to reflect the efforts of these professionals. 28 Accordingly, OTS estimates that the total cost of complying with this rule will be $569 to $667 per small institution. OTS notes that these costs will drop in subsequent years because thrifts will not be required to develop, and will only be required to update, policies and procedures on effecting securities transactions.

OTS solicits comment on its estimates of the costs of the potential burdens and on ways to minimize burden.

Section 603(c) of the RFA requires OTS to describe any significant alternatives to the proposed rule that accomplish the stated objectives of the rule while minimizing any significant economic impact of the rule on small entities. Section 603(c) lists several examples of significant alternatives, including: (1) Establishing different compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) clarifying, consolidating, or simplifying compliance and reporting requirements for small entities; (3) using performance standards rather than design standards; and (4) excepting small entities from coverage of the rule or a part of the rule.

OTS considered recommending, rather than requiring, recordkeeping and confirmation provisions regarding securities transactions conducted by savings associations, but decided that such an approach was inappropriate. The SEC and the other federal banking regulators have created a regulatory scheme designed to protect investors through adequate disclosure of information and to discourage and detect fraudulent securities practices through prudent recordkeeping requirements. OTS believes that similar provisions are necessary to bring the savings association industry into conformity with the standards of the securities and banking industries for effecting securities transactions.

OTS, however, has attempted to minimize the economic impact of the proposed rules on savings associations, including small savings associations, while still achieving the overall objectives of the regulation. OTS has included several exemptions to the rule that may be available to small savings associations. For example, proposed § 551.20(b)(1) exempts savings associations from certain recordkeeping and policy and procedure requirements if the institution conducts fewer than 500 securities transactions for customers (excluding transactions in government securities). Similarly, proposed § 551.20(b)(2) exempts savings associations who conduct fewer than 500 government securities transactions from certain recordkeeping requirements. OTS believes that many small associations will take advantage of these exemptions. Moreover, OTS continues to have the ability under 12 CFR 500.30(a) to waive any recordkeeping or confirmation requirements upon a finding of good cause. This provision permits OTS to minimize any significant economic impact of a provision on a specific institution on a case-by-case basis.

Finally, OTS has included a substantial amount of flexibility in the rule. For example, a savings association may maintain required records in any manner, form, or format that it deems appropriate. Further, the rules would specifically permit the use of electronic storage media and the provision of notices through electronic means. See proposed §§ 551.60 and 551.110. In addition, several provisions permit a savings association, through the agreement with the customer, to modify the requirements of the part.

OTS requests comment on the burdens associated with the proposed rule and whether any further exceptions for small institutions would be appropriate.

There are no federal rules or statutes that duplicate, overlap, or conflict with the proposed rule. However, as noted above, the SEC and the other banking regulators have adopted substantially similar recordkeeping and confirmation requirements for broker-dealers and other depository institutions.

OTS invites comments on the burdens associated with the proposed rule that affect small savings associations, and whether any modifications or exemptions from the rules for small savings associations would be appropriate.

OTS has a continuing interest in the public's opinion of our collections of information. OTS welcomes any comments on the collection requirements in the proposal. OTS specifically invites comment on:

(1) Whether the proposed collection of information contained in this notice of proposed rulemaking is necessary for the proper performance of the agency's functions, including whether the information has practical utility;

(2) The accuracy of the agency's estimate of the burden of the proposed information collection;

(3) Ways to enhance the quality, utility, and clarity of the information to be collected; and

(4) Ways to minimize the burden of the information collection on respondents, including through the use of automated collection techniques or other forms of information technology.

Respondents/recordkeepers are not required to respond to this collection of information unless it displays a currently valid OMB control number. The collection of information requirements contained in this notice of proposed rulemaking have been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Send comments on the collection of information to the Office of Management and Budget, Office of Information and Regulatory Affairs, Attention: Alexander T. Hunt, Washington, DC 20503, or e-mail to ahunt@omb.eop.gov , with copies to Information Collection Comments, Chief Counsel's Office, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, or e-mail to infocollection.comments@ots.treas.gov.

The collection of information requirements regarding fiduciary activities in this proposed rule are found in § 550.125. OTS requires the information called for under § 550.125 in order to know when a federal savings association is acting in a fiduciary capacity in a new state or conducting fiduciary activities that differ from those that OTS has already approved. Under a paperwork submission OTS filed in 2001 (OMB Control No. 1550-0037), OTS has estimated that 10 respondents file trust powers applications annually and spend approximately 9 hours compiling the application. Although the number of respondents should not change under the proposal, the hours needed to file the streamlined notice required in § 550.125 should be significantly less than the time needed to file a complete trust powers application. Substituting the notice requirement for a complete application should decrease the burden hours from 9 to approximately 3, resulting in a decrease in burden hours from 90 to 30.

OTS requires the information called for under §§ 551.50, 551.70-.100, 551.140, and 551.150 of the proposal to establish an audit trail. OTS uses this audit trail in its regulatory examinations as a tool to evaluate a savings association's compliance with banking and securities laws and regulations, such as the anti-fraud provisions of the federal securities laws. Further, the records provide a basis for adequate disclosure to customers who effect securities transactions through savings associations.

Under 12 U.S.C. 1464(n), OTS has supervisory responsibility for the fiduciary powers of federal savings associations. Further, under 12 U.S.C. 1463(a) and 12 U.S.C. 1464(a), the Director of OTS may prescribe rules and regulations to carry out its responsibility to provide for the operation and regulation of savings associations. The proposed recordkeeping and confirmation rules are necessary for OTS to effectively carry out its statutory responsibilities.

In estimating the potential number of respondents, OTS has used the number of OTS-supervised savings associations as of April 26, 2002. That number is 1009. Our estimate of the burden hours for respondents is based on the OCC's and FDIC's paperwork discussions in their final rules published in 1995 and 1996, respectively, as well as those agencies' updates of their paperwork analyses in 1999.

The recordkeepers/respondents are federal and state savings associations.

Estimated number of recordkeepers and/or respondents: 1009.

Estimated average annual burden hours per recordkeeper/respondent: 11.

Estimated total annual recordkeeping burden: 11,099 hours.

As noted, many savings associations contract with third-party registered broker-dealers to effect securities transactions. Moreover, at the request of OTS trust examiners, many federal savings associations with trust departments have been keeping records similar to those required by the proposal on recordkeeping and confirmation requirements. Accordingly, OTS anticipates that the start up costs to savings associations of the recordkeeping and confirmation requirements will be minimal. Records under part 551 are to be maintained for at least three years.

OTS has determined that the proposed rule will not result in expenditures by state, local, or tribal governments or by the private sector of $100 million or more. Accordingly, this rulemaking is not subject to section 202 of the Unfunded Mandates Act.

OTS has determined that the proposed rule does not constitute a “significant regulatory action” for purposes of Executive Order 12866.

Accordingly, OTS amends chapter V, title 12, Code of Federal Regulations as set forth below:

Interested persons are invited to participate in the making of the proposed rule by submitting such written data, views, or arguments as they may desire. Communications shall identify the Rules Docket number and be submitted in triplicate to the address specified above. All communications received on or before the closing date for comments, specified above, will be considered before taking action on the proposed rule. The proposals contained in this action may be changed in light of the comments received.

Submit comments using the following format:

• Organize comments issue-by-issue. For example, discuss a request to change the compliance time and a request to change the service bulletin reference as two separate issues.

• For each issue, state what specific change to the proposed AD is being requested.

• Include justification (e.g., reasons or data) for each request.

Comments are specifically invited on the overall regulatory, economic, environmental, and energy aspects of the proposed rule. All comments submitted will be available, both before and after the closing date for comments, in the Rules Docket for examination by interested persons. A report summarizing each FAA-public contact concerned with the substance of this proposal will be filed in the Rules Docket.

Commenters wishing the FAA to acknowledge receipt of their comments submitted in response to this action must submit a self-addressed, stamped postcard on which the following statement is made: “Comments to Docket 2001-NM-378-AD.” The postcard will be date stamped and returned to the commenter.

Any person may obtain a copy of this NPRM by submitting a request to the FAA, Transport Airplane Directorate, ANM-114, Attention: Rules Docket 2001-NM-378-AD, 1601 Lind Avenue, SW., Renton, Washington 98055-4056.

On August 29, 1996, the FAA issued AD 96-18-18, amendment 39-9744 (61 FR 47808, September 11, 1996), applicable to all Airbus Model A300-600 series airplanes, to require repetitive inspections to detect cracking of the upper radius of the forward fitting of frame 47, and repair if necessary. That action was prompted by results of full-scale fatigue testing, which revealed cracking in the upper radius of frame 47. The requirements of that AD are intended to prevent such fatigue cracking, which could result in reduced structural integrity of frame 47 of the fuselage.

Based on investigations and analyses and reports by the manufacturer, and in concert with the determination by the Direction Générale de l'Aviation Civile (DGAC), which is the airworthiness authority for France, the FAA has determined that the inspection thresholds and intervals required by AD 96-18-18 must be shortened. This proposed AD follows from these findings.

The FAA issued a related AD that applies to Model A300 B2 and B4 series airplanes. AD 96-13-11, amendment 39-9679 (61 FR 35122, July 5, 1996), mandates the incorporation of Airbus Industrie A300 Supplemental Structural Inspection Document (SSID). That SSID includes a requirement to inspect in accordance with Airbus Service Bulletin A300-53-0246, which would be required by paragraph (d) of this proposed AD.

Airbus has issued Service Bulletin A300-53-6029, Revision 05, dated April 11, 2001 (for Model A300-600 series airplanes). AD 96-18-18 cited Revision 02 of this service bulletin as the appropriate source of service information for accomplishment of the required repetitive eddy current inspections to detect cracking of the upper radius of the forward fitting of frame 47. Subsequent service bulletin revisions provide improved inspection methods. Flight cycles were incorporated into the compliance times and the corresponding values were adjusted in flight hours.

Airbus has also issued Service Bulletin A300-53-0246, Revision 03, dated April 11, 2001, which describes the same procedures as those in Service Bulletin A300-53-6029 for inspecting the same area on Model A300 B2 and B4 series airplanes.

The DGAC classified these service bulletins as mandatory and issued French airworthiness directive 2001-355(B), dated August 8, 2001, to ensure the continued airworthiness of these airplanes in France.

These airplane models are manufactured in France and are type certificated for operation in the United States under the provisions of section 21.29 of the Federal Aviation Regulations (14 CFR 21.29) and the applicable bilateral airworthiness agreement. Pursuant to this bilateral airworthiness agreement, the DGAC has kept the FAA informed of the situation described above. The FAA has examined the findings of the DGAC, reviewed all available information, and determined that AD action is necessary for products of this type design that are certificated for operation in the United States.

Since an unsafe condition has been identified that is likely to exist or develop on other airplanes of the same type design registered in the United States, the proposed AD would supersede AD 96-18-18 to continue to require repetitive eddy current inspections to detect cracking of the upper radius of the forward fitting of frame 47, and repair if necessary. The actions would be required to be accomplished in accordance with the service bulletins described previously, except as discussed below. The proposed AD also would require that operators report results of inspection findings to Airbus. These inspection reports will enable the DGAC, the FAA, and the manufacturer to develop a better understanding of the nature and extent of the problem. This understanding will aid in developing a more permanent resolution to the cracking problem. The results of these reports may warrant further rulemaking.

Although the service bulletins specify that the manufacturer may be contacted for disposition of certain repair conditions, this proposal would require the repair of those conditions to be accomplished per a method approved by either the FAA or the DGAC (or its delegated agent). In light of the type of repair that would be required to address the identified unsafe condition, and in consonance with existing bilateral airworthiness agreements, the FAA has determined that, for this proposed AD, a repair approved by either the FAA or the DGAC would be acceptable for compliance with this proposed AD.

Unlike the procedures described in the service bulletins, this proposed AD would prohibit further flight if cracks are detected in the upper radius of the forward fitting of frame 47. However, the FAA may consider allowing continued flight with cracks on a case-by-case basis. Paragraph (f)(1) of this proposed AD would allow operators to request an alternative method of compliance that would allow continued flight with cracks, provided data are presented to justify the use of such an alternative method. The manufacturer has advised that it may propose an alternative method of compliance with the requirements of this AD to include a repetitive inspection interval that is based on crack size. Once this method is developed, approved, and available, the FAA may consider additional rulemaking.

In addition, the FAA finds that the thresholds specified in the service bulletin for Model A300-600 series airplanes (11,500 total flight cycles/29,600 total flight hours) are inadequate to ensure the safety of affected airplanes. Cracking has recently been found on an airplane at a lower threshold, so the FAA has determined that those thresholds must be reduced to 10,000 total flight cycles/26,000 total flight hours.

Due to organizational restructuring within the Transport Airplane Directorate since AD 96-18-18 was issued, this proposed AD specifies that operators direct their requests for repair method approvals to the Manager of the FAA's International Branch, ANM-116 (not the Standardization Branch).

The applicability of AD 96-18-18 and this proposed AD includes Model A300-600 series airplanes. However, the model designation of these airplanes has been revised in this proposed AD to conform to the type certificate data sheet listing.

AD 96-18-18 specifies the compliance times in terms of “landings.” This proposed AD refers instead to “flight cycles” to more closely correspond to the terminology of the French airworthiness directive and the revised service bulletins described previously.

This is considered to be interim action. The manufacturer has advised that it currently is developing repair procedures that will address the unsafe condition identified in this AD and terminate the repetitive inspections. Once these procedures are developed, approved, and available, the FAA may consider additional rulemaking.

There are approximately 127 airplanes of U.S. registry that would be affected by this proposed AD.

The inspection that is currently required by AD 96-18-18, and retained in this proposed AD, takes approximately 4 work hours per airplane, per inspection cycle, to accomplish, at an average labor rate of $60 per work hour. Based on these figures, the cost impact of the currently required actions is estimated to be $240 per airplane, per inspection cycle.

The new proposed actions would take approximately 5 work hours per airplane to accomplish, at an average labor rate of $60 per work hour. Based on these figures, the cost impact of the proposed requirements of this AD on U.S. operators is estimated to be $38,100, or $300 per airplane, per inspection cycle.

The cost impact figures discussed above are based on assumptions that no operator has yet accomplished any of the current or proposed requirements of this AD action, and that no operator would accomplish those actions in the future if this AD were not adopted. The cost impact figures discussed in AD rulemaking actions represent only the time necessary to perform the specific actions actually required by the AD. These figures typically do not include incidental costs, such as the time required to gain access and close up, planning time, or time necessitated by other administrative actions.

The regulations proposed herein would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government. Therefore, it is determined that this proposal would not have federalism implications under Executive Order 13132.

For the reasons discussed above, I certify that this proposed regulation (1) is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and (3) if promulgated, will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act. A copy of the draft regulatory evaluation prepared for this action is contained in the Rules Docket. A copy of it may be obtained by contacting the Rules Docket at the location provided under the caption ADDRESSES.

These proposed regulations would affect disability determinations and decisions we make for you under title II and title XVI of the Act. In addition, to the extent that Medicare and Medicaid eligibility are based on entitlement to benefits under title II and eligibility for benefits under title XVI, these proposed regulations would also affect the Medicare and Medicaid programs.

Under title II of the Act, we provide for the payment of disability benefits if you are disabled and belong to one of the following three groups:

• Workers insured under the Act;

• Children of insured workers; and

• Widows, widowers, and surviving divorced spouses (see 20 CFR 404.336) of insured workers.

Under title XVI of the Act, we provide for Supplemental Security Income (SSI) payments on the basis of disability if you have limited income and resources.

Under both the title II and title XVI programs, disability means the inability to “. . . engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.” (Sections 223(d)(1)(A) and 1614(a)(3)(A) of the Act.) This definition applies if you file a claim under title II or if you file a claim as an adult under title XVI. (There is a different definition of disability for children filing under title XVI. See section 1614(a)(3)(C) of the Act.)

In addition, we only consider you to be disabled if your physical or mental impairment(s) is so severe that you are not only unable to do your previous work, but you cannot, considering your age, education, and work experience, engage in any other kind of substantial gainful work that exists in the national economy. This is true regardless of whether this kind of work exists in the immediate area in which you live, or whether a specific job vacancy exists for you, or whether you would be hired if you applied for work. (See sections 223(d)(2)(A) and 1614(a)(3)(B) of the Act.)

We will not consider you under a disability unless you furnish medical and other evidence that we need to show that you are disabled. (See section 223(d)(5)(A) and, by reference to section 223(d)(5), section 1614(a)(3)(H) of the Act.) However, when we decide whether you are disabled (or whether you continue to be disabled), we will develop a complete medical history of at least the preceding twelve months for any case in which we decide that you are not disabled. (See sections 223(d)(5)(B) and 1614(a)(3)(H) of the Act.)

Section 205(a) of the Act and, by reference to section 205(a), section 1631(d)(1) provide that:

To decide whether you are disabled under this statutory definition, we use a five-step sequential evaluation process, which we describe in our regulations at §§ 404.1520 and 416.920. We follow the five steps in order and stop as soon as we can make a determination or decision. The steps are:

1. Are you working and is the work you are doing substantial gainful activity? If you are working and engaging in substantial gainful activity, we find that you are not disabled regardless of your medical condition or your age, education, and work experience. If you are not, we go on to step 2 of the sequence.

2. Do you have any impairment or combination of impairments which significantly limits your physical or mental ability to do basic work activities? If you do not, we find that you are not disabled. If you do, we go on to step 3 of the sequence.

3. Do you have an impairment(s) that meets or equals the severity of an impairment listed in appendix 1 of subpart P of part 404 of our regulations? If you do, and the impairment(s) meets the duration requirement, we find you disabled. If you do not, we go on to step 4 of the sequence.

4. Considering your RFC and the physical and mental demands of the work you have done in the past, does your impairment(s) prevent you from doing your past relevant work? If not, we find that you are not disabled. If so, we go on to step 5 of the sequence.

5. Considering your RFC and your age, education, and past work experience, does your impairment(s) prevent you from doing any other work? If it does, and your impairment(s) meets the duration requirement, we find that you are disabled. If it does not, we find that you are not disabled.

We use different sequential evaluation processes if we are deciding whether your disability continues. See §§ 404.1594 and 416.994 of our regulations. However, these different processes also include steps that consider your RFC and past relevant work, and your ability to adjust to other work considering your RFC, age, education, and work experience.

We propose changing several sections in subpart P of part 404 and subpart I of part 416 to clarify our longstanding rules about how we make determinations and decisions for initial applications at steps 4 and 5 of the sequential evaluation process. The changes we propose will also apply to steps 7 and 8 of the sequential evaluation processes for determining continuing disability in § 404.1594(f), and steps 6 and 7 in § 416.994(b)(5). However, for clarity we will refer in this preamble only to the steps of the sequential evaluation process for initial applications.

Several of the proposed revisions will clarify our longstanding interpretation of our rules that we assess your RFC once, after we have found that you have a severe impairment(s) that does not meet or equal a listing; i.e., after step 3 but before we consider step 4. We use this RFC assessment first to determine, at step 4, whether you are able to do any of your past relevant work. If we determine that you cannot perform past relevant work, or you have no past relevant work, we use the same RFC assessment at step 5 to determine whether you are able to make an adjustment to other work, given your RFC, age, education, and work experience.

Under the Act and §§ 404.1512 and 416.912 of our regulations, you generally have the burden of proving your disability. You must furnish medical and other evidence we can use to reach conclusions about your impairment(s) and its effect on your ability to work on a sustained basis. Our responsibility is to make every reasonable effort to develop your complete medical history. That includes arranging for consultative examinations, if necessary. We are responsible for helping you produce evidence that shows whether you are disabled.

Our administrative process was designed to be nonadversarial. See §§ 404.900(b) and 416.1400(b) of our regulations; Richardson v. Perales, 402 U.S. 389, 403 (1971); Sims v. Apfel, 120 S. Ct. 2080, 2083-85, 2086 (2000). In addressing burdens of proof, it is critical to keep in mind that we are using a term in our nonadversarial administrative process that describes a process normally used in adversarial litigation. “Burdens of proof” operate differently in the disability determination process than in a traditional lawsuit.

In the administrative process, the burden of proof generally encompasses both a burden of production of evidence and a burden of persuasion about what the evidence shows. Director, OWCP v. Greenwich Collieries, 512 U.S. 267, 273 (1994) (citing Powers v. Russell, 30 Mass. 69, 76 (1833). You shoulder the dual burdens of production and persuasion through step 4 of the sequential evaluation process. See Bowen v. Yuckert, 482 U.S. 137, 146 n.5 (1987).

Although you generally bear the burden of proving disability throughout the sequential evaluation process, there is a limited shift in the burden of proof to us “only if the sequential evaluation process proceeds to the fifth step * * *.” Bowen v. Yuckert, id. When the process proceeds to the fifth step, this means that you have demonstrated the existence of a severe impairment(s) resulting in an RFC that prevents the performance of past relevant work. When we decide that you are not disabled at step 5, this means that we have determined that there is other work that you can do. To make this finding, we must provide evidence that demonstrates that jobs exist in significant numbers in the national economy that you can do, given your RFC, age, education, and work experience. In legal terms, this is a burden of production of evidence.

This burden shifts to us because, once you establish that you are unable to do any past relevant work, it would be unreasonable to require you to produce vocational evidence showing that there are no jobs in the national economy that you can perform, given your RFC. However, as stated by the Supreme Court, “It is not unreasonable to require the claimant, who is in a better position to provide information about his own medical condition, to do so.” Bowen v. Yuckert, id. Thus, the only burden shift that occurs at step 5 is that we are required to prove that there is other work that you can do, given your RFC, age, education, and work experience. That shift does not place on us the burden of proving RFC.

When the burden of production of evidence shifts to us at step 5, our role is to obtain evidence to assist in impartially determining whether there is a significant number of jobs in the national economy you can do. Thus, we have a burden of proof even though our primary interest in the outcome of the claim is that it be decided correctly. As required by the Act, the ultimate burden of persuasion to prove disability, however, remains with you.

The second sentence of §§ 404.1501(g) and 416.901(j) is very long and it includes a number of clauses. We propose to clarify this sentence by numbering and listing the clauses and by revising some language. This includes clarifying in proposed (g)(2) that assessment of RFC is our responsibility (“our residual functional capacity assessment”) and that we use this assessment at steps 4 and 5 of the sequential evaluation process.

In paragraph (a), we propose to revise the second sentence, to delete the third sentence, and to add four new sentences. The revisions in the second sentence will clarify our longstanding policy that, when we consider your “previous work,” we consider only work that was “past relevant work.” Past relevant work is work that you performed within the past 15 years, that was substantial gainful activity, and that lasted long enough for you to learn how to do it. See SSR 82-62, “Titles II and XVI: A Disability Claimant's Capacity To Do Past Relevant Work, In General,” Social Security Rulings, Cumulative Edition, 1982, p. 158.

The current third sentence explains that we consider your RFC, age, education, and work experience when we determine whether you can do other work; i.e., at step 5 of the sequential evaluation process. We propose to replace this sentence with four new sentences that will provide more detail about this policy, including cross-references to our rules on the sequential evaluation process and RFC. They will also clarify that we assess RFC once, and that we use this assessment at both step four and step five of the sequential evaluation process.

We propose several revisions in these sections to clarify both your responsibility and our responsibility. We propose to change the heading of these sections from “Evidence of your impairment” to “Evidence” because, as we discuss below, we propose to add a provision that is not about evidence of your impairment; i.e., a provision that is about our responsibility, at step 5 of the sequential evaluation process, to provide evidence of the existence of jobs.

We propose to make two changes in paragraph (c) to make it clearer. These are not substantive changes. First, we propose to add a new second sentence to paragraph (c) to clarify, consistent with the remainder of the current paragraph, that we may ask for non-medical information about functioning or about other non-medical issues in addition to medical information. Second, we propose to make a slight modification to the current second sentence (which will become the new third sentence) to make it clearer.

We also propose to add a new paragraph (g), “Other work” to explain our burden at step 5. It will explain that, in order to determine that you can make an adjustment to other work, we must provide evidence of the existence of work in the national economy that you can do, given your RFC and vocational factors. The new paragraph will include cross-references to regulations that explain how we evaluate your ability to do other work (§§ 404.1560 through 404.1569a and 416.960 through 416.969a, as appropriate).

The new paragraph will also clarify our longstanding interpretation of the statutory requirement that we consider your age, education, and work experience as well as your impairment(s) when we determine the ability to do other work at step 5.

Our use of the phrase “make an adjustment to other work” is not new. We used the phrase when we originally published proposed rules on the medical/vocational guidelines in appendix 2, subpart P of regulations part 404 (the grid rules) in 1978:

See 43 FR 9284, 9288 (March 7, 1978). We used the same language in the preamble when we published the final rules for the medical/vocational guidelines (see 43 FR 55349, 55352 (November 28, 1979)) and have used similar language in our Policy Interpretation Rulings (see, e.g., SSR 83-11, “Titles II and XVI Capability To Do Other Work—The Exertionally Based Medical-Vocational Rules Met,” Social Security Rulings, Cumulative Edition, 1983, p. 184). More recently, we have used the same or similar language in publications that we use to help the public better understand whether they may qualify for disability benefits under the Act and our regulations. Therefore, we are proposing to use this language in our regulations.

We propose to revise the language in paragraph (a) of these sections to make it clearer. We propose to divide it into five separate paragraphs. We also propose to modify the current language to explain more clearly what the five steps of the sequential evaluation process are, and to reflect the provisions of proposed new paragraph (e), which we discuss below.

We propose to add a new paragraph (e) to this section to explain that, after we decide that you are not working and have a severe impairment(s) that does not meet or equal any listing, we will assess your RFC. We then use this RFC assessment at step 4 to determine whether you are able to do any past relevant work and, if we make a determination at step 5, we use the same RFC assessment in determining whether you can do any other work.

Because we propose to add a new paragraph (e), we also propose to redesignate current paragraphs (e) and (f) as paragraphs (f) and (g). We also propose to revise these paragraphs to make changes consistent with proposed changes in other rules already described. For example, they will refer to “our residual functional capacity assessment,” to “past relevant work” (instead of “work you have done in the past” or “past work experience”), and to making “an adjustment to other work.” Likewise, proposed paragraph (g) (current paragraph (f)) will clarify that, at step 5, we consider “the same residual functional capacity assessment” we used at step 4. In current paragraph (e) (proposed paragraph (f)), we also propose to change the phrase, “[i]f we cannot make a decision based on your current work activity or on medical facts alone,” to “[i]f we cannot make a determination or decision at the first three steps of the sequential evaluation process,” in order to make it clear that this language has always referred to determinations or decisions at steps 1, 2 and 3 of the sequential evaluation process. We also propose to make a comparable conforming change to §§ 404.1560(a) and 416.960(a).

We propose to revise current paragraph (f)(2) (proposed paragraph (g)(2)) to reflect that we are adding a second special medical-vocational profile under which we may find you disabled without referring to our grid rules. When we discuss changes we are proposing to §§ 404.1562 and 416.962 later in this notice, we explain the second profile and our reasons for proposing to include it. We also propose to modify the language that is in current paragraph (f)(2) (proposed paragraph (g)(2)) to delete the partial description of the first special medical-vocational profile that is currently in our regulations because it is duplicative of information already contained in §§ 404.1562 and 416.962.

Finally, we are proposing a number of minor editorial changes in current paragraphs (e) and (f) (proposed paragraphs (f) and (g)).

To make current paragraph (a) easier to understand, we propose to revise the paragraph by breaking it into five numbered subparagraphs with headings. We also propose to reorganize and clarify some of the text.

In proposed paragraph (a)(3), “Evidence we use to assess your residual functional capacity,” we propose to include references to §§ 404.1512 and 416.912, which explain your burden to provide evidence of the existence and severity of your impairment(s) and how it affects your functioning, and our responsibility to develop a complete medical history and to arrange for a consultative examination(s) if necessary.

In paragraph (a)(5), “How we will use our residual functional capacity assessment,” we propose to explain that we first use our RFC assessment to decide if you can do past relevant work and to explain that, if you cannot do past relevant work, or do not have any past relevant work, we use the same assessment to decide, at step 5, if you can make an adjustment to other work.

In addition, we propose other changes in this section to clarify our rules. In paragraph (a)(1), “Residual functional capacity assessment,” we propose to add a sentence to explain that RFC is the most you can do despite your limitations. This will incorporate into our regulations a clarification that we currently provide in SSR 96-8p, “Titles II and XVI: Assessing Residual Functional Capacity in Initial Claims,” 61 FR 34474 (July 2, 1996). We also propose to incorporate another clarification provided in that SSR by explaining in paragraph (a)(2), “If you have more than one impairment,” that, when we assess RFC, we will consider all medically determinable impairments of which we are aware, including impairments that are not “severe.”

Proposed paragraph (a)(3) will clarify the fifth, sixth, and seventh sentences of current paragraph (a), which discusses the evidence we consider when assessing RFC. Our intent is to clarify three points about how we consider evidence of pain and other symptoms in our RFC assessments. First, we will make clear that the phrase “observations by your treating and examining physicians or psychologists,” in the current rule, includes “statements about what you can still do,” as discussed in §§ 404.1513 and 416.913. Second, we will clarify that we consider descriptions and observations of your impairment-related limitations from both medical and non-medical sources. Third, by removing the phrase “that are important in the diagnosis and treatment of your medical condition” from the fifth sentence of current section (a), we will make clear that we consider all limitations that result from your medically determinable impairments, not just those that are important in the diagnosis and treatment of a medical condition. We also propose to delete the entire eighth sentence, which could be misinterpreted to mean that we may or may not consider evidence that we already have. Because that is not our intent, and because these proposed rules make clear that we consider all relevant medical and nonmedical evidence in the case record, we believe this language is unnecessary.

We propose to revise the last sentence of current paragraph (a) (which will become the last sentence of proposed (a)(5)(ii)) to remove the language that discusses our rules on RFC assessment in deciding whether your disability continues or ends. Those rules are already discussed in §§ 404.1594 and 416.994, and the revised language will simply direct you to those sections.

We propose a number of other editorial changes to the current rule. These changes are intended only to clarify the current language and to reorganize the provisions into a more logical order.

We propose to revise the heading of these sections, which are currently titled “Responsibility for assessing and determining residual functional capacity.” The two words “and determining” are superfluous. Our assessment is our determination about RFC.

The other changes we propose in this section are editorial. To make the section easier to understand, we propose to break up the current single paragraph into three paragraphs that address the responsibilities of:

• State agency medical and psychological consultants (proposed paragraph (a));

•State agency disability hearing officers (proposed paragraph (b)); and

• Administrative law judges and Appeals Council administrative appeals judges (proposed paragraph (c)).

We propose to change the heading, putting it into active voice, to make the meaning clearer. We propose to make changes in paragraphs (b), “Past relevant work,” and (c), “Other work,” consistent with the changes we are proposing in other sections, already noted above.

For clarity, we propose to revise paragraph (b) by dividing it into three subparagraphs, designated (b)(1) through (b)(3). We propose to add a new sentence in proposed paragraph (b)(1), “Definition of past relevant work,” defining “past relevant work” as work you have done within the past 15 years, that was substantial gainful activity, and that lasted long enough for you to learn how to do it. This definition is based on our longstanding interpretation in SSR 82-62, already noted above. We also propose to add a cross-reference to § 404.1565(a) or 416.965(a), as appropriate, because these paragraphs explain how we determine the 15-year period.

We propose to add new language in paragraph (b)(2), “Determining whether you can do your past relevant work,” to explain how we obtain information that we need to determine, at step 4 of the sequential evaluation process, whether your impairment(s) prevents you from doing your past relevant work. It will indicate that we ask you for information about work you have done in the past, and that we may ask other people who know about your past work. This is consistent with the provisions in current §§ 404.1565(b) and 416.965(b), and we propose to include cross-references to those sections in paragraph (b)(2).

We also propose to explain in paragraph (b)(2) that we may use the services of vocational experts or vocational specialists, or other resources such as the “Dictionary of Occupational Titles” to obtain information that we need to determine whether you can do your past relevant work. For example, we may use one of these sources to determine how the work you did is usually performed in the national economy. This is a longstanding policy interpretation set out in SSR 82-61, “Titles II and XVI: Past Relevant Work—The Particular Job or the Occupation As Generally Performed,” Social Security Rulings, Cumulative Edition, 1982, p. 185.

Proposed paragraph (b)(3), “If you can do your past relevant work” will be essentially the same as the second sentence of current paragraph (b). We have edited it and made it into two sentences for clarity.

We propose to modify paragraph (c) to make clear that, if we decide at step 5 that you are not disabled, we are responsible for providing evidence of other work you can do (consistent with proposed §§ 404.1512(g) and 416.912(g)). The modified paragraph will also make clear that we are not responsible for providing additional evidence of RFC or for making another RFC assessment at step 5. This is because we use the same RFC assessment at step 5 that we made before we considered your ability to do past relevant work at step 4, a point in our process at which you have the burdens of production and persuasion.

We propose to delete these sections because their provisions are incorporated into other proposed and existing rules.

We propose to revise and update the headings of these sections in order to reflect changes we are proposing to their content.

Currently, §§ 404.1562 and 416.962 describe a special medical-vocational profile under which, if you have only a marginal education and work experience of 35 years or more during which you did arduous unskilled labor, and you are not working and are no longer able to do this kind of work because of a severe impairment, we will find that you are disabled. We consider this special medical-vocational profile at step 5 of the sequential evaluation process, before we consider the grid rules. We do this because we have decided that, if you match this profile, you do not have the ability to adjust to other work (i.e., you are disabled) regardless of your age. If you meet this profile, and are age 60 or over, we would usually find you disabled using our grid rules. However, if you are under age 60, you might not qualify without this special rule.

Although we have changed the language somewhat over the years, the current medical-vocational profile has been in our regulations since 1960 (when it was at § 404.1502(c)). However, it contains a number of provisions that need to be updated to be consistent with our current rules and policies. For example, the last sentence of the paragraph before the example speaks about the ability to do other work “on a full-time or reasonably regular part-time basis.” However, in SSR 96-8p, we explain that at step 5 we consider only full-time work when we consider other work you are able to do. See 61 FR 34474, 34475 (July 2, 1996). Other provisions in the current medical-vocational profile have been made obsolete or been superseded by more recent regulations, such as our rules on doing substantial gainful activity at step 1 of the sequential evaluation process, and our rules on transferability of skills in §§ 404.1568(d)(4) and 416.968(d)(4).

We therefore propose to delete the second and third sentences of the paragraph and to revise the example. These changes will only make the rule more consistent with our current policies and will not affect anyone who we would find disabled under the current profile. We propose to designate all the language discussing this current medical-vocational profile as paragraph (a) of §§ 404.1562 and 416.962.

We also propose to make a conforming change to the third sentence of section 203.00(b) in appendix 2 to subpart P of part 404, to reflect these changes.

We propose to add to §§ 404.1562 and 416.962 a second special medical-vocational profile that we have been using since 1975, but that is not in our regulations. We propose to designate the language discussing the second medical-vocational profile as paragraph (b). Under this profile, we will find you disabled if you:

• Are of “advanced age” (i.e., are at least 55 years old);

• Have a “limited” education or less (i.e., generally, an 11th grade education or less—see §§ 404.1564(b)(3) and 916.964(b)(3));

• Have no past relevant work (i.e., either no work experience or no work experience that satisfies our definition of “past relevant work”); and

• Have a “severe,” medically determinable impairment(s).

If you have these characteristics, we would usually find you disabled using our grid rules. However, if you have solely “nonexertional” limitations (see § 200.00(e) of appendix 2 to subpart p of part 404), you might not qualify without this special profile.

The original instruction for this profile dates back to a policy decision of July 7, 1975. In 1982, we incorporated this profile into SSR 82-63, “Titles II and XVI: Medical-Vocational Profiles Showing an Inability To Make an Adjustment to Other Work” (see Social Security Rulings, Cumulative Edition, 1982, page 205). Therefore, the proposed rule would only incorporate our longstanding policy interpretation into our regulations.

We also propose to make clear in paragraph (b) and other related rules that, if you meet the second medical-vocational profile, we do not have to assess RFC. This is because, once we have determined that you have a “severe” impairment(s) and that you meet the other criteria in the profile, we will find you disabled, and we will not need an RFC assessment. We recognize that, in most cases, our normal sequential evaluation process would require us to do an RFC assessment before we determine that you have no past relevant work. However, because you must only have a “severe” impairment(s) under this profile, and your advanced age, limited education, and lack of past relevant work should be readily apparent from the case record, an RFC assessment is unnecessary.

We propose only editorial changes to the second sentence of paragraph (a).

We propose to delete the seventh sentence of paragraph (a), “General,” and to add three new sentences in its place. These changes are consistent with other changes discussed above.

We propose to revise the first sentence of § 404.1594(f)(7) and § 416.994(b)(5)(vi), which contain essentially the same language, in order to update the cross-reference. This is necessary due to the changes we are proposing to §§ 404.1560 and 416.960 and §§ 404.1561 and 416.961.

As already noted, we propose to revise the third sentence of section 203.00(b) to conform to the changes in proposed §§ 404.1562(a) and 416.962(a).

We propose to make a number of minor editorial changes throughout these rules to make them easier to read and understand. Because these proposed changes will not be substantive, we have not summarized them all.

We have consulted with the Office of Management and Budget (OMB) and determined that these proposed rules do meet the criteria for a significant regulatory action under Executive Order 12866. Thus, they were subject to OMB review.

Executive Order 12866 requires each agency to write all rules in plain language. In addition to your substantive comments on these proposed rules, we invite your comments on how to make them easier to understand.

For example:

Have we organized the material to suit your needs?

Are the requirements in the rules clearly stated?

Do the rules contain technical language or jargon that is not clear?

Would a different format (grouping and order of sections, use of headings, paragraphing) make the rules easier to understand?

Would more (but shorter) sections be better?

Could we improve clarity by adding tables, lists, or diagrams?

What else could we do to make the rules easier to understand?

We certify that these proposed regulations will not have a significant economic impact on a substantial number of small entities because they affect only individuals. Therefore, a regulatory flexibility analysis as provided in the Regulatory Flexibility Act, as amended, is not required.

These proposed rules contain reporting requirements at §§ 404.1512(c), 416.912(c), 404.1545(a), 416.945(a), 404.1560(b) and 416.960(b). The public reporting burden is accounted for in the Information Collection Requests for the various forms that the public uses to submit the information to SSA. Consequently, a 1-hour placeholder burden is being assigned to the specific reporting requirement(s) contained in these rules. We are seeking clearance of the burden referenced in these rules because the rules were not considered during the clearance of the forms. An Information Collection Request has been submitted to OMB. We are soliciting comments on the burden estimate; the need for the information; its practical utility; ways to enhance its quality, utility and clarity; and on ways to minimize the burden on respondents, including the use of automated collection techniques or other forms of information technology. Comments should be submitted to the Social Security Administration at the following address: Social Security Administration, Attn: SSA Reports Clearance Officer, Rm. 1-A-20 Operations Building, 6401 Security Boulevard, Baltimore, MD 21235-6401.

You may submit comments on the reporting requirements for up to 60 days after publication of this notice; however, your comments will be most useful if you submit them within 30 days of publication.

For the reasons set out in the preamble, we propose to amend subpart P of part 404 and subpart I of part 416 of chapter III of title 20 of the Code of Federal Regulations as follows:

This document contains proposed amendments to the Regulations on Procedure and Administration (26 CFR part 301) relating to the definition of the term income tax return preparer under section 7701(a)(36) of the Internal Revenue Code (Code). These proposed regulations exclude certain qualified Low-Income Taxpayer Clinics (LITCs) from the definition of income tax return preparer and exclude certain persons who are employed by, or volunteer at, such clinics.

Section 7701(a)(36), defining the term income tax return preparer, was enacted by section 1203 of the Tax Reform Act of 1976, Public Law 94-455 (90 Stat. 1520) (1976) (TRA 1976). TRA 1976 also enacted many of the provisions of sections 6694 and 6695, which impose penalties for certain acts and omissions by income tax return preparers.

The preparer penalties enacted by TRA 1976 reflect the concern of Congress with improper practices within the commercial tax services industry. See H. R. Rep. No. 94-658, 94th Cong. 1st Sess. 274 (1976), 1976-3 (Vol. 2) C.B. 966. Consistent with the commercial focus of the legislative history, the definition of an income tax return preparer requires that the tax return or claim for refund be prepared “for compensation.” Persons who do not receive compensation are not income tax return preparers for purposes of section 7701(a)(36) regardless of the extent to which they are involved with the preparation of a return or claim for refund.

Section 3601(a) of the Internal Revenue Service Restructuring and Reform Act of 1998, Public Law 105-206 (112 Stat. 685) (1998) (RRA 1998), added section 7526 of the Code, which provides for grants to qualified LITCs. Qualified LITCs represent taxpayers in controversies with the IRS and operate programs to inform individuals for whom English is a second language (ESL taxpayers) about their rights and responsibilities as taxpayers (ESL outreach). Qualified LITCs are either clinical programs run by accredited educational institutions that allow students to represent low-income taxpayers, or tax-exempt organizations that provide representation to low-income taxpayers.

Under section 7526(b)(1)(A)(i), a qualified LITC may not charge more than a nominal fee for its authorized services (except for reimbursement of actual costs incurred). These proposed regulations do not address the definition of a nominal fee. The Treasury Department and the IRS specifically request comments on whether the final regulations, or other guidance, should define a nominal fee and, if so, the factors that should be considered in defining a nominal fee. In addition, although the Treasury Department and the IRS believe that a qualified LITC is not authorized by statute to provide return preparation assistance other than as described below, these regulations do not address the qualification of an LITC under section 7526 of the Code.

The Treasury Department and the IRS recognize that in the course of representing a taxpayer in a controversy with the IRS, a qualified LITC may provide assistance with a tax return or claim for refund that is related directly to that controversy. The Treasury Department and the IRS also recognize that as an ancillary part of a qualified LITC's ESL outreach program, the LITC may provide assistance with a tax return or claim for refund that will be treated as return preparation assistance. The Treasury Department and the IRS believe that such return preparation assistance should not cause the LITC, or its employees or volunteers, to be treated as income tax return preparers unless the LITC is compensated for such assistance. Accordingly, these proposed regulations specify when an LITC will be treated as having prepared a tax return or claim of refund for compensation for purposes of section 7701(a)(36).

The Treasury Department and the IRS expect that LITCs will follow the practices specified in sections 6694 and 6695 as the preferred practice for their operations even if they are not income tax return preparers within the meaning of section 7701(a)(36). For example, section 6695(a), in conjunction with section 6107(a), requires that an income tax return preparer furnish the taxpayer a completed copy of a tax return or claim for refund not later than the time the return or claim is presented to the taxpayer for signature.

The proposed regulations clarify that qualified LITCs, as defined by section 7526, and employees and volunteers of such LITCs, that provide assistance with a tax return or claim for refund will not be treated as income tax return preparers if two requirements are satisfied.

First, any such return preparation assistance must be (i) directly related to a controversy with the IRS for which the LITC is providing assistance or (ii) an ancillary part of an LITC's ESL outreach program. Second, the LITC cannot charge a separate fee or vary a fee based on whether the LITC provides assistance with a return of tax or claim for refund, or charge more than a nominal fee for its services.

The regulations, as proposed, would apply on the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register .

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and, because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (preferably a signed original and 8 copies) and electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register .

The principal author of the regulations is Brinton T. Warren of the Office of Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division.

Accordingly, 26 CFR part 301 is proposed to be amended as follows:

We encourage you to participate in this rulemaking by submitting comments and related material. If you do so, please include your name and address, identify the docket number for this rulemaking [COTP Houston-Galveston-02-010], indicate the specific section of this document to which each comment applies, and give the reason for each comment. Please submit all comments and related material in an unbound format, no larger than 8 1/2 by 11 inches, suitable for copying. If you would like to know that your submission reached us, please enclose a stamped, self-addressed postcard or envelope. We will consider all comments and material received during the comment period. We may change this proposed rule in view of them.

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

On September 11, 2001, both towers of the World Trade Center and the Pentagon were attacked by terrorists. National security and intelligence officials have warned that future terrorist attacks against civilian targets may be anticipated. In response to these terrorist acts and warnings, heightened awareness for the security and safety of all vessels, ports, and harbors is necessary. Due to the increased safety and security concerns surrounding the transit of cruise ships, the Captain of the Port, Houston-Galveston established temporary security zones around these vessels. The temporary final rule was published May 1, 2002 in the Federal Register (67 FR 21576).

Because the generalized high-level threat environment continues, the Captain of the Port Houston-Galveston has determined that there is a need for these security zones to remain in effect indefinitely. The Captain of the Port Houston-Galveston proposes to establish permanent security zones around these vessels as they transit within the Ports of Houston and Galveston. These security zones will reduce the potential of a waterborne attack on cruise ships and enhance public health, safety, defense, and security.

The Coast Guard is proposing a permanent rule to create moving security zones around cruise ships when they pass the Galveston Bay Approach Lighted Buoy “GB” inbound and to continue the zone through the cruise ship's transit, mooring, and return transit until the cruise ship passes the sea buoy outbound. The establishment of moving security zones described in this proposed rule will be announced to mariners via Marine Safety Information Broadcast.

In the Ports of Houston and Galveston, no vessel would be permitted to operate within 500 yards of a cruise ship unless operating at the minimum safe speed required to maintain a safe course. Except as described in this proposed rule, no person or vessel would be permitted to enter within 100 yards of a cruise ship unless expressly authorized by the Captain of the Port Houston-Galveston. Moored vessels or vessels anchored in a designated anchorage area would be permitted to remain within 100 yards of a cruise ship while it is in transit.

The Houston Ship Channel narrows to 400 feet or less near Houston Ship Channel Entrance Lighted Bell Buoy “18” and continues at this width through Barbours Cut. Between these points vessels that must transit the navigable channel will have to gain permission from the Captain of the Port Houston-Galveston or his designated representative, to pass within 100 yards of a cruise ship. Mariners that anticipate encountering a cruise ship in this section of the channel are encouraged to contact “Houston Traffic” prior to getting underway.

For the purpose of this proposed rule the term “cruise ship” is defined as a passenger vessel over 100 gross tons, carrying more than 12 passengers for hire, making a voyage lasting more than 24 hours any part of which is on the high seas, and for which passengers are embarked or disembarked in the United States or its territories. This definition covers passenger vessels that must comply with 33 CFR parts 120 and 128.

This proposed rule is not a “significant regulatory action” under section 3(f) of Executive Order 12866, Regulatory Planning and Review, and does not require an assessment of potential costs and benefits under section 6(a)(3) of that Order. The Office of Management and Budget has not reviewed it under that Order. It is not “significant” under the regulatory policies and procedures of the Department of Transportation (DOT) (44 FR 11040, February 26, 1979).

We expect the economic impact of this rule to be so minimal that a full Regulatory Evaluation under paragraph 10(e) of the regulatory policies and procedures of DOT is unnecessary. The impacts on routine navigation are expected to be minimal as the proposed zones will only impact navigation for a short period of time and the size of the zones allow for the transit of most vessels with minimal delay.

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

The Coast Guard certifies under 5 U.S.C. 605 (b) that this rule will not have a significant economic impact on a substantial number of small entities. This rule will affect the following entities, some of which may be small entities: the owners or operators of vessels intending to transit the narrow portion of the Houston-Galveston Ship Channel during a transit of a cruise ship in the same location. This proposed security zone will not have a significant economic impact on a substantial number of small entities for the following reasons:

1. Between the Houston-Galveston Sea buoy and Houston Ship Channel Entrance Lighted Bell Buoy “18” the size of the security zone allows for vessels to safely transit around or through the zone with minimal interference.

2. Between Houston Ship Channel Entrance Lighted Bell Bouy “18” and Barbour's Cut the channel narrows to 400 feet. In this section the Captain of the Port Houston-Galveston through Vessel Traffic Service (VTS) Houston-Galveston, “Houston Traffic,” and designated on scene personnel may grant vessels permission to pass within 100 yards of a cruise ship.

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

Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Public Law 104-121), we want to assist small entities in understanding this proposed rule so that they can better evaluate its effects on them and participate in the rulemaking. If the proposed rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact LTJG George Tobey, Marine Safety Office Houston-Galveston, Texas, Port Waterways Management, at (713) 671-5100.

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

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

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

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

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

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

This proposed rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it would not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. We invite your comments on how this proposed rule might impact tribal governments, even if that impact may not constitute a “tribal implication” under the Order.

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

We have considered the environmental impact of this proposed rule and concluded that, under figure 2- 1, paragraph (34)(g), of Commandant Instruction M16475.lD, this rule is categorically excluded from further environmental documentation because this rule is not expected to result in any significant environmental impact as described in the National Environmental Policy Act of 1969 (NEPA). A “Categorical Exclusion Determination” is available in the docket where indicated under ADDRESSES .

For the reasons discussed in the preamble, the Coast Guard proposes to amend 33 CFR part 165 as follows:

We encourage you to participate in this rulemaking by submitting comments and related material. If you do so, please include your name and address, identify the docket number for this rulemaking [COTP Houston-Galveston-02-009], indicate the specific section of this document to which each comment applies, and give the reason for each comment. Please submit all comments and related material in an unbound format, no larger than 8 1/2 by 11 inches, suitable for copying. If you would like to know that your submission reached us, please enclose a stamped, self-addressed postcard or envelope. We will consider all comments and material received during the comment period. We may change this proposed rule in view of them.

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

On September 11, 2001, both towers of the World Trade Center and the Pentagon were attacked by terrorists. National security and intelligence officials have warned that future terrorist attacks against civilian targets may be anticipated. In response to these terrorist acts, heightened awareness for the security and safety of all vessels, ports, and harbors is necessary. The Captain of the Port, Houston-Galveston established temporary security zones around highly industrialized areas within the Captain of the Port, Houston-Galveston Zone [COTP Houston-Galveston-02-011]. ( See temporary final rule entitled “Security Zones; Captain of the Port Houston-Galveston Zone” published elsewhere in today's issue of the Federal Register .)

Because the generalized high-level threat environment continues, the Captain of the Port Houston-Galveston has determined that there is a need for these security zones to remain in effect indefinitely. The proposed rule will establish permanent security zones identical to, and in the same location as, the temporary security zones previously established in the Captain of the Port Houston-Galveston Zone. The proposed rule also establishes a permanent security zone at Barbours Cut in Morgan's Point, Texas.

Vessels operating within the Captain of the Port Houston-Galveston Zone are potential targets of terrorist attacks, or platforms from which terrorist attacks may be launched upon other vessels, waterfront facilities and adjacent population centers. The Ports of Houston, Morgan's Point, Bayport, Texas City, and Freeport are all heavily industrialized areas with general cargo facilities, container terminals, and bulk liquid transfer facilities.

The proposed rule establishes security zones around areas concentrated with commercial facilities considered critical to national security. These facilities are located in narrow manmade harbors or along narrow depth-restricted ship channels. Any waterway closure within these security zones resulting from a terrorist attack could have a significant adverse impact on national security and the national economy.

The proposed security zones are as follows:

(1) Houston, Texas. The Houston Ship Channel and all associated turning basins, bounded by a line drawn between Houston Ship Channel Light 132 (LLNR-24445) and Houston Ship Channel Light 133 (LLNR-24450) west to the T & N Rail Road Swing Bridge at the entrance to Buffalo Bayou, including all waters adjacent to the ship channel from shoreline to shoreline and the first 200 yards of connecting waterways.

(2) Morgan's Point, Texas. The Barbours Cut Ship Channel and Turning Basin containing all waters west of a line drawn between Junction Light “Barbours Cut” 29°41′12″ N, 94°59′12″ W, and Houston Ship Channel Light 91, 29°40′58″ N, 94°58

59″ W.

(3) Bayport, Texas. The Port of Bayport, Bayport Ship and Bayport Turning Basin containing all waters south of a line drawn from Bayport Ship Channel Light 9 and a western point at 29°36′26″ N, 95°01′17″ W.

(4) Texas City, Texas. The Port of Texas City Channel, Turning Basin and Industrial Canal containing all waters bounded by the area south and west of a line drawn between Cut B Inner Range Rear Light, and Texas City Channel Light 19.

(5) Freeport, Texas. The Dow Barge Canal containing all waters bounded by its junction with the Intracoastal Waterway, by a line drawn between the eastern point at latitude 28°56′48″ N, 95°18′20″ W, and the western point at 28°56′40″ N, 95°18′33″ W. And the Brazos Harbor, containing all waters west of a line drawn between the northern point at 28°56′27″ N, 95°20′00″ W, and the southern point 28°56′09″ N, 95°20′00″ W at its junction with the Old Brazos River Cut.

This proposed rule will increase the level of security within the ports by reducing the number of vessels transiting the industrialized areas and limiting access to only those vessels that are conducting business with port industries. It restricts access to vessels engaged or assisting in commerce with waterfront facilities within the security zones, vessels operated by port authorities, vessels operated by waterfront facilities within the security zones, and vessels operated by federal, state, county or municipal agencies. Vessels having a need to enter these zones but prohibited from doing so under this rule, must obtain express permission from the Captain of the Port Houston-Galveston or his designated representative prior to entry. Restricting access to these areas reduces potential methods of attack on vessels, waterfront facilities and adjacent population centers located within these zones.

This proposed rule is not a “significant regulatory action” under section 3(f) of Executive Order 12866 and does not require an assessment of potential costs and benefits under section 6(a)(3) of that Order. The Office of Management and Budget has not reviewed it under that Order. It is not “significant” under the regulatory policies and procedures of the Department of Transportation (DOT) (44 FR 11040, February 26, 1979).

We expect the economic impact of this proposed rule to be so minimal that a full Regulatory Evaluation under paragraph 10(e) of the regulatory policies and procedures of DOT is unnecessary. The impacts on routine navigation are expected to be minimal. Due to the highly industrialized nature of these zones they are of limited interest to recreational boaters. Vessels engaged or assisting in commerce with facilities located within a zone or having the express permission of the Captain of the Port Houston-Galveston, are authorized entry under this rule.

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

The Coast Guard certifies under 5 U.S.C. 605(b) that this proposed rule would not have a significant economic impact on a substantial number of small entities. These security zones will not have an impact on a substantial number of small entities because this rule will not obstruct the regular flow of commercial vessel traffic conducting business within the zones. Other vessels may seek permission for entry into the zones from the Captain of the Port Houston-Galveston. If you think that your business, organization, or governmental jurisdiction qualifies as a small entity and that this rule would have a significant economic impact on it, please submit a comment (see ADDRESSES ) explaining why you think it qualifies and how and to what degree this rule would economically affect it.

Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Public Law 104-121), we want to assist small entities in understanding this proposed rule so that they can better evaluate its effects on them and participate in the rulemaking. If the proposed rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact LTJG George Tobey, Marine Safety Office Houston-Galveston, Texas, Port Waterways Management, at (713) 671-5100.

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

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

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

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

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

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

This proposed rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it would not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. We invite your comments on how this proposed rule might impact tribal governments, even if that impact may not constitute a “tribal implication” under the Order.

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

We have considered the environmental impact of this proposed rule and concluded that, under figure 2-1, paragraph (34)(g), of Commandant Instruction M16475.lD, this rule is categorically excluded from further environmental documentation because this rule is not expected to result in any significant environmental impact as described in the National Environmental Policy Act of 1969 (NEPA). A “Categorical Exclusion Determination” is available in the docket where indicated under ADDRESSES .

For the reasons discussed in the preamble, the Coast Guard proposes to amend 33 CFR part 165 as follows:

We encourage you to participate in this rulemaking by submitting comments and related material. If you do so, please include your name and address, identify the docket number for this rulemaking [COTP St. Louis-02-005], indicate the specific section of this document to which each comment applies, and give the reason for each comment. Please submit all comments and related material in an unbound format, no larger than 8 1/2 by 11 inches, suitable for copying. If you would like to know that your submission reached us, please enclose a stamped, self-addressed postcard or envelope. We will consider all comments and material received during the comment period. We may change this proposed rule in view of them.

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

On September 11, 2001, both towers of the World Trade Center and the Pentagon were attacked by terrorists. National security and intelligence officials have warned that future terrorist attacks against civilian targets are anticipated. In response to these terrorist acts and warnings, heightened awareness and security of our ports and harbors is necessary. The Captain of the Port St. Louis is proposing to make three existing temporary security zones permanent and create two additional permanent security zones.

The three temporary security zones the Captain of the Port St. Louis proposes to make permanent are: the Fort Calhoun Nuclear Power Station zone on the Missouri River in Fort Calhoun, Nebraska, published in the Federal Register March 7, 2002 (67 FR 10325); the Cooper Nuclear Station zone on the Missouri River in Brownville, Nebraska, published March 7, 2002 (67 FR 10324); and the Quad Cities Generating Station zone on the Mississippi River in Cordova, Illinois, published February 28, 2002 (67 FR 9207).

The proposed rule would establish two new security zones for the Prairie Island Nuclear Generating Station in Welch, Minnesota and the Clinton Power Station in Clinton, Illinois.

Permanent security zones are proposed for five locations within the Captain of the Port St. Louis Zone.

(1) Fort Calhoun Nuclear Power Station, Fort Calhoun, Nebraska. This proposed zone includes all water extending 75 feet from the shoreline of the right descending bank on the Missouri River, beginning at mile marker 645.6 and ending at mile marker 646.0.

(2) Cooper Nuclear Station, Brownville, Nebraska. This proposed zone includes all water extending 250 feet from the shoreline of the right descending bank on the Missouri River, beginning at mile marker 532.5 and ending at mile marker 532.9.

(3) Quad Cities Generating Station, Cordova, Illinois. This proposed zone includes all water extending 300 feet from the shoreline of the left descending bank on the Upper Mississippi River, beginning at mile marker 506.3 and ending at mile marker 507.3.

(4) Prairie Island Nuclear Generating Facility, Welch, Minnesota. This proposed zone includes all water extending 300 feet from the shoreline of the right descending bank on the Upper Mississippi River, beginning at mile marker 798.0 and ending at mile marker 798.3.

(5) Clinton Power Station, Clinton, Illinois. This proposed zone in Dewitt County in East Central Illinois is bounded by a dam constructed near the confluence of Salt Creek River mile 56 and the north fork of Salt Creek. The zone extends out 600 feet from shore. Boundaries of the zone will begin at 40°10′30″ N, 88°50′30″ W; east to 40°10′30″ N, 88°49′55″ W; south to 40°10′15″ N, 88°49′55″ W; west to 40°10′15″ N, 88°50′30″ W; returning north to the origin. These coordinates are based upon [NAD 83].

These security zones are designed to reduce the potential of a waterborne attack and enhance the public health and safety by protecting the public, facilities, and surrounding areas from possible subversive actions or acts of terrorism. All vessels would be prohibited from entering the Prairie Island, Quad Cities and Clinton security zones unless expressly authorized by the Captain of the Port St. Louis or his designated representative. Sight surveys indicate that vessels may safely navigate around these zones with minimal interference.

Both the Fort Calhoun and the Cooper security zones contain a portion of the navigable channel of the Missouri River. All vessels that may safely navigate outside of the channel are prohibited from entering the security zone without the express permission of the Captain of the Port St. Louis or his designated representative. Vessels requiring use of the channel for safe navigation will be authorized entry into the zone but must remain within the channel unless otherwise expressly authorized by the Captain of the Port St. Louis or his designated representative.

This proposed rule is not a “significant regulatory action” under section 3(f) of Executive Order 12866, Regulatory Planning and Review, and does not require an assessment of potential costs and benefits under section 6(a)(3) of that Order. The Office of Management and Budget has not reviewed it under that Order. It is not “significant” under the regulatory policies and procedures of the Department of Transportation (DOT) (44 FR 11040, February 26, 1979).

We expect the economic impact of this proposed rule to be so minimal that a full Regulatory Evaluation under paragraph 10e of the regulatory policies and procedures of DOT is unnecessary.

With the exception of the Fort Calhoun and Cooper zones the proposed zones do not include navigable channels. Vessel traffic should be able to safely transit around these zones. The proposed zones for Fort Calhoun Nuclear Power Station and the Cooper Nuclear Station allow deeper draft vessels to continue their transit, provided that they remain within the channel. Vessels that must transit through any of these security zones may seek permission from the Captain of the Port St. Louis or his designated representative.

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

The Coast Guard certifies under 5 U.S.C. 605(b) that this proposed rule would not have a significant economic impact on a substantial number of small entities for the reasons enumerated under the Regulatory Evaluation above.

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

Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Public Law 104-121), we want to assist small entities in understanding this proposed rule so that they can better evaluate its effects on them and participate in the rulemaking. If the proposed rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact LTJG Bill Clark, Marine Safety Office St. Louis at (314) 539-3091, ext 541.

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

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

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

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

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

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

This proposed rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it would not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. We invite your comments on how this proposed rule might impact tribal governments, even if that impact may not constitute a “tribal implication” under the Order.

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

We have considered the environmental impact of this proposed rule and concluded that, under figure 2-1, paragraph (34)(g), of Commandant Instruction M16475.lD, this rule is categorically excluded from further environmental documentation because this rule is not expected to result in any significant environmental impact as described in the National Environmental Policy Act of 1969 (NEPA). A “Categorical Exclusion Determination” is available in the docket where indicated under ADDRESSES .

For the reasons discussed in the preamble, the Coast Guard proposes to amend 33 CFR part 165 as follows:

We encourage you to participate in this rulemaking by submitting comments and related material. If you do so, please include your name and address, identify the docket number for this rulemaking [COTP New Orleans-02-005], indicate the specific section of this document to which each comment applies, and give the reason for each comment. Please submit all comments and related material in an unbound format, no larger than 8 1/2 by 11 inches, suitable for copying. If you would like to know they reached us, please enclose a stamped, self-addressed postcard or envelope. We will consider all comments and material received during the comment period. We may change this proposed rule in view of them.

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

On September 11, 2001, both towers of the World Trade Center and the Pentagon were attacked by terrorists. National security and intelligence officials have warned that future terrorist attacks against civilian targets may be anticipated. In response to these terrorist acts, heightened awareness and security of our port and harbors and the vessels that transit them is necessary. Due to the increased safety and security concerns surrounding the transit of cruise ships, the Captain of the Port, New Orleans established temporary moving security zones, [COTP New Orleans-02-004], around these vessels. These temporary moving security zones remain in effect until October 15, 2002. (See temporary final rule entitled “Security Zones; Lower Mississippi River, Southwest Pass Sea Buoy to Mile Marker 96.0, New Orleans, Louisiana” published elsewhere in today's issue of the Federal Register .)

Because the generalized high-level threat environment continues, the Captain of the Port New Orleans has determined that there is a need for these security zones to remain in effect indefinitely. The Captain of the Port New Orleans is proposing permanent regulations for security zones around these vessels as they transit between Southwest Pass and mile marker 96.0 LMR.

In our proposed rule, moving security zones would commence when a cruise ship passes the Southwest Pass Entrance Lighted Buoy “SW” inbound and continues through its transit, mooring, and return transit until it passes the sea buoy outbound. No vessel would be permitted to operate within 500 yards of a cruise ship unless operating at the minimum safe speed required to maintain a safe course. Except as described in this rule, no person or vessel would be permitted to enter within 100 yards of a cruise ship unless expressly authorized by the Captain of the Port, New Orleans. Moored vessels or vessels anchored in a designated anchorage area would be permitted to remain within 100 yards of a cruise ship while it is in transit.

The establishment of moving security zones described in this rule would be announced to mariners via Marine Safety Information Broadcast.

For the purpose of this proposed rule the term “cruise ship” is defined as a passenger vessel over 100 gross tons, carrying more than 12 passengers for hire, making a voyage lasting more than 24 hours any part of which is on the high seas, and for which passengers are embarked or disembarked in the United States or its territories. This definition covers passenger vessels that must comply with 33 CFR parts 120 and 128.

This proposed rule is not a “significant regulatory action” under section 3(f) of Executive Order 12866 and does not require an assessment of potential costs and benefits under section 6(a)(3) of that Order. The Office of Management and Budget has not reviewed it under that Order. It is not “significant” under the regulatory policies and procedures of the Department of Transportation (DOT) (44 FR 11040, February 26, 1979).

We expect the economic impact of this proposed rule to be so minimal that a full Regulatory Evaluation under paragraph 10(e) of the regulatory policies and procedures of DOT is unnecessary. The impacts on routine navigation are expected to be minimal as the zones will only impact navigation for a short period of time and the size of the zones allows for the transit of most vessels with minimal delay.

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

The Coast Guard certifies under 5 U.S.C. 605(b) that this rule will not have a significant economic impact on a substantial number of small entities. This rule will affect the following entities, some of which may be small entities: the owners or operators of vessels intending to transit Southwest Pass and the Lower Mississippi River, to mile marker 96.0. These security zones would not have a significant economic impact on a substantial number of small entities. The size of the security zones allow for vessels to safely transit around or through the zones with minimal interference.

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

Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121), we want to assist small entities in understanding this proposed rule so they can better evaluate its effects on them and participate in the rulemaking. If the proposed rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact LT Ricardo Alonso, Marine Safety Office New Orleans, Port Waterways Management, at (504) 589-4222.

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

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

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

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

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

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

This proposed rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it does not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. We invite your comments on how this proposed rule might impact tribal governments, even if that impact may not constitute a “tribal implication” under the Order.

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

The Coast Guard considered the environmental impact of this proposed rule and concluded that under figure 2-1, paragraph (34)(g) of Commandant Instruction M16475.1D, this rule is categorically excluded from further environmental documentation because this rule is not expected to result in any significant environmental impact as described in the National Environmental Policy Act of 1969 (NEPA). A “Categorical Exclusion Determination” is available in the docket where indicated under ADDRESSES .

For the reasons discussed in the preamble, the Coast Guard proposes to amend 33 CFR part 165 as follows:

For further information, please see the information provided in the direct final action for the Pennsylvania's air resource regulations, that is located in the “Rules and Regulations” section of this Federal Register publication.

For further information, please see the information provided in the direct final action of Maryland's Visible Emissions and Open Fire Amendments, that is located in the “Rules and Regulations” section of this Federal Register publication.

On March 25, 2002 (67 FR 13684), EPA proposed a conditional exclusion from the definition of solid waste. As noted in the proposal, the exclusion would apply to hazardous oil-bearing secondary materials (i.e., sludges, by-products, or spent materials) generated by the petroleum refining industry (Standard Industrial Classification (SIC) 2911), when processed, either on-site or off-site, in a gasification system to produce synthesis gas fuel and other non-fuel chemical by-products. As proposed, the exclusion is subject to a set of conditions that specify the following: (1) The system meets the definition of a gasification system; (2) the system generates a synthesis gas fuel that meets the specification of exempted synthesis gas; (3) the materials generated by the gasification system must not be placed on the land if they exceed the nonwastewater Universal Treatment Standards (UTS) for chromium, lead, nickel, vanadium, arsenic, and antimony (found at 40 CFR 268.48); and (4) the excluded materials must not be placed on the land or speculatively accumulated prior to insertion into the gasification system.

The proposal also solicits comment on an option to broaden the conditional exclusion to other generated hazardous secondary materials under an expanded set of conditions. These conditions include: (1) Each hazardous secondary material processed in the system contains greater than 20% by weight total organic carbon; (2) the gasification system does not process any hazardous waste which exhibits the characteristic of mercury and any hazardous waste for which mercury is a basis for listing under 40 CFR part 261, Appendix VII as hazardous secondary material; (3) the system meets the definition of a gasification system; (4) the system generates a synthesis gas fuel that meets the specification of exempted synthesis gas; (5) the materials generated by the gasification system are not placed on the land if they exceed the nonwastewater UTS for antimony, arsenic, barium, beryllium, cadmium, chromium (total), cyanides (total), cyanides (amenable), lead, mercury, nickel, selenium, silver, thallium, and vanadium; and (6) the excluded materials are not placed on the land or speculatively accumulated prior to insertion into the gasification system.

While the Agency has requested comment on all aspects of the proposal, we specifically solicit comment, information, and data on: (1) The performance of gasification on other hazardous secondary material (that are currently hazardous waste) known to contain concentrations of metals; (2) the performance of gasification on certain hazardous secondary materials that contain certain high concentration of non-contributing components (namely metals or halides); (3) potential partitioning of metals to the product synthesis gas fuel and their subsequent release during the combustion of the synthesis gas in turbines to produce power: (4) criteria for and the types of hazardous secondary materials that could be processed in a gasification system; (5) specific design and operating conditions for all components of the gasification system; (6) the market for building and operating gasification systems in the future; (7) the market for synthesis gas and other gasification products; and (8) appropriate documentation (reporting and record keeping) for those claiming this exclusion.

The Agency is extending the comment period by 75 days to accommodate requests by several parties for additional time to prepare relevant comments and to gather operating and emissions data on gasification systems permitted in Europe and Japan.

The requirement for collection of information contained in this proposed rule has been submitted to the Office of Management and Budget for review under section 3504(h) of the Paperwork Reduction Act (44 U.S.C. 3504(H). Persons wishing to comment on this collection of information should direct their comments to Judy Boley, Office of the Managing Director, Federal Communications Commission, The Portals, Room 1C-804, 445 12th Street, SW., Washington, DC 20554, tel. 202-418-0214, e-mail jboley@fcc.gov. This is a summary of the Commission's Second Further Notice of Proposed Rule Making, adopted April 18, 2002, and released April 22, 2002. Comments may be filed using the Commission's Electronic Comment Filing System (ECFS) or by filing paper copies. See Electronic Filing of Documents in Rulemaking Proceedings, 63 FR 24121, 1998. Comments filed through the ECFS can be sent as an electronic file via the Internet to http://www.fcc.gov/e-file/ecfs.html. Generally, only one copy of an electronic submission must be filed. If multiple docket or rulemaking numbers appear in the caption of this proceeding, however, commenters must transmit one electronic copy of the comments to each docket or rulemaking number referenced in the caption. In completing the transmittal screen, commenters should include their full name, Postal Service mailing address, and the applicable docket or rulemaking number. Parties may also submit an electronic comment by Internet e-mail. To get filing instructions for e-mail comments, commenters should send an e-mail to ecfs@fcc.gov , and should include the following words in the body of the message, “get form <your e-mail address>.” A sample form and directions will be sent in reply. Parties who choose to file by paper must file an original and four copies of each filing. If more than one docket or rulemaking number appears in the caption of this proceeding, commenters must submit two additional copies for each additional docket or rulemaking number. Filings can be sent by hand or messenger delivery, by commercial overnight courier, or by first-class or overnight U.S. Postal Services mail (although we continue to experience delays in receiving U.S. Postal Service mail). The Commission's contractor, Vistronix, Inc., will receive hand-delivered or messenger-delivered paper filings for the Commission's Secretary at 236 Massachusetts Avenue, NE., Suite 110, Washington, DC 20002. The filing hours at this location are 8 a.m. to 7 p.m. All hand deliveries must be held together with rubber bands or fasteners. Any envelopes must be disposed of before entering the building. Commercial overnight mail (other than U.S. Postal Service Express Mail and Priority Mail) must be sent to 9300 East Hampton Drive, Capitol Heights, MD 20743. U.S. Postal Service first-class mail, Express Mail, and Priority Mail should be addressed to 445 12th Street, SW., Washington, DC 20554. All filings must be addressed to the Commission's Secretary, Marlene H. Dortch, Office of the Secretary, Federal Communications Commission, 445 12th Street, SW., Room TW-A325 Washington, DC 20554. Parties who choose to file by paper should also submit their comments on diskette. These diskettes should be submitted to: Dana Jackson, Federal Communications Commission, 445 12th Street, SW., Room 5-A741, Washington DC 20554. Such a submission should be on a 3.5 inch diskette formatted in an IBM compatible format using Word 97 or compatible software. The diskette should be accompanied by a cover letter and should be submitted in “read only” mode. The diskette should be clearly labeled with the commenter's name, proceeding (including the lead docket number in this case, CC Docket No. 98-67, type of pleading (comment or reply comment), date of submission, and the name of the electronic file on the diskette. The label should also include the following phrase “Disk Copy—Not an Original.” Each diskette should contain only one party's pleadings, preferably in a single electronic file. In addition, commenters must send diskette copies to the Commission's copy contractor, Qualex International, Portals II, 445 12th Street, SW., Room CY-B402, Washington, DC 20554. Copies of any subsequently filed documents in this matter will be available for public inspection and copying during regular business hours at the FCC Reference Information Center, Portals II, 445 12th Street, SW., Room CY-A257, Washington, DC 20554. The complete text of this decision may be purchased from the Commission's duplication contractor, Qualex International, Portals II, 445 12th Street, SW., Room CY-B402, Washington, DC 20554. Copies of this document in other alternative formats (computer diskette, large print and Braille) are available to persons with disabilities by contacting Brian Millin, of the Consumer and Governmental Affairs Bureau at (202) 418-7426 (voice), (202) 418-7365 (TTY), or e-mail bmillin@fcc.gov. This Second Further Notice of Proposed Rule Making can also be downloaded in Text and ASCII formats at: http://www.fcc.gov/cgb/dro.

In this Second Further Notice of Proposed Rule Making, the Commission notes that there is no automatic means of determining the origination of IP Relay calls. In the absence of this information, TRS providers cannot determine, or report to the TRS Fund Administrator, whether a call is interstate or intrastate. We request comment on whether we should attempt to devise a method for allocating calls as intrastate or interstate, and if so, suggestions for how we may accomplish this goal. We seek comment on whether section 225 of the Communications Act requires us to develop a cost allocation methodology for IP relay calls, or whether the statute gives us the discretion to conclude that all costs for IP relay shall be reimbursable from the Interstate TRS Fund. To the extent that commenters believe that costs must be allocated between the interstate and intrastate jurisdictions for purposes of recovery from the Interstate TRS Fund, we request that they consider what methods may exist, or could be developed, to determine the location of a caller using IP Relay. Further, we ask commenters to consider whether the use of a fixed allocator would satisfy the statutory requirement that costs caused by interstate relay services be recovered from all subscribers for every interstate service, and if so, how such a fixed allocator could best be derived. We also ask commenters to address whether the Commission should be responsible for devising a fixed allocator for dividing the reimbursement for IP Relay costs between the Interstate TRS Fund and the states, or whether we should charge some other party with this responsibility.

As required by the Regulatory Flexibility Act of 1980, as amended (RFA) the Federal Communications Commission (Commission) has prepared this present Initial Regulatory Flexibility Analysis (IRFA) of the possible significant economic impact on a substantial number of small entities by the policies and rules proposed in this Second Further Notice of Proposed Rulemaking. See 5 U.S.C. 603. The RFA, see 5 U.S.C. 601-612, has been amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), Public Law No. 104-121, Title II, 110 Stat. 857 (1996). We expect that we could have complied with the RFA by completing an Initial Regulatory Flexibility Certification on this issue; however, we have chosen instead to complete this Initial Regulatory Analysis for more complete record. 5 U.S.C. 605(b). Written public comments are requested on this IRFA. Comments must be identified as responses to the IRFA and must be filed by the deadlines for comments on the Second Further Notice of Proposed Rulemaking provided in paragraph 51 of the item. The Commission will send a copy of the Second Further Notice of Proposed Rulemaking, including this IRFA, to the Chief Counsel for Advocacy of the Small Business Administration (SBA). See 5 U.S.C. 603(a). In addition, the Second Further Notice of Proposed Rulemaking and IRFA (or summaries thereof) will be published in the Federal Register . See 5 U.S.C. 603(a).

Telecommunications Relay Service (TRS), which is provided through the public switched telephone network (PSTN), enables persons with hearing and speech disabilities to communicate by telephone with persons who may or may not have such disabilities. 47 CFR 64.601(5)(7). TRS facilities have special equipment and are staffed by communications assistants (CAs) who relay conversations between people who use text telecommunications devices and people who communicate by voice. WorldCom, Inc. (WorldCom) indicates that its Internet Protocol (IP) Relay service is used in a manner similar to the PSTN-based TRS system. The user establishes a local connection to an Internet Service Provider using a computer, web phone, personal digital assistant, or any other IP-capable device. The user clicks on the relay operator icon, and when the call reaches the Internet platform a connection is automatically established, via an 800 number, to the WorldCom relay center. The call is then routed to a CA and a regular relay session is initiated. WorldCom, Petition for Clarification, CC Docket No. 90-571, Telecommunications Services for Individuals with Hearing and Speech Disabilities, Dec. 22, 2000, at 2.

WorldCom's Petition for Clarification ( Petition ) asked the Commission to clarify (1) that IP Relay falls within the definition of TRS and (2) that it is entitled to recover its operating costs under section 225 of the Communications Act. WorldCom, Petition for Clarification, CC Docket No. 90-571, Telecommunications Services for Individuals with Hearing and Speech Disabilities, Dec. 22, 2000. 47 U.S.C. 225. WorldCom further requested that the Commission allow it to recover all of the costs of its IP Relay service from the Interstate TRS Fund. Calls come to IP relay via the Internet, and there is currently no automatic method by which the IP Relay center can tell whether a given call is intrastate or interstate, given that Internet addresses have no geographic correlates. This is in contrast to PSTN-based TRS, in which the TRS center uses the caller's Automatic Numbering Identification (ANI) to identify the location of the caller.

The Commission briefly addressed the potential impact of the Internet on TRS earlier in this proceeding when the Commission requested comment on the provision of improved TRS and on WorldCom's Petition. We solicited comment on the use of the World Wide Web for TRS voice communications in the Improved Service Report and Order and Further Notice of Proposed Rulemaking. “We also seek comment on improved transmission speed, wireless messaging services, use of the World Wide Web for voice communications, Internet telephony, and any other technologies or changes to technology that may improve relay services or should be available via TRS.” See Improved Service Report and Order and Further Notice of Proposed Rulemaking, Report and Order and Further Notice of Proposed Rulemaking, 65 FR 38490, Jun. 21, 2000, 15 FCC Rcd 5140, 5197 (2000) ( Improved Service Report and Order and Further Notice of Proposed Rulemaking ). Consumer Information Bureau Seeks Additional Comment on the Provision of Improved Telecommunications Relay Service, DA 01-1555, Public Notice , 16 FCC Rcd 13100, Jun. 29, 2001; published at 66 FR 37631, Jul. 19, 2001. The Public Notice asked for public comment on the benefits of IP Relay, the appropriate means for allowing WorldCom to recover the costs of providing IP Relay, the minimum standards that should apply to IP Relay, and the security of IP Relay calls. See Public Notice , 16 FCC Rcd 13103. The Public Notice also sought comment on IP capabilities and outreach regarding TRS. While we do not reach these issues in our consideration of WorldCom's Petition, we will consider these comments along with the other comments received in response to our Improved Service Report and Order and Further Notice of Proposed Rulemaking. The Commission received 12 comments and five reply comments from carriers, organizations representing the deaf community, and public officials, along with hundreds of e-mail comments and letters from individuals who use IP Relay. Comments were filed by AT&T, Inc. (AT&T), the California Public Utilities Commission (California), Katherine Keller, Dana Mulvany, the National Association for the Deaf (NAD), Self Help for Hard of Hearing People (SHHH), Sprint Corporation (Sprint), Charles Sterling, Telecommunications for the Deaf, Inc. (TDI), The United States Telecommunications Association (USTA), Ronald Vickery, and WorldCom. Additionally, individuals sent over a hundred e-mails. California, Dana Mulvany, TDI, USTA, and WorldCom filed reply comments. In the Second Notice of Proposed Rule Making aspect of this item, we request comment on whether recovery of costs from the Interstate TRS Fund for IP Relay should be a temporary or a permanent measure. If this should be a temporary measure, we seek comment from the public on how IP Relay TRS providers can develop the capability to determine whether a call is intrastate or interstate. If a permanent measure, we seek comment on the bases for such proposed action. Finally, we seek comment on the mechanisms for applying the process of reimbursement for all affected IP TRS Relay providers, including any small entities providing TRS.

The proposed action is authorized under sections 1, 2, and 225 of the Communications Act of 1934, as amended, 47 U.S.C. 151, 152, and 225.

The RFA directs agencies to provide a description of, and where feasible, an estimate of the number of small entities that may be affected by the proposed rules, if adopted. 5 U.S.C. 603(b)(3). The RFA generally defines the term “small entity” as having the same meaning as the terms “small business,” “small organization,” and “small governmental jurisdiction.” 5 U.S.C. 601(6). In addition, the term “small business” has the same meaning as the term “small business concern” under the Small Business Act. 5 U.S.C. 601(3) (incorporating by reference the definition of “small-business concern” in the Small Business Act, 15 U.S.C. 632). Pursuant to 5 U.S.C. 601(3), the statutory definition of a small business applies “unless an agency, after consultation with the Office of Advocacy of the Small Business Administration and after opportunity for public comment, establishes one or more definition of such term which are appropriate to the activities of the agency and publishes such definition(s) in the Federal Register .” A “small business concern” is one which: (1) Is independently owned and operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by the SBA. 15 U.S.C. 632.

The most reliable source of information regarding the total numbers of certain common carrier and related providers nationwide, as well as the numbers of commercial wireless entities, appears to be data the Commission publishes annually in its Telecommunications Industry Revenue report, regarding the TRS. FCC, Common Carrier Bureau, Industry Analysis Division, Trends in Telephone Service (Aug. 2001). TRS Providers. Neither the Commission nor the SBA has developed a definition of small entity specifically applicable to TRS providers. The closest applicable definitions under the SBA rules are for wired telecommunications carriers and telecommunications resellers. 13 CFR 120.201, North American Industry Classification System (NAICS) Code 513310 and 513330. The SBA defines such establishments to be small businesses when they have no more than 1,500 employees. See 13 CFR 121.201, NAICS Code 513310 and 513330. According to our most recent data, there are 11 interstate TRS providers, which consist of entities whose core businesses are as interexchange carriers, local exchange carriers, state-managed entities, and non-profit organizations. This is recent data from National Exchange Carriers Association, which administers the Interstate TRS Fund. We note that currently there are no wireless IP Relay TRS providers. However, we welcome comments on the proposals in our Second Notice of Proposed Rulemaking from wireless service providers. We do not have data specifying the number of these providers that are either dominant in their field of operations, are not independently owned and operated, or have more than 1,500 employees, and we are thus unable at this time to estimate with greater precision the number of TRS providers that would qualify as small business concerns under the SBA's definition. We note, however, that these providers include large interexchange carriers and incumbent local exchange carriers. Consequently, we estimate that there are fewer than 11 small TRS providers that may be affected by the proposed changes. We seek comment generally on our analysis identifying TRS providers, and specifically on whether we should conclude, for RFA purposes, that any TRS providers are small entities. There is currently one provider of IP Relay TRS, WorldCom, Inc. WorldCom, Inc. is not a small entity. AT&T Corp. and Sprint, Inc. have indicated their intention to provide IP Relay TRS. These two corporations are not small entities. Therefore they are outside the statutory mandated scope of this IRFA.

If rules establishing a reimbursement system for IP Relay providers are promulgated pursuant to this proceeding, all providers of IP Relay, including small entities, will be required to report to the TRS Administrator data needed to calculate their reimbursement amount. This data would be provided on an existing Interstate TRS Fund Administrator's form. This form is straightforward and simple to complete. In addition, the form represents data that is already collected by TRS providers.

The RFA requires an agency to describe any significant, specifically small business, alternatives that it has considered in reaching its proposed approach, which may include the following four alternatives (among others): “(1) The establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) the clarification, consolidation, or simplification of compliance and reporting requirements under the rule for such small entities; (3) the use of performance rather than design standards; and (4) an exemption from coverage of the rule, or any part thereof, for such small entities.” 5 U.S.C. 603(c)(1)-(c)(4).

The proposals in the Second Further Notice of Proposed Rulemaking, and the comments the Commission seeks regarding them, are part of the Commission's analysis of its role with respect to the implementation and operation of nationwide TRS for persons with hearing and speech disabilities. The guiding principle shaping these proposals is Congress' direction to the Commission to ensure that TRS keeps pace with advancing technology and that the Commission's rules do not discourage the implementation of technological advances or improvements. See 47 U.S.C. 225(d)(2). Easily the majority of TRS service is provided by large interexchange carriers and incumbent local exchange carriers. The majority of IP Relay TRS is likely to be provided by these same carriers. Currently, WorldCom, which is a large entity, is the only provider of IP Relay. We believe that the number of small entities impacted by these proposals, apparently 11, would be potentially very small. With respect to proposals in the Second Further Notice of Proposed Rulemaking , common carriers providing voice transmission services that are subject to the TRS rules, including small entities, may comply with their obligations individually, through designees, through competitively selected vendors, or in concert with other carriers. See 47 U.S.C. 225(c). Because of the array of options available to TRS providers when complying with these requirements, the Commission expects that the proposals contained in the Second Further Notice of Proposed Rulemaking will have minimal impact on small entities. We tentatively conclude that our proposals in the Second Further Notice of Proposed Rulemaking would impose minimum burdens on small entities. We seek comment on our tentative conclusion.

At this time, there is no mechanism available that would allow differentiation between intra- and inter-state calls made through the Internet. The Second Further Notice of Proposed Rulemaking identifies and requests comment on establishing a mechanism for reimbursing IP Relay providers based on the use of a fixed allocator. If an allocator were to be established, all TRS providers, including small entities, would be able to determine the appropriate amount for reimbursement. Such an approach would satisfy the statutory requirement that costs caused by interstate relay service be recovered from all subscribers for every interstate service. An alternative the Commission is considering is making the interim arrangement of cost recovery from the Interstate TRS Fund for all calls permanent. We recognize that this alternative may benefit small TRS providers, by simplifying reporting requirements and clarifying reimbursement amounts. We seek comment on the statutory basis for such a decision.

None.

It is further ordered that, pursuant to the authority contained in sections 1, 2, 4(i), 4(j), 225, 303(r), and 403 of the Communications Act of 1934, as amended, 47 U.S.C 151, 154(i), 154(j), 225, 303(r), and 403, the Notice of proposed rulemaking is adopted. Comments regarding the Notice of proposed rulemaking are requested as described.

It is further ordered that the Commission's Consumer and Governmental Affairs Bureau, Reference Information Center, shall send a copy of this Second Further Notice of Proposed Rulemaking, including the Initial Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of the Small Business Administration.

This is a synopsis of the Commission's Notice of Proposed Rule Making, MB Docket No. 02-130, adopted May 29, 2002, and released June 5, 2002. The full text of this document is available for public inspection and copying during regular business hours in the FCC Reference Information Center, Portals II, 445 12th Street, S.W., Room CY-A257, Washington, DC, 20554. This document may also be purchased from the Commission's duplicating contractor, Qualex International, Portals II, 445 12th Street, SW, Room CY-B402, Washington, DC, 20554, telephone 202-863-2893, facsimile 202-863-2898, or via e-mail: qualexint@aol.com.

Provisions of the Regulatory Flexibility Act of 1980 do not apply to this proceeding.

Members of the public should note that from the time a Notice of Proposed Rule Making is issued until the matter is no longer subject to Commission consideration or court review, all ex parte contacts are prohibited in Commission proceedings, such as this one, which involve channel allotments. See 47 CFR 1.1204(b) for rules governing permissible ex parte contacts.

For information regarding proper filing procedures for comments, see 47 CFR 1.415 and 1.420.

For the reasons discussed in the preamble, the Federal Communications Commission proposes to amend 47 CFR part 73 as follows:

This is a synopsis of the Commission's Notice of Proposed Rule Making, MB Docket No. 02-129, adopted May 29, 2002, and released June 5, 2002. The full text of this document is available for public inspection and copying during regular business hours in the FCC Reference Information Center, Portals II, 445 12th Street, SW., Room CY-A257, Washington, DC 20554. This document may also be purchased from the Commission's duplicating contractor, Qualex International, Portals II, 445 12th Street, SW., Room CY-B402, Washington, DC 20554, telephone 202-863-2893, facsimile 202-863-2898, or via-e-mail qualexint@aol.com.

Provisions of the Regulatory Flexibility Act of 1980 do not apply to this proceeding.

Members of the public should note that from the time a Notice of Proposed Rule Making is issued until the matter is no longer subject to Commission consideration or court review, all ex parte contacts are prohibited in Commission proceedings, such as this one, which involve channel allotments. See 47 CFR 1.1204(b) for rules governing permissible ex parte contacts.

For information regarding proper filing procedures for comments, see 47 CFR 1.415 and 1.420.

For the reasons discussed in the preamble, the Federal Communications Commission proposes to amend 47 CFR part 73 as follows:

This is a synopsis of the Commission's Notice of Proposed Rule Making, MB Docket No. 02-106, MB Docket No. 02-107, MB Docket No. 02-108, and MB Docket No. 02-109, adopted May 1, 2002, and released May 17, 2002. The full text of this Commission decision is available for inspection and copying during normal business hours in the FCC Reference Information Center (Room CY-A257), 445 12th Street, SW., Washington, DC. The complete text of this decision may also be purchased from the Commission's copy contractor, Qualex International, Portals II, 445 12th Street SW., Room CY-B402, Washington, DC 20554.

The Commission requests comments on a petition filed Northern Paul Bunyan Radio Company proposing the allotment of Channel 289A at Alpena, Michigan, as the community's third local commercial FM transmission service. Channel 289A can be allotted to Alpena in compliance with the Commission's minimum distance separation requirements with a site restriction of 6.4 kilometers (4.0 miles) northeast to avoid a short-spacing to the licensed site of Station WKHQ-FM, Channel 290C1, Charlevoit, Michigan. The coordinates for Channel 289A at Alpena are 45-05-30 North Latitude and 83-21-48 West Longitude. Since Alpena is located within 320 kilometers (200 miles) of the U.S.-Canadian border, Canadian concurrence has been requested.

The Commission requests comments on a petition filed by Northern Paul Bunyan Radio Company proposing the allotment of Channel 226A at Harrisville, Michigan, as the community's first local commercial FM transmission service. Channel 226A can be allotted to Harrisville in compliance with the Commission's minimum distance separation requirements at city reference coordinates. The coordinates for Channel 226A at Harrisville are 44-39-22 North Latitude and 83-17-41 West Longitude.

The Commission requests comments on a petition filed by Donald F. White and Jerry E. White, d/b/a Morgan Radio Company, proposing the allotment of Channel 228A at Morgan, Georgia, as the community's first local aural transmission service. Channel 228A can be allotted to Morgan in compliance with the Commission's minimum distance separation requirements with a site at city reference coordinates. The coordinates for Channel 228A at Morgan are 31-32-15 North Latitude and 84-35-58 West Longitude.

Provisions of the Regulatory Flexibility Act of 1980 do not apply to this proceeding.

Members of the public should note that from the time a Notice of Proposed Rule Making is issued until the matter is no longer subject to Commission consideration or court review, all ex parte contacts are prohibited in Commission proceedings, such as this one, which involve channel allotments. See 47 CFR 1.1204(b) for rules governing permissible ex parte contacts.

For information regarding proper filing procedures for comments, see 47 CFR 1.415 and 1.420.

For the reasons discussed in the preamble, the Federal Communications Commission proposes to amend 47 CFR Part 73 as follows:

This is a synopsis of the Commission's Notice of Proposed Rule Making, MB Docket No. 02-118, adopted May 15, 2002, and released May 24, 2002. The full text of this Commission decision is available for inspection and copying during normal business hours in the FCC's Reference Information Center at Portals II, CY-A257, 445 Twelfth Street, SW., Washington, DC. This document may also be purchased from the Commission's duplicating contractors, Qualex International, Portals II, 445 12th Street, SW, Room CY-B402, Washington, DC 20554, telephone 202-863-2893, or via e-mail: qualexint@aol.com.

Provisions of the Regulatory Flexibility Act of l980 do not apply to this proceeding.

Members of the public should note that from the time a Notice of Proposed Rule Making is issued until the matter is no longer subject to Commission consideration or court review, all ex parte contacts are prohibited in Commission proceedings, such as this one, which involve channel allotments. See 47 CFR 1.1204(b) for rules governing permissible ex parte contacts.

For information regarding proper filing procedures for comments, see 47 CFR 1.415 and 1.420.

For the reasons discussed in the preamble, the Federal Communications Commission proposes to amend 47 CFR part 73 as follows:

This is a synopsis of the Commission's Notice of Proposed Rule Making, MB Docket No. 02-119, adopted May 15, 2002, and released May 24, 2002. The full text of this Commission decision is available for inspection and copying during regular business hours in the FCC's Reference Information Center at Portals II, 445 12th Street, SW., CY-A257, Washington, DC, 20554. This document may also be purchased from the Commission's duplicating contractors, Qualex International, Portals II, 445 12th Street, SW., Room CY-B402, Washington, DC, 20554, telephone 202-863-2893, facsimile 202-863-2898, or via e-mail qualexint@aol.com.

The provisions of the Regulatory Flexibility Act of 1980 do not apply to this proceeding.

Members of the public should note that from the time a Notice of Proposed Rule Making is issued until the matter is no longer subject to Commission consideration or court review, all ex parte contacts are prohibited in Commission proceedings, such as this one, which involve channel allotments. See 47 CFR 1.1204(b) for rules governing permissible ex parte contacts.

For information regarding proper filing procedures for comments, See 47 CFR 1.415 and 1.420.

For the reasons discussed in the preamble, the Federal Communications Commission proposes to amend 47 CFR Part 73 as follows:

This is a synopsis of the Commission's Notice of Proposed Rule Making, MB Docket No. 02-105, adopted May 15, 2002, and released May 24, 2002. The full text of this Commission decision is available for inspection and copying during normal business hours in the FCC's Reference Information Center at Portals II, CY-A257, 445 Twelfth Street, SW., Washington, DC. This document may also be purchased from the Commission's duplicating contractors, Qualex International, Portals II, 445 12th Street, SW., Room CY-B402, Washington, DC 20554, telephone 202-863-2893, or via e-mail qualexint@aol.com

Provisions of the Regulatory Flexibility Act of 1980 do not apply to this proceeding.

Members of the public should note that from the time a Notice of Proposed Rule Making is issued until the matter is no longer subject to Commission consideration or court review, all ex parte contacts are prohibited in Commission proceedings, such as this one, which involve channel allotments. See 47 CFR § 1.1204(b) for rules governing permissible ex parte contacts.

For information regarding proper filing procedures for comments, see 47 CFR §§ 1.415 and 1.420.

For the reasons discussed in the preamble, the Federal Communications Commission proposes to amend 47 CFR Part 73 as follows:

On February 25, 1998, we received a petition from Kieran Suckling, of the Southwest Center for Biological Diversity requesting that the Service add the Rio Grande cutthroat trout ( Oncorhynchus clarki virginalis ) to the list of threatened and endangered species. The petition addressed the range-wide distribution of the Rio Grande cutthroat trout that includes populations in Colorado and New Mexico. Section 4(b)(3)(B) of the Endangered Species Act (Act) requires that we make a finding on whether a petition to list, delist or reclassify a species presents substantial scientific or commercial information indicating that the petitioned action is—(a) not warranted; (b) warranted; or (c) warranted but precluded by listing proposals of higher priority. We subsequently published a notice of a 90-day finding in the Federal Register (63 FR 49062) on September 14, 1998. In the 90-day finding we concluded that the petition did not present substantial information indicating that listing of the Rio Grande cutthroat trout may be warranted.

On June 9, 1999, a complaint was filed by the Southwest Center for Biological Diversity challenging the September 14, 1998, 90-day petition finding as violating the Act and the Administrative Procedures Act. While the litigation was pending, we received information (particularly related to the presence of whirling disease in hatchery fish in the wild) that led us to believe that further review of the status of the species was warranted. On November 8, 2001, a settlement agreement executed by both parties (the Service and the Southwest Center for Biological Diversity) was filed with the court. The settlement stipulates that we will initiate a candidate status review for the Rio Grande cutthroat trout. The settlement also stipulates that on or before June 3, 2002, we will make a determination concerning the results of this review and, shortly thereafter, we will publish our determination in the Federal Register . The agreement also states that we will not vacate our previous determination in the interim.

The Rio Grande cutthroat trout (RGCT) is a subspecies of cutthroat trout, endemic to the Rio Grande, Pecos, and possibly the Canadian River Basins in New Mexico and Colorado. The first specimens that were collected for scientific purposes came from Ute Creek in Costilla County, Colorado. Girard described these fish as Salar virginalis in 1856 (Behnke 1967). Cutthroat trout are distinguished by the red to orange slashes in the throat folds beneath the lower jaw. Rio Grande cutthroat trout have irregular shaped spots that are concentrated behind the dorsal fin (largest fin on the back), smaller less numerous spots located primarily above the lateral line anterior to the dorsal fin, and basibranchial (located on the floor of the gill chamber) teeth that are minute or absent. Rio Grande cutthroat trout are light rose to red-orange on the sides and pink or yellow-orange on the belly.

The historical distribution of RGCT is not known with certainty. In general, it is assumed that RGCT occupied all streams capable of supporting trout in the Rio Grande and Pecos basins (Stumpff and Cooper 1996). It is unclear if RGCT were also present in the Canadian River Basin. The Pecos River is a tributary of the Rio Grande, so a historic connection between RGCT in the two basins is possible. The Canadian River, tributary to the Mississippi River, has no connection with the Rio Grande. It is possible that through headwater capture (a tributary from one watershed joins with a tributary from another), there may have been natural migration of fish between the Pecos and Canadian headwater streams. However, because trout were moved and stocked frequently beginning in the 1800s, the difficulties in correctly identifying fish, and errors in locality records make it difficult to know if early reports of trout from the Canadian River headwaters were indeed RGCT. Genetic testing of RGCT from the three basins using molecular methods has not yet clarified the situation, but research continues on this subject (pers. comm., Yvette Paroz, New Mexico Department of Game and Fish (NMDGF), 2002). Biologists have suggested that RGCT may have occurred in Texas (Garrett and Matlock 1991) and Mexico (Behnke 1967). Currently, the southern most distribution of RGCT occurs in Animas Creek, Sierra County, New Mexico, and Indian Creek on the Mescalero Apache Indian Reservation in Otero County, New Mexico.

Because the RGCT has not been studied intensively, less is known specifically about their habitat requirements or life history characteristics than is known for several other subspecies of cutthroat trout. As is true of other subspecies of cutthroat trout, it is found in clear, cold streams. Unlike some subspecies of cutthroat trout, such as the Bonneville ( O. c. utah ) and Yellowstone ( O. c. bouvieri ), RGCT did not originally inhabit large lake systems. However, they have been introduced into coldwater lakes and reservoirs. They spawn as high flows from snowmelt recede, typically from the middle of May to the middle of June in New Mexico (NMDGF 2002). Spawning is probably keyed to day length, water temperature, elevation, and runoff (Stumpff 1998, Sublette et al. 1990). The size of mature females ranges from 10.7-26 centimeters (4.21-10.27 inches (in)) (Stumpff 1998). Number of eggs per female varies greatly depending on the size and age of the fish. Stumpff (1998) reported that average egg production from 93 females spawned from Rio Puerco, New Mexico, was less than 100 eggs per female; however, these fish may have been collected after the peak of the spawn. From efforts to develop RGCT broodstock, fish from several streams were collected and spawned from 1994 to 1997. The average number of eggs per female from these collections was 175 (Stumpff 1998). The mean number of eggs taken from 12 RGCT from Indian Creek (Tularosa Basin) was 311 with the range between 232-454 (Cowley 1993). Sublette et al. (1990) state that females produce between 200-4,500 eggs; however, this figure applies to all cutthroat subspecies and is not specific to RGCT.

It is unknown if RGCT spawn every year or if some portion of the population spawns every other year as has been recorded for westslope cutthroat trout ( O. c. lewisi ) (McIntyre and Rieman 1995). Likewise, while it is assumed that females mature at age 3, they may not spawn until age 4 or 5 as seen in westslope cutthroat trout (McIntyre and Rieman 1995). Sex ratio is also unknown, but a ratio skewed towards more females might be expected (Cowley 1993). Although Yellowstone (Gresswell 1995), Colorado River ( O. c. pleuriticus ) (Young 1995), Bonneville (Service 2001), and westslope (Bjornn and Mallet 1964, McIntyre and Riemand 1995) cutthroat subspecies are known to have a migratory life history phase, it is not known if RGCT currently have, or once had, a migratory form when there were fluvial (flowing water) connections among watersheds.

Most cutthroat trout are opportunistic feeders, eating both aquatic invertebrates and terrestrial insects that fall into the water (Sublette et al. 1990). RGCT evolved with Rio Grande chub ( Gila pandora ), longnose dace ( Rhinichthys cataractae ) (all basins); Rio Grande sucker ( Catastomus plebius ) (Rio Grande Basin); white sucker ( C. commersoni ) and creek chub ( Semotilus atromaculatus ) (Pecos and Canadian Basins), and the southern redbelly dace ( Phoxinus erythrogaster ) (Canadian River Basin) (Rinne 1995). Many of these fish have either been extirpated from streams with RGCT or are greatly reduced in number. It is not known if they once were an important component of RGCT diet. Other species of cutthroat trout become more piscivorous (fish eating) as they mature (Sublette et al. 1990, Moyle 1976), and cutthroat trout living in lakes will prey heavily on other species of fish (Echo 1954). It is possible that native cyprinids (i.e., chubs, minnows, and dace) and catastomids may have once been important prey items for RGCT.

Growth of cutthroat trout varies with water temperature and availability of food. Slowest growth is seen in high-elevation streams where temperatures are cold and productivity is typically low. Most populations of RGCT are found in high-elevation streams and under these conditions growth may be relatively slow, and time to maturity may take longer than is seen in subspecies that inhabit lower elevation streams. Based on 471 fish from 3 streams, Cowley (1993) estimated the following age/size classes: age 0, 30-64 millimeters (mm), (1.0-2.5 in); age 1, 65-114 mm (2.5-4.5 in); age 2, 115-149 mm (4.5-5.9 in); age 3, 150-174 mm (5.9-6.9 in); age 4, 175-205 mm (6.9-8.0 in); and age 5, over 205 mm (8.0 in). At Seven Springs Hatchery, eggs hatched in 32 days at 10 degrees Celcius (°C), 50 degrees Fahrenheit (°F) (NMDGF 2002).

Typical of trout, RGCT require four types of habitat for survival: spawning habitat, nursery or rearing habitat, adult habitat, and overwintering habitat. Spawning habitat consists of clean gravel (little or no fine sediment present) that ranges between 6 to 40 mm (0.24-1.6 in) (NMDGF 2002). Nursery habitat is usually at the stream margins where water velocity is low and water temperature is slightly warmer. Harig and Fausch (in press) have found that water temperature may play a critical role in the life history of the young of the year cutthroat. Streams with cold temperatures (less than 7.8°C (46°F) mean daily temperature for July) may not have successful recruitment or reproduction in most years. The cold temperatures can delay spawning and prolong egg incubation. Fry (recently hatched fish) emerge later in the summer and may not have sufficient time to grow and gain metabolic reserves to be able to overwinter. Overwintering habitat in the form of large deep pools that do not freeze is also necessary for survival. Lack of large pools may be a limiting factor in headwater streams (Harig and Fausch in press).

It has been estimated that there are 106 populations of RGCT in New Mexico (NMDGF 2002) and 161 in Colorado (Alves et al. 2002) in both streams and lakes. All of these populations contribute in some way to the overall security of the range-wide population. However, many of these populations are hybrids, some populations have an extremely low number of individuals, and some have been invaded by nonnative salmonids that either hybridize or compete with RGCT. These factors can make individual RGCT populations more vulnerable to extinction and limit the likelihood of their long-term persistence. Conservation actions can remove or reduce these threats. Because ecological factors affecting persistence vary among populations, we decided to use criteria to categorize populations based on vulnerability to threats that affect long-term persistence. The populations deemed most likely to persist are considered “core” populations. Criteria were established for purity, population stability, and security from invasion by nonnative salmonids. We recognize that our criteria are conservative, and that population estimates are not precise. For these reasons we also evaluate non-core populations (discussed in the conclusion) that do not meet all of the core criteria but are important components of the range-wide population.

For the purposes of this review we considered “pure” to mean that there was less than 1 percent introgression (genetic mixing) with either rainbow or another subspecies of cutthroat trout. Allendorf et al. (2001) suggest that conservation efforts should focus on maintaining and expanding remaining pure populations, and we have decided to follow this guidance for RGCT. To meet our criteria, testing for purity had to include either allozymes (forms of an enzyme) or nuclear DNA (genetic coding molecule in cell nucleus). We did not include populations that were tested only with meristics (counts of body parts). Although a meristic evaluation is a good first step to determine purity, individuals can look pure and still have a significant level of introgression. We also did not include the results from mitochondrial DNA (mtDNA). Because mtDNA is passed on only from the mother to her offspring, it can only detect hybridization when the mother is a rainbow trout or another subspecies of cutthroat trout and the father is RGCT; however, it cannot detect hybridization when the mother was RGCT and the father was another species. For this reason we have not included populations that were only tested with meristics and mtDNA or mtDNA only.

The exclusion of populations with evidence of greater than 1 percent introgression does not imply that these populations may not be important to the species conservation or that they should be eliminated from stream systems. They provide recreational opportunities for anglers; in some watersheds they may act as a buffer between pure populations and downstream areas where nonnatives are present, and in some streams hybrids may still contain genes unique to a watershed. There is a minimum of 30 pure, remnant populations of RGCT widely distributed range-wide. It is likely that the gene pool of the hybrid populations is represented in one of the many pure, remnant populations. In terms of restoration, only pure populations are used for translocation into renovated streams or for use as broodstock in hatcheries. For these reasons we view pure populations as particularly important to the status of the RGCT.

We identified a total of 82 populations (remnant and transplants) in New Mexico and Colorado that are genetically pure. An additional 13 populations have been identified as pure by NMDGF and Colorado Department of Wildlife (CDOW) based on meristics or a combination of meristics and mtDNA. Genetics testing is in progress on 12 populations in New Mexico, and 31 more populations are scheduled for testing through 2005 (NMDGF 2002). Once additional genetic testing is completed, it is likely that several more pure populations will be identified.

For the long-term persistence of a population, sufficient population size is needed to prevent inbreeding depression (genetic defects caused by mating of closely related family members) and maintain genetic variation (Franklin 1980). Large populations also have been suggested to be less susceptible to both demographic events (random changes in the population structure, e.g., uneven male/female ratios), and environmental random events (random changes in the fishes' surroundings) that can eliminate small populations. The expected time to extinction decreases as population size decreases (Rieman et al. 1993). Habitat size (length of stream) and habitat quality affect the potential size of the population: the larger the fragment, the more likely the population will be large and able to resist chance extinctions (Gilpin and Soulé 1986). Smaller stream fragments can have less diverse habitats and a lack of refugia (areas where individuals can survive through environmentally challenging periods) that can lead to greater population fluctuations through time (Rieman and McIntyre 1995). As long as birth rate equals or exceeds death rate, small populations may persist; however, smaller isolated populations may be more vulnerable to detrimental effects of genetic change and detrimental effects of demographic and environmental change.

Dr. David Cowley (New Mexico State University) developed a model to determine population viability for RGCT in New Mexico (NMDGF 2002). The model incorporates habitat size, population size, reproductive success, a probability of extinction of less than 10 percent over 100 years, and a probability that long-term net effective population size (N e ) of 500 is greater than 90 percent. For the purposes of this review, we consider elements in the model and work done on other populations of salmonids to evaluate the likelihood of long-term population persistence. Three factors were considered: population number, biomass (weight of fish per unit area), and stream length. Of these factors, population number is considered to be the most important for viability and has been discussed most often in the literature.

Franklin (1980) proposed some general rules for effective population sizes to maintain a genetically viable population. Franklin's “50/500” rule is still used as a starting point by which to judge the viability of populations. This rule suggests that a short-term N e size of 50 will prevent an unacceptable rate of inbreeding, and a long-term N e size of 500 will maintain overall genetic variability. The N e size refers to an ideal population of breeding adults produced by the random union of an equal number of male and female gametes randomly drawn from the previous generation. The population size (N) needed to meet the effective population varies according the percent of individuals that are capable of breeding, the number of animals that actually breed, sex ratio, and other factors. Typically, N e /N ratios vary from 10 to 33 percent giving long term population sizes of 2,000 to 5,000 (Thompson 1991). Population sizes between 2,000 and 5,000 have been suggested as appropriate for the long-term persistence of other fish populations (Nelson and Soulé 1987, Reiman and McIntyre 1993, Hilderbrand and Kershner 2000), based on both genetic and demographic consideration.

For this analysis we consider 2,500 total fish in a population to be a number that will ensure long-term persistence ( i.e., reduce the risks associated with small population size alone). Although larger populations are most likely incrementally “safer,” in the absence of specific work on RGCT, we determined that 2,500 individuals is a reasonable number that falls within the range suggested for other salmonids. Although there are examples of persistence of much smaller populations of RGCT (100-500 individuals), these fish evolved in connected systems and we have no assurance at this time that they can persist ( i.e., survive as a species for 100-500 years). We do not know if isolated populations of RGCT can be sustained for long periods (100 years) in small stream fragments; however, managers have documented the persistence of small RGCT populations for at least 30 years (Interagency meeting on RGCT, pers. comm. 2002). There are 11 pure populations in New Mexico and 10 in Colorado that have more than 500 and less than 2,500 individuals and 15 populations in both States with less than 500 individuals.

Biomass of fish and stream length are related to population size. Both of these factors have been used as alternative methods to judge the viability of inland trout populations (Service 1998, Hilderbrand and Kershner 2000). In the greenback cutthroat recovery plan, one recovery goal is that populations have a biomass of 22 kilograms/hectare (kg/ha), 20 pounds/acre (ac) (lb/ac) (Service 1998). All the RGCT populations with 2,500 fish or more have a biomass greater than 22 kg/ha (20 lb/ac). The lowest biomass in the populations with 2,500 or more individuals is 29 kg/ha (26 lb/ac). Seventeen of 22 populations of RGCT with 2,500 fish or more have a biomass of 50 kg/ha (44.6 lb/ac) or more. Biomass is not considered a limiting factor in these pure populations.

Having sufficient stream length is another factor that can play a role in the survival of cutthroat trout populations (Hilderbrand and Kershner 2000, Harig and Fausch in press). Fish density is high for RGCT populations with over 2,500 individuals, suggesting that the stream length of 8 kilometers (km) (4.9 miles (mi)) suggested by Hilderbrand and Kershner (2000) is probably sufficient for most of the streams. Only one stream reach with a population of more than 2,500 fish is of a length shorter than is recommended. However, fish density is high (0.7 fish/meter, 0.21 fish/foot), and we deduce from this that the habitat is of high quality and sufficient to support a strong population.

We identified 22 pure populations with 2,500 or more fish, but there may be slightly more or slightly fewer. An inherent problem with using population size as a criterion for the status review is that populations fluctuate naturally from year to year. Survey sites might not represent the entire stream; a limited number of surveys have been conducted on each stream (0-4); survey methods vary; survey efficiency varies with crew experience and stream conditions (deep water, complex habitats such as beaver ponds, and low water conductivity decrease electrofishing efficiency); and surveys have not been conducted recently on some streams. Around every population estimate are upper and lower confidence intervals that may be large or small. It is possible that more populations should be included in the pure, secure, and stable category because they have slightly less than the 2,500 fish criterion employed here. Riley and Fausch (1992) found that two- and three-pass removal methods underestimate total abundance because of decreasing catchability of fish with each pass (electrofishing a set length of stream). Nearly all the survey results are from two- or three-pass methods, so it is possible that of the populations that did not meet the 2,500 fish criterion, some actually have 2,500 fish or more. It is possible that with new survey data the streams in the stable group could change with some dropping down below 2,500 fish and with others being added. Twelve populations in New Mexico that have tested pure have no population information available. It is possible that five of these, which are in longer stream segments (8 to 18 km [5.0 to 11.2 mi] long), would meet the 2,500 fish criterion.

A population of RGCT is not considered secure if nonnative salmonids are present. The presence of rainbow trout in RGCT populations is unacceptable because of hybridization. Because brook trout ( Salvelinus fontinalis ) and brown trout ( Salmo trutta ) are fall spawners (RGCT spawn in spring), they do not hybridize with RGCT. However, they are competitors for food and space, and there have been both historic and recent examples of population extirpation due to nonnative introductions. In some limited situations, co-existence of RGCT and brook or brown trout may occur, especially in high-gradient or high-elevation streams that may favor cutthroat trout. However, not enough is known about the competitive interactions between these fish to know what factors tip the scale in favor of the nonnatives over RGCT. Preliminary evidence from Peterson and Fausch (2001) indicate that brook trout have the most impact on young of the year Colorado River cutthroat trout. Competitive interactions between RGCT and brook or brown trout have not yet been studied. Where nonnatives are present, active management must occur to remove them on a regular basis or the nonnative trout will gradually replace RGCT. For the purposes of this review, the emphasis is on self-sustaining pure populations of RGCT. Brook and brown trout are present in several pure populations of RGCT. While these populations are less secure than the populations without nonnatives, removal of the nonnatives by State agency personnel on a regular basis can lead to stable RGCT populations. These populations are important to the overall status of the subspecies.

Inextricably linked to the presence of nonnatives is the presence of a barrier. Barriers prevent nonnatives from migrating into habitat occupied by RGCT. They also prevent the upstream migration of RGCT, limiting gene flow among populations. Until more watersheds with connecting tributaries are restored, having secure barriers to prevent invasion of nonnatives is essential for protecting existing populations. Once large watersheds are restored, upstream barriers could be breached to allow for free passage of RGCT upstream and downstream. For this status review, populations had to be protected by a barrier to be considered secure with no nonnative trout above the barrier. We identified 13 populations that are pure (confirmed by appropriate genetic testing), have over 2,500 fish, are secured by a barrier, and do not coexist with nonnatives (see Table 1 below).

Section 4 of the Act and regulations (50 CFR 424) promulgated to implement the listing provisions of the Act set forth the procedures for adding species to the Federal lists. A species may be determined to be threatened or endangered due to one or more of the five factors discussed below.

The historic range of RGCT has been greatly reduced over the last 150 years. Many populations have been lost or impacted by water diversions, dams, habitat degradation, changes in hydrology, hybridization with rainbow trout, or competition with brown or brook trout. Quantifying the exact magnitude of loss in either number of fish or habitat is difficult because there are no baseline data. Stumpff and Cooper (1996) estimated the loss in habitat (stream miles) to be about 91 percent in New Mexico. Harig and Fausch (1998) suggest that native cutthroat (greenback and RGCT) have been reduced to less than one percent of their historic habitat. Because RGCT are now restricted to headwater and first and second order streams that are narrow and small compared to larger second, third, and fourth order streams they once occupied, the absolute loss of habitat is greater than stream miles might indicate and includes the loss of diversity of habitat found in larger stream systems. As a consequence of the habitat loss, RGCT populations that were once connected are now fragmented.

The constriction and fragmentation of RGCT habitat most likely began gradually about 1350 A.D. and accelerated in the late 1800s. Agriculture in the Rio Grande Valley began about 1350 A.D. and water diversions for the irrigation of crops started at that time (Crawford et al. 1993). Diversion of water from tributaries of the Rio Grande probably represents the first interruptions in RGCT habitat. Following Spanish colonization in 1598, human influence increased as more land was cleared and more acequias (irrigation canals) were built to divert water into fields. The greatest contraction in RGCT habitat most likely occurred between 1880 and 1973. In 1880, the maximum number of acres in the middle Rio Grande Valley were under cultivation, and grazing pressure was intense with over 2 million sheep and 200,000 cattle, horses, and mules (Crawford et al. 1993). In addition, it is likely that RGCT were sought for subsistence during this time. In the early 1900s, numerous water supply and flood control dams were built in the Rio Grande headwaters (Crawford et al. 1993). Rainbow, brook, and brown trout were introduced at the turn of the century (Sublette et al. 1990). The livestock industry grew through the mid-1930s and livestock numbers increased far beyond the carrying capacity of the range and had a widespread negative impact on riparian systems (Meehan and Platts 1978). In addition, timber harvest and an associated increase in roads led to increased levels of sedimentation in the streams. As a result of these multiple impacts, reduction of RGCT habitat occurred range-wide, affecting essentially every watershed.

Habitat fragmentation reduces the total area of habitat available, reduces habitat complexity, and isolates the fragments (Saunders et al. 1991, Rieman and McIntyre 1993, Rieman and McIntyre 1995, Burkey 1995). Originally, many watersheds supporting RGCT would have been connected creating an interconnected network. For example, in Colorado, the Trinchera, Conejos, Culebra, Costilla, and Alamosa Rivers would all have been connected through the upper Rio Grande, forming a vast network of streams. Each of these watersheds is now isolated from one another, and RGCT are restricted to fragments of streams. Compared to the lower elevation, larger order streams, the high-elevation streams that RGCT are now restricted to may represent relatively poor habitat. Water temperatures are colder, productivity is lower, length of time for young-of-the-year development is shorter, and amount of habitat available is less. For some isolated populations, fragmentation may lead to a negative growth rate and extinction over time (Terborgh and Winter 1980).

Burkey (1995) suggests that fragmentation accelerates extinction, especially when dispersal among fragments is not possible, as is the case with some RGCT populations. Isolated populations are vulnerable to extinction through demographic change (random changes in the population structure, e.g., uneven male/female ratios), environmental change (random changes in the fishes' surroundings) and catastrophes (e.g., fires and massive flooding), loss of genetic heterozygosity (genetic diversity) and fixation of rare detrimental alleles (inherited forms of a genetic trait), and human disturbance (Burkey 1995). It has been suggested that spatial and temporal complexity is needed so that the expression of complex life histories ( i.e., migratory and sedentary forms) can be maintained (Rieman et al. 1993, Dunham et al. 1997, Harig and Fausch in press). In fragmented habitats, fish are unable to migrate or if they do migrate downstream past a barrier, they are lost from the population. It is possible that migratory behavior is a hedge against catastrophes. Individuals that have migrated away from a stream segment escape death during the catastrophic event and are then available to recolonize the open habitat once it becomes suitable again (Rieman and McIntyre 1993). In streams subject to a variety of natural extreme events (drought, fire, flooding) such as the streams in New Mexico, having a variety of life histories may have been an evolutionarily advantageous adaptation. Currently, fish migrating from isolated streams are lost from the population, and, if a population is extirpated, recolonization is not possible except through specific management activities such as stocking. Over time, this can lead to the loss of migratory behavior as the genes responsible for the behavior are non-advantageous and are essentially selected against.

Watershed scale projects have been initiated on both private and National Forest lands and are in various phases of implementation. Three projects are briefly summarized. A joint project between Vermejo Park Ranch and the States of Colorado and New Mexico to restore the Costilla Creek watershed is in progress. A Memorandum of Understanding was signed by all parties in 2001 and an Environmental Assessment was completed. Restoration is scheduled for July 2002. The restoration will remove brook trout, brown trout, and introgressed cutthroat trout and reintroduce pure RGCT into 4 tributaries and 4 small lakes, totaling 22 km (13.6 miles) of stream and 9.5 ha (23.5 acres) of lake. A draft environmental assessment has been completed on Animas Creek on the Ladder Ranch, Sierra County, New Mexico, in cooperation with the Gila National Forest. The restoration portion of the project is scheduled to occur in October 2002. Approximately 48 km (29.8 miles) of stream will be restored. A Watershed Restoration Action Strategy for the Comanche Creek watershed has been written, and a work plan has been submitted and approved by the New Mexico Environment Department. Six partners will work together to improve habitat conditions on Comanche Creek, a watershed with over 70 km of streams and pure RGCT in the upper tributaries. Recovery of this watershed will be a substantial gain for RGCT, especially if the pure populations expand downstream.

The recent establishment of the Valles Caldera National Preserve presents the opportunity to restore the headwaters of the East Fork Jemez and San Antonia Rivers with RGCT. With the Santa Fe National Forest managing the land downstream of the Valles Caldera, there is the opportunity to connect the two river systems together and restore over 112 km (69.6 miles) of stream. Initial contacts have been made and both parties are interested in pursuing this large-scale restoration project. The Rio Santa Barbara watershed (Camino Real Ranger District, Carson National Forest) is another site with excellent potential to reconnect multiple populations (West Fork, Middle Fork, and East Forks of Rio Santa Barbara, Jicarita, and Indian Creeks). In 1999, a barrier was built on East Fork and the barrier on the Middle Fork Rio Santa Barbara was improved. Brown trout were removed from above the barriers from 1998 to 2000. While some progress has been made, we note that a significant amount of planning and on the ground activities remain to be done. We recognize that these projects may not come to fruition, and we are not relying on them as part of this status review. However, we mentioned them here to recognize that the States and Federal agencies are looking for opportunities to conserve the RGCT in areas where it historically occurred.

Habitat fragmentation is a threat that can be alleviated by management activities. Currently there are five pure, stable, and secure populations that are connected to at least one other tributary. Six other large, pure, connected populations exist but nonnatives are present. State and Forest Service personnel remove nonnatives from these streams during population surveys and as part of ongoing management actions.

The Service determines that fragmentation is not a threat to the persistence of these 13 populations now or in the foreseeable future. All the 13 pure, stable, and secure populations have over 2,500 fish, which provide sufficient numbers to prevent an unacceptable rate of inbreeding and to maintain genetic variability in these populations. Recognizing this, population sizes between 2,000 and 5,000 have been suggested as appropriate for the long-term persistence of other fish populations (Nelson and Soulé 1987, Reiman and McIntyre 1993, Hilderbrand and Kershner 2000), based on both genetic and demographic consideration. Additionally, the length of these streams (mean equals 12.4 km (7.7 mi)) is sufficient to provide diverse habitats to meet all the life history requirements of the fish. This statement is supported by the high fish density (mean equals 0.5 fish/m (0.15 fish/ft)) present in these core streams. Another potential threat from fragmentation is related to catastrophic events. However, if a catastrophic event (e.g., fire, drought) results in the extirpation of one or more of these 13 populations, the States and Federal agencies have the capability to replace the population with hatchery fish or fish transplanted from another pure population.

Rio Grande cutthroat habitat has been degraded by many activities. Impacts have been caused by livestock grazing and timber harvest (with associated roads). Mining has impacted specific sites. Livestock grazing practices on public land in New Mexico have improved. Changing livestock stocking levels and improved management practices have occurred and will continue to occur following current management direction (James Webb, Rio Grande National Forest, in litt. 1994). Restoration of riparian areas and maintaining healthy habitat is a priority for the Forest Supervisors and Regional Foresters (Leonard Atencio, Santa Fe National Forest, in litt. 2002, Peter Clark, Rio Grande National Forest in litt. 2002). Although recovery of these habitats can be slow, the continued commitment of managers to restore watersheds will continue to improve RGCT habitat over time.

Timber harvest and associated road building have also led to the deterioration of RGCT habitat. However, timber harvest in the National Forests has declined appreciably in the last 15 years. As an example, in New Mexico, from 1987 to 1990 the amount of timber cut averaged 146,722 million board feet (MBF). From 1991 to 2001 the average has been 35,740 (MBF) (Paul Fink, USDA Forest Service, in litt. 2002). Few new roads are built in conjunction with timber harvest as the existing infrastructure can be used (Paul Fink, USDA Forest Service, pers. comm. 2002). Roads are being decommissioned and obliterated on all the forests, reducing their contribution to sedimentation of streams. For example in Region 3 of the USDA Forest Service, in 1999, 2000, and 2001, 528, 375, and 332 miles of roads, respectively, were decommissioned (Mike Noland, USDA Forest Service, in litt. 2002). Many of the current pure, stable, and secure populations occur at elevations where timber harvest has not occurred and therefore, have not been affected. As management activities proceed to expand populations to lower elevations, restoration will continue to improve habitat condition in those areas, such as is planned on Comanche Creek (discussed above).

Habitat condition in streams with pure, stable, and secure populations was assessed by CDOW, NMDGF, or Forest Service biologists depending on which agency was most familiar with a particular stream. Condition was rated either as 0, no habitat problems; 0-1 which usually indicated that headwater reaches were in good condition and lower reaches had problems in discrete areas; 1, some problems identified (sedimentation, lack of pools, warm water temperature, heavy metals, etc.); and 2, pervasive problems related to RGCT habitat were identified. In most instances, sedimentation and problems related to livestock grazing were identified as primary sources of habitat degradation. While streams that are rated with a “1” have some level of habitat degradation that probably prevents populations from reaching maximum reproductive capability, the degradation is not judged to be a threat to the existence of any of the populations. In most instances, stream habitat condition was rated between the range of 0 to 1, with very few streams rated as 2. Based on the outcome of these assessments for each stream, it is the opinion of the agencies responsible that habitat problems are typically localized and can be or are being addressed through management practices (Interagency meeting on RGCT, pers. comm. 2002).

Based on the information provided to us by agency personnel (Interagency meeting on RGCT, pers. comm. 2002), discussed in the paragraph above, as well as the information stated above on timber harvest and livestock grazing, the Service determines that habitat condition is not a threat to the 13 pure, stable, and secure populations or to the populations with 500 to 2,500 fish. Although habitat condition may prevent maximum reproductive potential in some populations, habitat condition is not judged a threat to the existence of any of the populations. In addition, as evidenced by the number of roads being decommissioned, lower levels of timber harvest and associated road building, and changes in livestock management practices, sedimentation from these sources is most likely declining. Over time we expect RGCT trout habitat to improve.

Barriers are essential to separate RGCT from nonnative salmonids. However, to be effective barriers must be checked frequently and be maintained. Flood events can either blow a man-made barrier out, change the channel morphology permanently, or provide a temporary channel around the barrier that fish can use for upstream migration. Older gabion barriers (rocks in a wire basket) and culverts appear to be the most vulnerable structures. Changes in water velocity (either an increase or decrease depending on the situation) can change an impassable barrier into one that can be passed. These structures should be checked on a regular basis. Regardless of the structure, reaches above barriers need to be checked regularly because nonnatives are sometimes found upstream of barriers with no evidence of impairment to the barrier. This can be caused by an incomplete removal of nonnatives during stream restoration or illegal transplantation of nonnative trout. The only solution to the latter situation is the education of the public and gaining their widespread support for RGCT. Education and outreach efforts are discussed below under “Public sentiment.”

Both Colorado and New Mexico have conducted barrier inventories (see factor D. for further information on past activities). New Mexico will assess the status of 8 barriers in 2003, 13 in 2004, and 13 in 2005 (NMDFG 2002). The Forest Service also assesses barriers as part of its stream surveys. With the increase in numbers of Forest Service fisheries biologists and technicians that has occurred in the last few years, miles of stream inventory have increased. For example, on the Carson National Forest a full time Fisheries Biologist and two technicians have been added to the staff (Fact sheet received from Carson National Forest, in litt. 2002). They completed 50 miles of stream surveys in 2001. In 2000, the Santa Fe National Forest hired a full time fisheries biologist. In 2001, they employed 2 temporary fisheries biologists, 8 fisheries technicians, and 7 interns. In 2001, 105 miles of stream were surveyed (Ferrel 2001). A similar level of staffing is expected for the field season of 2002, and it is anticipated that approximately 150 miles of streams will be surveyed (James Simino, Santa Fe National Forest, pers. comm. 2002). For these reasons, the Service determines that barrier failure is not a threat to the 13 pure, stable, and secure populations.

There is no commercial fishing for RGCT. Because of fishing regulations in New Mexico and Colorado, recreational angling is not considered a threat to the species. Many of the streams with RGCT are “catch and release.” Those that are not have a 2 (New Mexico) or 4 (Colorado) fish limit. Many of the streams with pure populations of RGCT are remote and angling pressure is light (Interagency meeting on RGCT, pers. comm. 2002).

Overutilization for scientific purposes is not considered a threat to RGCT. Because of advancements in molecular technology, a small clipping from a fin provides sufficient material to perform molecular analysis of genetic purity. To test for whirling disease, usually 60 fish are collected and these fish must be sacrificed. To minimize the collection of RGCT, nonnative salmonids are collected preferentially over RGCT or sample sites are selected below a barrier that protects a population of RGCT. In some situations fewer RGCT will be collected and sacrificed for testing.

Overutilization of a population can occur when it is used repeatedly as a source of fish for translocations. Managers must carefully assess the status of a population before it is used as a source of fish or eggs for broodstock or transplantation of adults to other streams. Reducing a population to low levels can make it very susceptible to other impacts, such as the introduction of nonnatives as has occurred on West Indian Creek in Colorado (Alves et al. 2002). When collecting fish for translocation, care must be taken in deciding how many, of what age class, and from where fish are taken. The broodstock management plan developed by Cowley (1993) for NMDGF addresses these issues and provides criteria regarding the selection of founder populations. With proper management, depletion of the 13 core populations is not a threat.

The Service determines that overutilization for recreational and scientific purposes is not a threat to the 13 pure, stable, and secure populations for the reasons stated above. Overutilization for commercial or educational reasons has not been identified as a threat.

Whirling disease (WD) was first detected in Pennsylvania in 1956, being transmitted here from fish brought from Europe (Thompson et al. 1995). Myxobolus cerebralis is a parasite that penetrates through the skin or digestive tract of young fish and migrates to the spinal cartilage where it multiplies very rapidly, putting pressure on the organ of equilibrium. This causes the fish to swim erratically (whirl), and have difficulty feeding and avoiding predators. In severe infections, the disease can cause high rates of mortality in young-of-the-year fish. Water temperature, fish species and age, and dose of exposure are critical factors influencing whether infection will occur and its severity (Hedrick et al. 1999). Fish that survive until the cartilage hardens to bone can live a normal life span, but have skeletal deformities. Once a fish reaches three to four inches in length, cartilage forms into bone and the fish is no longer susceptible to effects from whirling disease. Fish can reproduce without passing the parasite to their offspring; however, when an infected fish dies, many thousands to millions of the parasite spores are released to the water.

The spores can withstand freezing, desiccation, passage through the gut of mallard ducks, and can survive in a stream for many years (El-Matbouli and Hoffmann 1991). Eventually, the spore must be ingested by its alternate host, the common aquatic worm, Tubifex tubifex . After about 3.5 months in the gut of the worms, the spores transform into a Triactinomyon (TAM). The TAM's leave the worm and attach to the fish or they are ingested when the fish eats the worm. Either method can lead to infection. It is likely that the parasite will continue to spread to more and more streams because the spores are easily transported by animals and humans.

Salmonids native to the United States did not evolve with WD. Consequently, most native species have little or no natural resistance. Colorado River cutthroat trout and rainbow trout are very susceptible to the disease with 85 percent mortality within 4 months of exposure to ambient levels of infectivity in the Colorado River (Thompson et al. 1999). Percent survival of RGCT in this research was less than one percent (Thompson et al. 1999). Even though the cutthroat trout had lower spore concentrations than did the rainbow trout, they often showed more overt signs of the disease and died at a faster rate. Brown trout, native to Europe, become infected by M. cerebralis , but rarely suffer clinical disease. At the study site on the Colorado River, brown trout thrive whereas there has been little recruitment to age 1 of rainbow trout since 1992 (Thompson et al. 1999). Yellowstone cutthroat trout have also been shown to be very susceptible to WD (Hiner and Moffitt 2001).

Whirling disease was first detected in New Mexico in 1988 in rainbow trout imported into private ponds in the Moreno Valley in northern New Mexico. The first case of WD in wild trout that could not be directly linked to importation or transportation of fish was detected in autumn of 1999 in the Pecos River. The Cebolla, San Juan, Cimarron, Red and Canones Rivers are also infected. Three of seven State hatcheries also tested positive (Seven Springs, Lisboa Springs, and Parkview). The M. cerebralis was accidentally introduced in Colorado in the 1980s through imported trout from a private hatchery. The parasite has been confirmed in three drainages that support RGCT: South Fork Rio Grande, Rio Grande, and the Conejos. Eight of Colorado's State hatcheries have tested positive for WD.

In New Mexico all WD positive fish are destroyed. Seven Springs fish hatchery has been renovated and is no longer WD positive. There is an ongoing program to test more drainages for WD. In Colorado, a policy implemented in spring 1995 prevents the stocking of trout from hatcheries testing positive into waters where WD has not been found, including wilderness areas and streams where native trout may be restored, and no WD positive fish are to be stocked in habitats that are capable of supporting self-reproducing salmonid populations in Colorado after 2003. Trout from positive hatcheries will be stocked into waters where the parasite has been found to minimize the risk of contaminating other watersheds. Only trout from hatcheries testing negative can be stocked into waters where the parasite has not been found.

Although WD is a potential threat to RGCT, high infection rates will probably only occur where water temperatures are relatively warm and where T. tubifex is abundant. T. tubifex is the secondary host for the parasite; when T. tubifex numbers are low, the number of TAMs produced will be low, and consequently, the infection rate of RGCT will be low. T. tubifiex is a ubiquitous aquatic oligochaete (worm); however, it is most abundant in degraded aquatic habitats, particularly in areas with high sedimentation, warm water temperatures, and low dissolved oxygen. In clear coldwater streams, as is typical of RGCT habitat, it is present but seldom abundant. T. tubifex is likely to be most abundant in beaver ponds, and populations of RGCT below beaver ponds may be at risk (Hiner and Moffitt 2001). In addition, infection rate is low at temperatures less than 10°C (50°F) (Thompson et al. 1999). At the time when the young fish are most susceptible (spring and early summer), the populations in high-elevation streams are probably partially protected by low water temperatures.

One threat to the RGCT is the introduction of WD infected fish into waters inhabited by the RGCT. Both States currently have web sites, brochures, and information in their fishing regulations regarding WD and what anglers can do to prevent its spread. In addition, both States have regulations regarding the stocking of fish by private landowners that are designed to eliminate the importation of WD positive fish. It states clearly in the fishing regulations that it is illegal to stock fish in public waters without prior permission from a State agency. Public education and compliance are two important elements in keeping imported fish disease free and not having nonnatives stocked in locations where they can enter RGCT streams.

The Service determines that WD is not a threat to the 13 pure, stable, and secure populations because these populations are located in high-elevation, headwater streams that typically have cold water and low levels of sedimentation limiting T. tubifex populations and infection rates from TAMs. Although RGCT is susceptible to infection there has not been a documented loss or decline in population number due to WD in a wild RGCT population. The States are testing all their hatchery fish before stocking, are in the process of documenting which streams in their States are WD positive, and are educating the public about how to prevent the spread of WD. With these efforts the spread of WD should be slowed and any problems in wild populations should be quickly detected.

The NMDGF and the CDOW have authority and responsibility for the management of RGCT on all Federal, State, and private land within their respective States. The State agencies' capabilities include the regulation of fishing, law enforcement, research, and conservation and educational activities relating to RGCT. Policies regarding the stocking of nonnative fish (no nonnatives are stocked in RGCT populations) and minimization of exposure to WD and other diseases are in place in both Colorado and New Mexico. Additionally, New Mexico has a broodstock management plan in place.

New Mexico has an approved management plan currently being implemented that will “facilitate long range cooperative, interagency conservation of Rio Grande cutthroat trout.” From 1999 to 2001, population inventory was completed on 18 streams, barrier evaluations were completed on 14 streams, and genetic samples were taken from fish in 17 streams. The plan has schedules for fiscal years 2003 to 2005 for population inventory and monitoring, collection and analysis of genetic material, assessing barriers, habitat inventory, inventory of unexplored streams, testing for and mapping WD, and maintaining a database of all the information. For example, 17 streams are scheduled for inventory and monitoring in 2003, the genetic purity of 8 populations will be analyzed, and barriers on 8 streams will be surveyed. A budget for all activities from 2003-2005 is also developed.

Rio Grande cutthroat trout is designated as a species of special concern by the State of Colorado. Colorado is both implementing and revising a previous management plan. Consistent with their direction to monitor populations, protect habitat and populations, and detect genetic contamination, 58 populations were monitored and 20 populations were analyzed using molecular techniques from 1998 to 2001. From 1999 to 2001, nonnative trout were removed from 3 streams and one lake, two barriers were maintained and one new barrier was installed. An inventory of barriers on RGCT streams in Colorado has been developed. Approximately 10,000 brochures on RGCT conservation have been distributed.

A range-wide conservation agreement that will facilitate cooperation and coordination among State and Federal agencies and other interested parties is in final draft and is expected to be finalized before the end of 2002. The agreement's goal is to assure the long-term persistence of the subspecies, preserve its genetic integrity, and to provide adequate numbers and populations. We applaud the efforts of the States to establish this multi-party agreement, and we believe that it will serve to better the status of the RGCT overall. We mentioned the draft plan in this finding to recognize that the States and Federal agencies have taken steps to draft such a plan. However, we are not relying on it as part of this status review because it is not finalized and would require us to speculate as to the final outcome of the plan.

The Forest Service, the landowner with the majority of pure RGCT populations, is also implementing special management for the RGCT. RGCT is a Management Indicator Species (MIS, species which have been identified as a representative for a group of species with special habitat requirements) on the Santa Fe and Carson National Forests, and is proposed as an MIS on the Rio Grande National Forest. All resident trout are MISs on the Gila National Forest. Management Indicator Species act as proxies for fulfilling the National Forest Management Act viability requirement. Habitat objectives are established for maintaining the viability of the MIS. The RGCT is also listed on the Regional Forester's Sensitive Species List. Sensitive species must receive special management emphasis to ensure their viability and to preclude trends towards endangerment. Forest Service objectives for sensitive species are to develop and implement management practices to ensure that the species does not become threatened or endangered, maintain viable populations, and develop and implement management objectives. The Forest Service also assesses barriers as part of its stream surveys (see discussion above in factor A. “Fish Barriers” above).

Based on the discussion above, both the States and the National Forests have adequate regulatory mechanisms to protect and enhance RGCT populations and habitat.

Wildfires are a natural disturbance in forested watersheds. Historically, fires occurred every 4-5 years (Swetman 1990), and burned the understory leaving open stands of older trees. Fire suppression has resulted in large increases in fuel loads and understory density. As a result, under the proper conditions, wildfires today can spread rapidly and burn intensely. In the Southwest, the fire season (May to June) is followed by the monsoon season (July to August). Consequently, denuded watersheds can be hit by heavy precipitation leading to floods and ash flows in streams. Although fish often survive the fire, the ash/slurry floods that occur after a fire can eliminate populations of fish from a stream (Rinne, 1996, Brown et al. 2001). In addition to ash, fire retardant slurry deposited on the fire may wash into streams and kill fish (Buhl and Hamilton 2000). Although the return interval for stand replacing fire is much greater in the Rocky Mountains (200 + years) (Ruediger et al. 2000), a fire of this magnitude could affect fish populations in several watersheds as it did in the greater Yellowstone ecosystem (Bozek and Young 1994). Because the return interval is shorter, fire is a more frequent threat to populations in New Mexico. There appears to be an association between severe droughts and large fire years (Swetnam and Baisan 1994). Because fire is unpredictable, it is hard to assess how great the risk of fire is to individual RGCT populations. Because several trout populations in New Mexico have been impacted in the last 10 years by fire, it is logical to assume that a few isolated RGCT populations could be lost to the effects of fire in the foreseeable future.

Catastrophic fire can also provide the opportunity to reclaim streams that were invaded by nonnatives. This situation has occurred on the Santa Fe National Forest where fish populations were eliminated from the Cow Creek watershed by the Viveash Fire in 2000. Once the habitat recovers, approximately 25 stream miles will be repatriated with RGCT (Ferrel 2002). The Dome Fire in the Jemez Mountains extirpated the fish residing in Capulin Canyon. In partnership with Bandalier National Monument, the Santa Fe National Forest is developing plans to repatriate RGCT in approximately 10 miles of perennial stream (Ferrel 2002). Fire risk can be reduced through fuels reduction and prescribed burns. The National Forests in New Mexico have active programs to improve forest health. As an example, 69,965 ac have been treated, improving watershed conditions associated with 62 stream miles, and an additional 145,575 ac are planned for treatment to improve conditions associated with an additional 79.5 stream miles (Ferrel 2002). Over the next 10 to 20 years it is possible that a small number of RGCT populations will be lost to fire; however, we do not believe that such a loss will affect the long-term persistence of the RGCT because the populations are widely distributed and loss of RGCT populations that contain nonnatives provides an opportunity to reestablish pure RGCT populations.

The Service cannot determine if fire is a threat to the 13 pure, stable, and secure populations. Fire is unpredictable and we have no way of determining where or with what intensity a fire may burn because so many variables are involved. New Mexico is in the midst of a drought and fire can be a threat. Because the populations are spread out across the landscape and are not grouped together, the chances of more than one population being affected is reduced. As mentioned above, if catastrophic fire does occur, it provides an opportunity to reintroduce pure RGCT trout into streams that had been dominated by nonnative trout and expand the range of RGCT.

The standard method to collect population information on stream trout is electrofishing. In addition, short of complete stream renovation, electrofishing is the primary method used to remove brook and brown trout from RGCT streams. Although there is a continuing need for additional data on the existing RGCT populations, it should also be recognized that electrofishing could have a negative effect on fish. Kocovsky et al. (1997) found that 44 percent of X-rayed fish showed evidence of spinal injury in a stream that had been electrofished for 8 years even though the fish showed no external sign of injury. It has also been shown that in a laboratory setting electroshocking can have a negative impact on salmonid eggs (Cho et al. 2001). Nielsen (1998) warns that the accumulated effects of electrofishing may be significant especially in small populations. Although some fish may be killed or injured by electrofishing, it is not known if these impacts affect RGCT populations over time. However, managers need to be aware of the potential dangers of electrofishing and begin exploring alternative methods such as trapping or visual observation as a means by which to evaluate populations.

Currently electrofishing is the primary tool to conduct population surveys, and to detect and remove nonnative trout in RGCT streams. It is expected that electrofishing in RGCT streams will continue until alternative census methods are adopted. Electrofishing will also continue to be the primary method for removing nonnatives, as no other expedient method exists. Snorkeling surveys are being used by the Forest Service as part of their stream inventories. While these inventories can detect nonnative adults, it is very difficult to distinguish between young trout species.

The Service determines that electrofishing is not a threat to the 13 pure, stable, and secure populations. Although individual fish may be injured, no research indicates that electrofishing is detrimental to populations as a whole. Electrofishing is a necessary tool at this time to control nonnative trout and to monitor population size.

It is likely that future management of RGCT will depend in part on the use of hatchery-reared fish. Although hatcheries can produce many fish in a short period of time, the use of hatchery fish is not without risks (Busack and Currens 1995). Transmission of disease has been discussed (see above discussion on WD) and is a threat that must be managed. Maintenance of a “wild” broodstock is difficult, but if hatchery-reared RGCT are to survive in the wild, care must be taken so that broodstock does not become domesticated. Inbreeding can also pose a problem (Cowley 1993). Planning is essential in the selection of fish used as broodstock. Fish used as broodstock must be genetically pure. Streams that are used as sources for broodstock should be rotated so that the source population is not depleted and also so that the hatchery broodstock is infused with new genes. However, stocks from the Rio Grande, Pecos, and Canadian Basins should not be mixed until the population genetics of the fish has been clarified. New Mexico has a broodstock management plan designed specifically for RGCT that addresses these issues (Cowley 1993). Having been implemented in the field over the last several years, the feasibility and difficulties of various aspects of the plan have been tested. The Plan is currently under revision, and it could serve as a range-wide protocol.

Currently New Mexico has about 16,500 captive RGCT. Although Seven Springs Hatchery was to be in full RGCT production by 1998, infection by WD, subsequent disinfection and renovation of the hatchery, and difficulties in rearing RGCT have delayed full production. However, production from Seven Springs should increase over the next few years.

In Colorado, Haypress Lake contains wild broodstock, and captive populations are reared at Poudre Rearing Unit and at the Fishery Research Hatchery in Fort Collins. Colorado planted 33,400 RGCT into 6 waters in 1999, 66,600 into 40 waters in 2000, and 152,700 into 77 waters in 2001.

The Service determines that hatchery management is not a threat to the 13 pure, stable, and secure populations. Hatchery-reared fish are not planted into pure, stable RGCT populations so there is no risk of disease transmission into these populations. Hatchery equipment is sterilized before being used in the field to prevent disease transmission. If the criteria suggested by Cowley (1993) are implemented, a wild population would be used for spawning purposes only once, insuring that the source population is not depleted or compromised.

Several stream renovation projects are planned in the upcoming years. One obstacle that must be recognized is public resistance to the use of piscicides such as antimycin. Antimycin is an antibiotic that is an effective fish toxicant. It can be neutralized at stations outside the treatment area. The public must be educated and support range expansion of RGCT, or restoration efforts could be undermined. The “Respect the Rio” program on the Santa Fe National Forest is a particularly good example of an outreach effort to educate the public and gain support for stream restoration. In 2000, the Santa Fe National Forest was awarded a grant to begin this program, and an education coordinator was hired in 2002. Nearly 1,000 students and over 200 adults have heard presentations relating to native fish and respect for the land. The Respect the Rio program has three mascots: RGCT, Rio Grande chub, and Rio Grande sucker (Ferrel 2002). The Carson and Rio Grande National Forests also sponsor activities (e.g., Fish Fiesta) to educate and raise public awareness about RGCT. Both State management plans include education and outreach elements. Public support is essential for the success of future projects, and the States of New Mexico and Colorado recognize the importance of education and outreach in achieving their conservation goals for the RGCT. For this reason, the Service determines that public sentiment is not a threat to the 13 pure, stable, and secure populations.

There are 13 confirmed pure populations of RGCT with populations over 2,500 fish, that are secured by barriers and do not have nonnative competitors. There are an additional five populations in Colorado that are considered pure by CDOW based on meristics and/or mtDNA that have over 2,500 fish, are protected by a barrier, and have no nonnatives but have not yet been tested by allozymes or nuclear DNA (Torcido, Jaroso, Osier, Cat, and Cascade Creeks) (Table 1). Once these populations have been tested using allozymes or nuclear DNA, it is very likely that some or all will be part of the core group of secure populations, bringing the total to as many as 18. Biomass values for these populations range from 37 to 160 kg/ha (33 to 142 lb/acre). Stream length on Osier and Cascade Creeks is less than ideal; however, as in the case of Policarpio Creek, New Mexico, fish density in the two streams is high (0.89 and 0.5 fish/m (0.27 and 0.15 fish/foot), respectively), indicating suitable habitat conditions. In New Mexico, there are 12 populations that are in the process of being tested and an additional 12 populations that have tested pure but for which there is inadequate information to judge the status of the populations. Five of these creeks (Rio Frijoles, Chihuahuenos, Polvadera, Rio de Truchas, and Tienditas) are between 8 and 18 km (5.0 and 11.2 miles) long and have the potential to be secure populations (see Table 2 below).

Additionally, some large populations of pure RGCT have recently been invaded by nonnatives, either because of barrier failure or illegal transplantation. In Colorado, low numbers of brook trout have been found in Sangre de Cristo Creek (with tributary Wagon Creek); however, population size (over 9,000 RGCT), biomass, and stream length are excellent. The same situation exists in the Placer Creek watershed where there are four linked tributaries (total of over 11,000 RGCT). In New Mexico, Rio de las Vacas and its tributaries, Rio de las Perchas and Rio Anastacio (total of over 15,000 RGCT); Rito Café (5,000 RGCT); and Comanche Creek (5,000 RGCT) are all strong RGCT populations that have either brook trout or brown trout present (Table 2). Brown trout were found in Rio de las Vacas in 2001. Electrofishing removal and surveys are scheduled for 2002 and the existing barrier will be improved by the Forest Service. These populations are important components of the range-wide population. Agency personnel are aware of the undesirability of nonnatives in RGCT streams and remove nonnatives both during the course of regular stream surveys and as on-going programs in selected streams.

In addition, there are 11 pure populations in New Mexico and 10 in Colorado (21 total) that have more than 500 and less than 2,500 fish and 15 pure populations in both States with less than 500 individuals. While these populations may be at greater long-term risk of extinction compared to large populations, they continue to persist. In the future these populations may be expanded downstream, and they may serve as repositories of unique genetic material. As such they also are important components of the range-wide population and provide additional security for the overall status of the subspecies.

In the context of the Act, the term “threatened species” means any species that is likely to become an endangered species within the foreseeable future throughout all or a significant portion of its range. The term “endangered species” means any species that is in danger of extinction throughout all or a significant portion of its range. The Act does not indicate threshold levels of historic population size at which (as the population of a species declines) listing as either “threatened or endangered” becomes warranted. Instead, the principal considerations in the determination of whether or not a species warrants listing as a threatened or endangered species under the Act are the threats that currently confront the species and the likelihood that the species will persist in the “foreseeable future.” Specific threats discussed in detail above in our five factor analysis include nonnative salmonids that either hybridize or compete with RGCT, habitat fragmentation, livestock grazing, timber harvest, overutilization, disease (e.g., whirling disease), inadequacy of existing regulatory mechanisms, fire, electrofishing, and opposition to the use of fish poisons (e.g., piscicides). We have determined that the 13 core populations are not threatened by any of the identified threats alone or in combination.

Our finding is also based upon the other large populations of RGCT identified in Tables 1 and 2, as well as the 21 other populations discussed above. We find that these populations are likely to persist into the future because of the large numbers of individuals within these populations and the threats are adequately addressed by the ongoing management actions of the States and Federal agencies to remove nonnatives (brook and brown trout), test for genetic purity, conduct stream surveys, maintain barriers, conduct public education and outreach, and test for WD.

At different times in discussing the ongoing management actions by the State or Federal government we have included a discussion of actions that are projected to occur over the next few years. We described the future conservation actions that agencies indicate they will be undertaking, but we have not relied on these future actions for purposes of determining the current status of the species or the adequacy of current management actions to alleviate threats to the RGCT.

After reviewing the best scientific and commercial information available (1998 status review, available literature, information supplied to us by State and Federal agencies, and other unpublished documents and maps), for all of the reasons discussed herein, we find that the RGCT is not endangered and is not likely to become endangered within the foreseeable future throughout all or a significant portion of its range and that listing as threatened or endangered is not warranted at this time.

A complete list of all references cited in this notice is available from the New Mexico Ecological Services Field Office (see ADDRESSES section).

The authority for this action is the Endangered Species Act (16 U.S.C. 1531 et seq. ).