[Federal Register Volume 68, Number 60 (Friday, March 28, 2003)]
[Rules and Regulations]
[Pages 15047-15050]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-7677]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

RIN 3245-AE84


Small Business Size Regulations; Petroleum Refiners

AGENCY: Small Business Administration (SBA).

ACTION: Final rule.

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SUMMARY: The U.S. Small Business Administration (SBA) is modifying the 
small business size standard for petroleum refiners for purposes of 
Federal government procurement. The modification consists of the 
following: Increasing the capacity component of the standard from 
75,000 barrels per day (bpd) to 125,000 barrels per calendar day 
(bpcd); defining capacity in bpcd; and measuring a refiner's total 
Operable Atmospheric Crude Oil Distillation Capacity. This is a better 
definition of what size a refiner must be to qualify as a small refiner 
for the Federal government's procurement of refined petroleum products. 
SBA is not changing the 1,500 employee size standard for this industry.

DATES: This rule is effective April 28, 2003.

FOR FURTHER INFORMATION CONTACT: Carl J. Jordan, Office of Size 
Standards, (202) 205-6618 or [email protected].

SUPPLEMENTARY INFORMATION:
    Introduction: SBA is modifying the small business size standard for 
North American Industry Classification System (NAICS) 324110, Petroleum 
Refineries, for purposes of the Federal Government's procurement of 
refined petroleum products. The revised size standard replaces current 
footnote 4 to SBA's Table of Small Business Size Standards, contained 
in 13 CFR 121.201. The footnote will now read as follows:

    NAICS code 324110--For purposes of Government procurement, the 
petroleum refiner must be a concern that has no more than 1,500 
employees nor more than 125,000 barrels per calendar day total 
Operable Atmospheric Crude Oil Distillation capacity. Capacity 
includes owned or leased facilities as well as facilities under a 
processing agreement or an arrangement such as an exchange agreement 
or a throughput. The total product to be delivered under the 
contract must be at least 90 percent refined by the successful 
bidder from either crude oil or bona fide feedstocks.

    Background: On February 12, 2002, SBA proposed in the Federal 
Register (67 FR 6437): (1) To increase the capacity component of the 
standard from 75,000 bpd to 155,000 bpcd; (2) to clarify that the 
capacity component is measured in bpcd as defined by the U.S. 
Department of Energy, Energy Information Administration (EIA); and (3) 
to clarify that the capacity component is a measure of a refiner's 
total Operable Atmospheric Crude Oil Distillation Capacity, as used by 
EIA. The proposed rule included the history of this small business size 
standard, the reasons for the proposed changes, a description of how 
SBA establishes and evaluates small business size standards, and 
alternatives that SBA considered proposing.
    Summary of Comments: SBA received 15 comments to the proposed rule, 
which are discussed below. They were received from the following 
organizations: one industry association, six small refiners, six-other-
than small refiners, one Federal agency, and a United States Senator. 
The comments reflect no prevailing opinion about the level to which SBA 
should increase the capacity component, nor even whether or not SBA 
should increase it at all. Below SBA summarizes the four significant 
issues raised by the comments and provides SBA's consideration of those 
comments.

1. Whether SBA Should Retain Refiners' Capacity as a Component of the 
Size Standard

    Comments received: All commenters but one stated that capacity is a 
valid and meaningful size measure for purposes of the Federal 
government's procurement of refined petroleum products. One commenter 
pointed out that other regulations, such as the Clean Air Act and the 
Emergency Petroleum Allocation Act, define small refiners and small 
refineries in terms of their capacity. Another commenter supported that 
point by stating that it ``is always helpful to the public for Federal 
agencies to clarify and standardize their definitions and measures.'' 
Another commenter stated that capacity is and has been the historical 
basis for small business determinations in the refinery industry, and 
believes that it is the best method for doing so.
    SBA's position: SBA concurs with these commenters. Refining 
capacity is a relevant measure for the petroleum refining industry. 
Consistency with the historical size standard and with measurements 
used by other Federal agencies such as EIA and the Environmental 
Protection Agency (EPA) is important.

2. Whether SBA Should Replace ``Barrels Per Day'' With ``Barrels Per 
Calendar Day''

    Comments received: SBA received eight comments on this subject, 
four of which support and four of which do not support the change of 
term. Supporters favored the change as a useful standardization among 
Federal government agencies. Opponents believed it could allow for 
``gaming'' and permit other than small refiners to qualify as small by 
reducing output, and that it relies too heavily on representations made 
to EPA.
    SBA's position: SBA does not agree that the use of ``barrels per 
calendar day'' (bpcd) would necessarily lead to gaming. Bpcd measures a 
refiner's present capacity to produce, not its actual production. It is 
a static amount, that a refiner uses when it self-certifies that it is 
small to a Federal procuring agency, which is generally when it submits 
its initial offer including price (13 CFR 121.404). Since it could 
change, it may or may not be the same as what it stated in its annual 
certification to EIA. Nor is bpcd a measure of how much a refiner has 
produced, but rather how much a refiner ``can process under usual 
operating conditions * * * '' allowing for a number of limitations, as 
stated in EIA's definition of ``Barrels Per Calendar Day.'' This term 
is also consistent with the standard measure that EIA uses to rank U.S. 
refiners by size, and that other agencies, such as EPA, use when 
applicable to enforcement of their regulations.
    Bpcd, which includes both the refiners' operating and idle 
capacity, is an estimate (as are bpd and barrels per stream day), 
taking into consideration anticipated downtime, etc. Further, EIA's 
definition of ``Barrels Per Calendar Day'' takes into consideration, `` 
* * * the environmental constraints associated with refinery 
operations''

[[Page 15048]]

(see EIA's definition of ``Barrels per Calendar Day'' in the glossary 
to Petroleum Supply Annual 2000, Vol. 1).
    If a refiner believes that a successful bidder is not small when it 
self-certifies as such, then that refiner, or any other interested 
party, may file a size protest with the procuring agency's contracting 
officer. Provisions and procedures for doing so are set forth in SBA's 
Small Business Size Regulations, 13 CFR 121.1001-1010, ``Procedures for 
Size Protests and Requests for Formal Size Determinations'' and the 
Federal Acquisition Regulation (FAR) 48 CFR 19.302, ``Protesting a 
small business representation.''
    SBA believes that standardizing measurement units among Federal 
agencies is an appropriate justification for this part of the rule, 
because it is consistent with the type of information refiners furnish 
EIA and that EIA reports. Additionally, the rule applies only to the 
Federal government's procurement of refined petroleum products.

3. Whether SBA should increase the capacity component to 155,000 bpcd

    Comments received: Eight commenters opposed SBA's proposed increase 
to 155,000 bpcd. Three, including a national petroleum association, 
opposed the increase to 155,000 bpcd, and suggested 125,000 bpcd as an 
acceptable alternative because it would be sufficient to allow small 
refiners to increase their capacity without affecting their small 
refiner status. The association maintained that a 155,000 bpcd refiner 
is not a small business, and that it is well above the level for 
realizing economies of scale. In addition, noted the association, most 
small refiners, under the current definition, are not disadvantaged 
when competing in local and regional markets.
    Four of the eight opposed any increase at all. The current size 
standard is adequate, one argued, to allow expansion, mergers or 
acquisition among existing small refiners. The commenter maintained 
that there are economic benefits that accrue to the small refiner that 
loses its eligibility as a small refiner by merger or acquisition. 
Accordingly, such growth provides the economies of scale that were not 
available to the small refiner and that will adequately compensate the 
small refiner for its loss of small refiner status.
    Commenters also had concerns, if SBA were to adopt the proposed 
rule, with adding additional refiners to the existing universe of small 
refiners. Since newly eligible refiners would be substantially larger 
than currently small refiners, the adoption of the proposed rule could 
adversely affect small refiners' ability to compete for Federal 
government contracts and undermine their competitiveness. Some stated 
that SBA's targeted 7.6 percent of domestic production capacity may not 
be correct in today's economy, and that a smaller share for small 
refiners may actually be more appropriate in today's competitive 
environment. Some commenters were particularly concerned with the 
possible effect on regional markets served by both small refiners and 
those refineries below 75,000 bpcd that are affiliated with others, and 
do not qualify as small refiners because of their total refiner 
capacity.
    Another commenter expressed concern that the proposed rule might 
actually be detrimental to existing small refiners and result in less 
fuel supply in one or more states, particularly because of the 
inclusion of refiners that are significantly larger than the current 
small refiners. The commenter is concerned that newly classified small 
refiners would be located in geographic areas where there is now 
significant small refiner participation. The commenter also questioned 
SBA's targeted 7.6 percent share of domestic petroleum production.
    Four commenters supported the increase to 155,000 bpcd as adequate 
to meet the purposes of the proposed rule, and stated that size 
standard should be no higher. A fifth, supporting an increase, 
commented that SBA should increase the size standard more, to about 
160,000 bpcd. In the proposed rule, SBA projected that there would be 
no more than two refiners that would gain small refiner status if it 
adopted the proposed rule. The commenter stated that, at 155,000 bpcd, 
due to one refiner's increase in capacity that was not caused by 
merger, acquisition, etc., there will be only one refiner with 1,500 
employees or less that could qualify as a small refiner, not two. That 
is, there would remain only one U.S. refiner with 1,500 employees or 
less that would not qualify as a small refiner.
    One of the five comments in support an increase in the size 
standard noted that the reduced number of small refiners is due to 
closures because small refiners could not compete with larger, 
integrated refiners. Another stated that 155,000 bpd is consistent with 
the EPA's definition of a small refiner and that this size standard 
will restore small refiners' capacity to their historical levels. 
155,000 bpd is below the average sized refiner, and allows for some 
limited expansion by small refiners.
    One refiner agreed with SBA that a size standard of 75,000 bpd is 
too low. The refiner suggested eliminating the capacity requirement, 
maintaining that it would be more far reaching than retaining a 
capacity limit.
    Commenters suggested other alternatives as well. One would qualify 
a refiner as small if it has no more than 1,500 employees and/or no 
refinery larger than 100,000 bpd. Because EPA has granted certain 
compliance exemptions to refineries below 155,000 bpd and the 
exemptions can run until 2010, the commenter also suggested that SBA 
not increase the standard until the 2010 or when refineries have 
complied, whichever occurs first.
    Another commenter was not entirely opposed to the increase, but 
offered an alternative--retain the 75,000 bpd capacity per refinery and 
increase the limit to 155,000 bpd for the entire company. The refiner 
also suggested including in the number of employees only those that are 
employed in the refining activity of the refiner. This refiner 
suggested eliminating the 1,500 employee size standard entirely, or 
counting only those that are engaged in refining operations. The 
commenter stated that the 1,500 employee size standard lacks meaning 
when measuring a refiner's resources available for competing for 
government contracts.
    SBA's position: After evaluating all comments, SBA agrees that 
increasing the capacity component to 155,000 bpcd would not provide the 
best assistance for small refiners. SBA agrees with the position of the 
commenters that recommended a smaller increase of 125,000 bpcd. SBA 
accepts the position that refiners with 155,000 bpcd would be above the 
level needed to realizing economies of scale that accrue to refiners of 
that size and suffer no disadvantage when competing in local and 
regional markets. Further, because SBA recognizes that most if not all 
currently small refiners produce and market their products regionally, 
adding significantly larger refineries owned by newly designated small 
refiners to those regions could adversely affect small refiners' 
ability to bid for and fulfill Federal government contracts as small 
refiners. SBA accepts commenters' concerns that additional competition 
from substantially larger refiners in their competitive areas might 
adversely affect those refiners that are currently defined as small. 
From EIA's Form EIA-820, ``Annual Refinery Report'' as of January 1, 
2002, SBA determined that increasing the standard to 125,000 bpcd will 
not characterize any refiners as small that are not small now. 
Therefore, increasing the size standard to 125,000 bpcd will not by 
itself increase the number of small refiners competing for Federal

[[Page 15049]]

government contracts. At that level, the small refiners' share of total 
U.S. petroleum refining will not be restored to the 7.6 percent share 
attained by the 1992 revision to the size standard. In its proposed 
rule, SBA did not intend to present the attainment of a particular 
small refiners' share as determinative of an appropriate size standard, 
but rather as only a reference to prior Agency actions. The data on the 
industry and the comments received on the proposed size standard taken 
as a whole serve as the basis for SBA's final decision to adopt 125,000 
bpcd as the size standard. Although increasing the size standard to 
125,000 bpcd does not create additional small refiners, it provided a 
significant increase in the size standard to allow current small 
refiners to realize economies of scale through an expansion of their 
operations or to merge with other small refiners.
    SBA does not agree with the commenter that suggests more than one 
capacity limit. SBA believes this approach would be overly complex as 
well as a burdensome measure for Federal agencies to apply. Also, SBA 
does not agree that employees should either be eliminated from the 
standard or that only those employees in the refining industry be 
counted. NAICS classifies petroleum refining as a manufacturing 
industry, as did the Standard Industrial Classification system. 
Consistent with section 3(a)(2) of the Small Business Act, SBA has 
established size standards for all manufacturing concerns in terms of 
number of employees. Further, to include only those employees involved 
in refinery operations would conflict with SBA's Small Business Size 
Regulations, 13 CFR 121.106, ``How does SBA calculate number of 
employees?'' The regulation requires that all employees of the concern 
be used to measure the size of a concern, including those of its 
domestic and foreign affiliates, no matter how or where they are 
employed.
    SBA does not ``phase in'' size standards. This is because SBA's 
size standards do not depend on whether or not a concern is small for 
another agency's program, or on when it comes into compliance with 
another agency's regulations. Some Federal agencies, such as EPA, 
outside of their Federal government procurement activities, use small 
business size standards mostly for regulatory enforcement. For 
instance, under EPA's gasoline sulfur regulations at 40 CFR part 80, a 
refiner is small if it had average crude capacity less than or equal to 
155,000 bpcd for 1998. To delay applying a size standard for some 
companies until they have complied with EPA's regulations, and not 
delay applying it to others, is inconsistent with SBA's rules and 
regulations. On a given Federal procurement, it does not treat all 
bidders equitably. A further reason why delaying application of the 
size standard until a refiner complies with environmental regulations 
is not a factor is that a refiner's bpcd capacity takes into effect, as 
noted above, ``* * * the environmental constraints associated with 
refinery operations'' (see EIA's definition of ``Barrels per Calendar 
Day'').
    Small business size standards have their greatest incidence of 
applicability in Federal procurement. This 125,000 bpcd size standard 
relates only to the Federal government's procurement of refined 
petroleum products, and refiners' participation in the program is 
voluntary. Size standards for Federal procurement and for all Federal 
programs apply to every concern in its industry, regardless of the 
status of their compliance with rules and regulations that have 
different purposes.

4. Whether SBA Should Incorporate ``Total Operable Atmospheric Crude 
Oil Distillation Capacity'' into Its Small Business Definition

    Comments received: Two commenters, an association and a refiner, 
support the added language to standardize the measure within the 
Federal government. Two other commenters, one a small refiner and the 
other not, did not see the need for the added clarification. None of 
the commenters, however, expressed a strong preference of one over the 
other.
    SBA's position: SBA believes that adding ``total Operable 
Atmospheric Crude Oil Distillation Capacity'' does in fact add to the 
specificity of the definition by distinguishing it from refiners' 
``Downstream Charge Capacity.'' SBA's definition of a small refiner 
should, where practical, use terms consistent with those of EIA to 
avoid confusion among users of the definition. The phrase ``total 
Operable Atmospheric Crude Oil Distillation Capacity'' therefore 
clarifies and specifies the subject of measurement when determining a 
refiner's small refiner status, because it does not include 
``Downstream Charge Capacity.''

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

    The Office of Management and Budget (OMB) has determined that this 
rule is a ``significant'' regulatory action for purposes of Executive 
Order 12866. Size standards determine which businesses are eligible for 
Federal small business programs. This is not a major rule under the 
Congressional Review Act, 5 U.S.C. 800. For the purpose of the 
Paperwork Reduction Act, 44 U.S.C. ch. 35, SBA has determined that this 
rule would not impose new reporting or record keeping requirements, 
other than those required of SBA. For purposes of Executive Order 
13132, SBA has determined that this rule does not have any federalism 
implications warranting the preparation of a Federalism Assessment. For 
purposes of Executive Order 12988, SBA has determined that this rule is 
drafted, to the extent practicable, in accordance with the standards 
set forth in that order. Our Regulatory Impact Analysis follows.

Regulatory Impact Analysis

1. Is There a Need for This Regulatory Action?

    SBA is chartered to aid and assist small businesses through a 
variety of financial, procurement, business development, and advocacy 
programs. To effectively assist intended beneficiaries of these 
programs, SBA must establish distinct definitions of which businesses 
are deemed small businesses. The Small Business Act (15 U.S.C. 632(a)) 
delegates to the SBA Administrator the responsibility for establishing 
small business definitions. The Act also requires that small business 
definitions vary to reflect industry differences. The supplementary 
information to the proposed rule explained the approach SBA follows 
when analyzing a size standard for a particular industry. Based on that 
analysis and on the comments SBA received to the proposed rule, SBA 
believes an increase is supportable, but to a 125,000 bpcd instead of 
the proposed 155,000 bpcd.

2. What Are the Potential Benefits and Costs of This Regulatory Action?

    The rule affects Federal government agencies purchasing refined 
petroleum products and small refiners that compete to sell refined 
petroleum products to the Federal government. Increasing the 75,000 
bpcd size standard to 125,000 bpcd will enable small refiners to expand 
their refining operations or to merge with other small refiners. They 
can compete for larger Federal petroleum procurements set aside for 
small businesses or for the 8(a) and HUBZone Empowerment Contracting 
Programs, as well as those awarded through full and open competition 
after application of the HUBZone or small disadvantaged

[[Page 15050]]

business price evaluation preference or adjustment. Federal agencies 
will benefit from the higher size standards if more small refiners 
compete for more set-aside petroleum procurements. This will increase 
competition and lower the prices on set-aside petroleum procurements. 
The higher size standard will also likely influence Federal agencies to 
set aside more petroleum procurements. Price increases associated with 
set-aside procurements will be minimal because set-asides must be 
awarded at fair and reasonable prices. The increased size standard will 
allow, and possibly encourage, small refiners to increase their 
operational efficiencies without jeopardizing their small business 
status. Currently small refiners will become more competitive and this 
could result in lower prices to the Federal government and to private 
sector customers.
    The higher size standard may have distributional effects between 
large and small refiners. The actual outcome of the gains and loses 
between small and large refiners cannot be estimated with certainty. 
Small refiners may obtain petroleum contracts from what would have been 
awarded to refiners that are not small. Large refiners might lose some 
Federal petroleum contracts to small refiners if Federal agencies 
decide to set aside more petroleum procurements for small refiners. The 
potential loss of contracts to large businesses would be limited to the 
amount of petroleum that expanding small refiners were willing and able 
to sell to the Federal government. Small nonmanufacturers can also 
obtain additional petroleum contracts as a result of a higher petroleum 
size standard. On set-aside petroleum procurements, a small 
nonmanufacturer must supply the product of a small petroleum refiner. 
With an effectively larger base of small refiners, nonmanufacturers 
would have access to a larger supply of petroleum products from small 
refiners. The potential gain in contracting opportunities for small 
nonmanufacturers would be limited to the amount of petroleum the 
expanded small refiners are willing and able to supply through a third 
party as opposed to selling directly to the Federal government.
    The revision to the current size standard for petroleum refineries 
is consistent with SBA's statutory mandate to assist small business. 
This regulatory action promotes the Administrator's objectives. One of 
SBA's goals in support of the Administrator's objectives is to help 
individual small businesses succeed through fair and equitable access 
to capital and credit, government contracts, and management and 
technical assistance. Reviewing and modifying size standards, when 
appropriate, ensures that intended beneficiaries have access to small 
business programs designed to assist them. Size standards do not 
interfere with State, local, and tribal governments in the exercise of 
their government functions. In a few cases, State and local governments 
have voluntarily adopted SBA's size standards for their programs to 
eliminate the need to establish an administrative mechanism to develop 
their own size standards.
    For purposes of the Regulatory Flexibility Act (RFA), SBA has 
determined that this rule does not have a significant economic effect 
on a substantial number of small entities. As stated in the 
SUPPLEMENTARY INFORMATION section, SBA estimates that this rule will 
create no additional small refiners. Accordingly, SBA does not believe 
there will be significantly increased competition that could harm small 
refiners. On the contrary, small refiners will be able to bid on and 
perform more and larger Federal procurements using some of the same 
business practices as the largest refiners (though on a smaller scale), 
proportionate to their sizes. In addition, since Federal procurement 
programs are voluntary, this rule will not impose any significant costs 
on any small refiners participating in the Federal procurement of 
petroleum programs. Further, the rule will not affect the amount of 
refined petroleum purchased by the Federal government. Federal 
government procurement dollars are expected to remain about the same. 
In addition, since more small refiners will be able to share resources, 
they will be eligible for more Federal procurement dollars.

List of Subjects in 13 CFR Part 121

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

0
For the reasons stated in the preamble, SBA amends part 121 of title 13 
of the Code of Federal Regulations as follows:

PART 121--SMALL BUSINESS SIZE REGUALTIONS

0
1. The authority citation for part 121 continues to read as follows:

    Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a), 644(c), and 
662(5); and sec. 304, Pub. L. 103-403,108 Stat. 4175, 4188.

0
2. In Sec.  121.201, revise footnote 4 at the end of the table titled 
``Small Business Size Standards by NAICS industry'' to read as follows:


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

* * * * *
FOOTNOTES
* * * * *

0
4. NAICS code 324110--For purposes of Government procurement, the 
petroleum refiner must be a concern that has no more than 1,500 
employees nor more than 125,000 barrels per calendar day total Operable 
Atmospheric Crude Oil Distillation capacity. Capacity includes owned or 
leased facilities as well as facilities under a processing agreement or 
an arrangement such as an exchange agreement or a throughput. The total 
product to be delivered under the contract must be at least 90 percent 
refined by the successful bidder from either crude oil or bona fide 
feedstocks.
* * * * *

    Dated: February 5, 2003.
Hector V. Barreto,
Administrator.
[FR Doc. 03-7677 Filed 3-27-03; 8:45 am]
BILLING CODE 8025-01-P