[Federal Register Volume 68, Number 121 (Tuesday, June 24, 2003)]
[Notices]
[Pages 37456-37463]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-15931]


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DEPARTMENT OF COMMERCE

International Trade Administration


Proposed Policies Regarding the Conduct of Changed Circumstance 
Reviews of the Countervailing Duty Order on Softwood Lumber From Canada 
(C 122 839)

AGENCY: Import Administration, International Trade Administration, 
Department of Commerce.

ACTION: Policy bulletin; request for comments.

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SUMMARY: The purpose of this policy bulletin is, consistent with the 
intent of U.S. law, to provide an incentive for Canadian provinces to 
move to market-based systems of timber sales that ensure that the 
provinces receive adequate remuneration for sales of standing timber. 
The proposed policies are intended to serve as the basis for a long-
term, durable solution to the ongoing dispute between the United States 
and Canada over trade in softwood lumber and encourage the development 
of an integrated market for forest products consistent with the goals 
of the North American Free Trade Agreement and sustainable forestry.

DATES: To be assured of consideration, written comments must be 
received not later than July 25, 2003. Rebuttal comments must be 
received not later than August 8, 2003.

ADDRESSES: A signed original and six copies of each set of comments, 
including reasons for any recommendation, along with a cover letter 
identifying the commenter's name and address, should be submitted to 
Grant D. Aldonas, Under Secretary for International Trade, Central 
Records Unit, Room 1870, U.S. Department of Commerce, Pennsylvania 
Avenue and 14th Street, NW., Washington, DC 20230; Attention: Softwood 
Lumber Policy Bulletin.

FOR FURTHER INFORMATION CONTACT: Jim Terpstra, Office of AD/CVD 
Enforcement, Import Administration, International Trade Administration, 
U.S. Department of Commerce, at (202) 482-3965.

Request for Comment

    The Department solicits comments pertaining to its proposed 
policies on softwood lumber from Canada. Initial comments should be 
received by the Under Secretary not later than July 25, 2003. Any 
rebuttals to the initial comments should be received by the Under 
Secretary not later than August 8, 2003. Commenters should file a 
signed original and six copies of each set of initial and rebuttal 
comments. All comments will be available for public inspection and 
photocopying in the Import Administration's Central Records Unit, Room 
B-099, between the hours of 8:30 a.m. and 5 p.m. on business days.
    Each person submitting a comment should include the commenter's 
name and address, and give reasons for any recommendations. To 
facilitate their consideration by the Department, initial and rebuttal 
comments regarding these proposed policies should be submitted in the 
following format: (1) Number each comment in accordance with the 
paragraph numbering of the proposed policy being addressed; (2) begin 
each comment on a separate page; (3) provide a brief summary of the 
comment (a maximum of three sentences) and label this section ``Summary 
of the Comment;'' and (4) concisely state the issue identified and 
discussed in the comment and provide reasons for any recommendation.
    In order to ensure timely and complete distribution of comments, 
the Department recommends the submission of initial and rebuttal 
comments in electronic form to accompany the required paper copies. 
Comments filed in electronic form should be submitted on a DOS 
formatted 3.5'' diskette, Iomega Zip disk, or Compact Disc (CD-R or CD-
RW). Please submit each comment as a separate file on the electronic 
media and name each separate file using the paragraph numbering of the 
proposed policy being addressed in the comment.

[[Page 37457]]

Comments received in electronic form will be made available to the 
public in Portable Document Format (PDF) on the Internet at the IA Web 
site at the following address: ``http://ia.ita.doc.gov/''.
    Any questions concerning file formatting, document conversion, 
access on the Internet, or other electronic filing issues should be 
addressed to Andrew Lee Beller, Import Administration Webmaster, at 
(202) 482-0866, email address [email protected].

    Dated: June 18, 2003.
Joseph Spetrini,
Acting Assistant Secretary for Import Administration.

Policy Bulletin--Policies Regarding the Conduct of Changed Circumstance 
Reviews of the Countervailing Duty Order on Softwood Lumber From Canada

Table of Contents

Purpose of the Policy Bulletin
General Statement of Policy
I. Standard for a Market-Based Timber Sales System
    A. Policies and Practices That Inhibit Market Response
    1. Appurtenancy Requirements
    2. Minimum Cut Requirements
    3. Mill Closure Restrictions
    4. Minimum Processing Requirements
    5. Long-term, Non-Transferrable Tenure
    6. Offsetting Provincial Actions
    B. Market-Based Pricing
    1. Reference Prices
    a. Number of Participants in the Reference Market
    b. Quality of Information
    c. Direction of the Causal Link
    d. Barriers to Entry or Exit in the Market
    e. Safeguards Against Collusive Behavior
    2. Transparency
    a. Transparency in the Functioning of the Market Used as a 
Reference Point for Market Prices
    b. Application of Prices Observed in Independently Functioning 
Markets to Stumpage Set on the Administered Portion of a Province's 
Harvest
    c. Comparability of Obligations Imposed on the Purchaser
II. Examples of Market-Based Timber Sales
    A. Auctions of Provincial Timber
    1. Example of Auction Sales
    2. Analysis
    B. Comparison with Prices Established in Markets in Other 
Jurisdictions
    1. Example of Prices Established in Markets in Other 
Jurisdictions
    2. Analysis
    C. Other Timber Sales Methods Designed to Achieve Adequate 
Remuneration
III. Changed Circumstances Reviews
    A. Timing
    B. Content of Request
    C. Evidentiary Standard
    D. Conduct of the Review
    E. Effective Date of Revocation

Purpose of the Policy Bulletin

    A government may confer a benefit on an industry by virtue of 
the provision of goods or services for ``less than adequate 
remuneration.'' Section 771(5)(E)(iv) of the Tariff Act of 1930, as 
amended; 19 U.S.C. 1677(5)(E)(iv). The term ``adequate 
remuneration'' is not defined in the statute. The Department 
interprets the term ``adequate remuneration,'' as used in section 
771(5)(E)(iv), to mean fair market value. The government provision 
of goods or services at or above fair market value, therefore, does 
not provide a countervailable subsidy.
    Softwood lumber from Canada is, with certain exceptions, 
currently subject to countervailing duties, based on the 
Department's determination that the Canadian provinces provided 
their lumber producers with a subsidy by selling timber from 
provincial lands for less than ``adequate remuneration,'' i.e., for 
less than fair market value. The purpose of this policy bulletin is, 
consistent with the intent of U.S. law, to provide an incentive for 
Canadian provinces to move to market-based systems of timber sales 
that ensure that the provinces receive adequate remuneration for 
their sales of standing timber to Canadian producers of softwood 
lumber.
    More broadly, the Department intends the policy guidance to 
serve as the basis for a long-term, durable solution to the ongoing 
dispute between the United States and Canada over trade in softwood 
lumber and encourage the development of an integrated market for 
forest products consistent with the goals of the North American Free 
Trade Agreement and sustainable forestry. The Department is 
publishing this policy bulletin with the goal that firms in Canada 
are free from government restraints that inhibit their ability to 
respond to changing conditions in the markets in which they operate 
and pay market prices for their timber.
    The overriding objective is to create economic conditions under 
which lumber producers and timber markets throughout North America 
would face the same competitive pressures. The Department expects 
that reforms introduced by the Canadian provinces, consistent with 
the discussion below, will result in a North American market in 
which lumber producers and timber markets in Canada and the United 
States operate under similar competitive conditions and that timber 
valuations would equilibrate, subject to the normal qualifications 
based on geography, species, and other factors that normally apply 
in the case of timber markets in either country.

General Statement of Policy

    Upon submission of an application by a provincial government 
that satisfies the criteria for initiation, the Department will 
conduct a changed circumstances review of the countervailing duty 
order on certain softwood lumber from Canada (``countervailing duty 
order'')\1\ to determine whether reforms to the province's system of 
timber sales meet the standards set out in this policy bulletin for 
a market-based timber sales system that charges adequate 
remuneration.\2\ If those standards are met, the Department will 
determine that the provincial system does not provide a 
countervailable subsidy and will revoke the countervailing duty 
order with respect to lumber produced in that province.\3\
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    \1\ Amended Final Affirmative Countervailing Duty Determination 
and Countervailing Duty Order: Certain Softwood Lumber Products from 
Canada, 67 FR 37,775 (May 30, 2002).
    \2\ Solely for the purpose of such changed circumstances 
reviews, the policies set forth in this bulletin supercede any prior 
guidelines, analytical frameworks or draft policies for assessing 
whether a provincial timber sales system is market-based and, 
therefore, does not provide a countervailable subsidy. The 
calculation of an ad valorem subsidy rate from provincial stumpage 
programs in an administrative review or other type of proceeding is 
governed by the Department's regulations at 19 CFR 351.511.
    \3\ Revocation is also contingent on the absence of any other 
countervailable subsidies (above de minimis in the aggregate), 
whether such subsidies are new or preexisting.
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I. Standard for a Market-Based Timber Sales System

    To be considered ``market-based,'' a province must implement 
changes in its current timber sales programs that--(1) eliminate 
practices and policies that inhibit the ability of lumber producers 
to respond to changes in the market; and (2) ensure that the pricing 
of standing timber on provincial lands is set by reference to prices 
established in an open and competitive, independently functioning 
market for sales of standing timber or logs. Open and competitive, 
independently functioning markets, as discussed below, are based on 
buyers and sellers participating unencumbered by artificial 
constraints that are part of existing administered systems.

A. Policies and Practices That Inhibit Market Response

    In order to move toward a market-based system of timber sales 
and ensure that a province receives adequate remuneration for its 
sales of standing timber, it is essential that the price for 
standing timber be set with reference to prices established in 
independently functioning markets. Just as important, however, are 
any government practices that limit the operation of market forces 
and interfere with an industry participant's ability to respond 
freely to changes in the marketplace. Functioning markets rely on 
industry participants to respond to market signals free of 
artificial constraint.
    Accordingly, as part of any changed circumstances review, the 
Department will determine whether individual provinces have, in 
fact, eliminated or substantially reformed the policies and 
practices identified below in a way that removes the current 
constraints on a lumber producer's ability to respond to changes in 
the market and, thereby, reinforces the operation of market forces.

1. Appurtenancy Requirements

    Appurtenancy and similar provisions mandate that the tenure 
holder process timber harvested under the tenures in

[[Page 37458]]

specific mills or mills they own, which limits the ability of tenure 
holders to rationalize their harvesting operations, log purchase and 
sale operations, and lumber production in response to changing 
market conditions.

2. Minimum Cut Requirements

    Perhaps the most extreme interference with market forces is in 
the operation of minimum cut requirements. These requirements, which 
can be either explicit or implicit, are currently imposed on or 
perceived by tenure holders to apply to provincial forest land and 
oblige tenure holders to cut a certain volume of timber during a set 
period regardless of conditions in downstream product markets that 
drive the actual demand for timber on the stump. These requirements 
can be explicitly provided for in provincial regulations or imposed 
implicitly through the means by which the province implements its 
policies with respect to the annual allowable cut under tenures and 
licenses. The result is either a requirement or an incentive to 
continue harvesting and producing lumber even when market conditions 
would dictate otherwise.

3. Mill Closure Restrictions

    Mill closure restrictions generally dictate the number of days a 
mill must be in productive operation in order for the operator to 
maintain access to its tenure. As a result, a mill may be forced to 
continue to produce lumber even when market conditions would 
otherwise compel a cut in production or closure of the mill.

4. Minimum Processing Requirements

    Minimum processing requirements require the tenure holder or 
timber buyer to undertake some minimum amount of processing of the 
timber harvested (or an equivalent volume) before it can be shipped 
from the province. These requirements have the effect of 
constraining the impact of market forces in public and private 
timber markets, as well as limiting the options available to the 
tenure holder to rationalize harvesting operations, log purchase and 
sale operations, and lumber production in response to changing 
market conditions. The elimination or reform of such requirements 
would reinforce the normal operation of supply and demand in any 
open and competitive, independently functioning market for timber 
sales. The Department will, as a consequence, take into account any 
minimum processing requirements in evaluating the market chosen by a 
province as a reference point for setting stumpage on provincial 
lands.

5. Long-Term, Non-Transferable Tenure

    Long-term, non-transferable tenures create barriers to entry or 
exit from the market for provincial timber, which limit competition 
for the province's timber and the ability of individual firms to 
adjust to changing conditions in the marketplace.
    An important aspect of long-term, non-transferable tenure is the 
degree to which the security of supply it affords also inhibits the 
responsiveness of tenure holders to changes in the market. Such 
inhibition would serve to undermine the overall operation of market 
forces in the province; which in turn interferes with the market's 
ability to set prices. The issues may, however, be most 
appropriately addressed as a factor affecting the use of reference 
points in independently functioning markets as a basis for setting 
stumpage rates on the administered portion of a province's harvest. 
Adjustments to the observed prices may be required to take into 
account the differences in the attributes of sales in the 
independently functioning market and long-term, non-transferable 
arrangements on provincial lands, including the security of supply 
associated with a long-term, non-transferable tenures on the 
administered portion of a province's harvest.

6. Offsetting Provincial Actions

    The Department will also examine any evidence that suggests that 
a province maintains or introduces other requirements or conditions 
on the sale of provincial timber that would inhibit or undercut the 
operation of the policy reforms discussed above. The Department 
will, for example, want to ensure that a province's decisions with 
respect to the annual allowable cut authorized on provincial lands 
is consistent with sound forest management and the full rotational 
economics of the forest, rather than a means of increasing supply 
and thereby artificially lowering the amount charged on provincial 
stumpage.

B. Market-Based Pricing

    By ``market-based pricing,'' the Department means that a 
province sets its prices for sales of standing timber on provincial 
lands either through free and open competition, such as auctions of 
standing timber or log markets, or a system that ensures the 
equivalent result. In either instance, to qualify the system must 
ensure that a province receives adequate remuneration on all 
provincial timber.

1. Reference Prices

    For any portion of a provincial harvest that continues to be 
sold under prices set administratively the Department will, in 
general, focus on whether those prices are set by reference to a 
sufficient range of representative transactions in one or more 
independently functioning markets for sales of standing timber or 
logs. Examples of independently functioning markets would include 
open and competitive auctions of standing timber on provincial 
lands, competitive log markets, robust and competitive markets for 
the sale of standing timber or logs harvested from private lands 
within the province, and, where relevant, similar markets 
functioning in other jurisdictions.
    In assessing whether any reference market is an open, 
competitive, and functioning independently, the Department will not 
employ a presumption that a market must represent a specific 
percentage of the a province's harvest before it could be used as a 
point of reference for setting prices on the administered portion of 
the harvest. The Department will, instead, employ a rule of reason--
one that is designed to ensure that the market used as a point of 
reference affords a sufficient basis to establish fair market prices 
that would then apply to the administered portion of the timber 
sales system. As reflected in the discussion below with respect to 
the number of market participants, all other things being equal, the 
greater the number of market participants who must participate in 
the reference market for a sizeable share of the furnish for their 
mills, the stronger the evidence that the reference market is open, 
competitive and functioning independently of the administered 
portion of a province's harvest, and would, as a consequence, serve 
as an adequate reference point for assessing stumpage on provincial 
lands.
    One reason for adopting that approach is the potentially 
significant interplay between a province's willingness to undertake 
the tenure reforms outlined above and the percentage of its harvest 
that could be used as a reference point for pricing on the 
administered portion of the province's harvest. To the extent a 
province has made the reforms outlined above and tenure holders are 
free to respond to changes in the market, it is easier to identify 
and evaluate the operation of independent market forces and the size 
of the reference market per se becomes less significant in ensuring 
an adequate range of reliable prices that could be used to set 
stumpage on the administered portion of a province's harvest.
    In assessing whether the market-based reference prices provide 
an adequate basis for setting administered prices that constitute 
adequate remuneration, the Department will focus on (1) whether the 
market(s) a province chooses to use as a point of reference 
(``reference market'') actually functions as a market and (2) 
whether that reference market functions independently of the 
administered portion of that province's harvest. In determining 
whether the reference market in fact, ``functions'' as a truly 
competitive market, the Department will consider the number of 
participants, open access to the market, the volume of timber traded 
on the market (including imports and exports), the lack of 
restraints on buyers and sellers, access to market information, and 
other factors listed below. For the Department to determine that the 
market used as a reference point operates ``independently,'' the 
Department will want to assure itself, consistent with the 
discussion below about the direction of the causal link between the 
reference market and the administered portion of the harvest, that 
prices observed in the reference market are the result of the free 
operation of market forces unaffected by any distortions associated 
with provincial administered timber policies or the effect from 
stumpage rates charged on the administered portion of the harvest.
    More specifically, the Department will examine, inter alia, the 
following characteristics of each reference market chosen by a 
province for setting the prices for standing timber on the 
administered portion of a province's harvest, regardless of whether 
the market chosen involves auctions of the province's own standing 
timber, auction sales in other jurisdictions, private sales within 
the province or in other jurisdictions, or any other set of market-
based transactions.
    a. Number of Participants in the Reference Market. The province 
must demonstrate that there are sufficient numbers of participants 
in the reference market to ensure that no individual or group of 
market participants

[[Page 37459]]

can influence the sales prices. This does not mean that a small 
number of actual participants on any particular transaction 
necessarily means that the market is not functioning. Rather, the 
more fundamental question is whether the market is contestable 
(i.e., anyone who wants to bid or buy and use the fiber as they 
choose, depending on the form of sale, has a fair and open 
opportunity to do so).
    In addition, to the extent that many producers are able to 
source all, or virtually all, of their wood fiber needs from crown 
tenure, these parties would not be active participants in the 
private market. As noted above, all other things being equal, the 
greater the number of market participants who must participate in 
the reference market or other competitive markets for a sizeable 
share of the furnish for their mills, the stronger the evidence that 
the reference market is open, competitive and functioning 
independently of the administered portion of a province's harvest 
and would, as a consequence, serve as an adequate reference point 
for assessing stumpage on provincial lands.
    b. Quality of Information. The province must demonstrate that 
similar full and transparent information is available to all 
participants in the reference market about alternative commercial 
opportunities, particularly with respect to price. This is 
especially important in those instances in which a province intends 
to rely for its reference prices on a private market that is made up 
largely of bilaterally negotiated sales of standing timber on 
private lands, but would be important to the Department's assessment 
of any auction-based system as well.
    Thus, for example, it would be particularly important for any 
private owner of standing timber to have access to current 
information on prices others are receiving for similar stands in 
assessing the amount he or she intends to charge. This would help 
sellers (either public or private) develop a ``reservation price,'' 
a price below which the seller will not sell--one that is consistent 
with the fully allocated costs of the seller's investment in 
bringing the forest to a harvestable state. For small holders, this 
could ensure that they receive the ``market price'' even if only a 
limited number of buyers were making bids. This information flow 
could take the form of internet pages, trade publications, or other 
similar sources of public information.
    In addition, a significant feature of any independently 
functioning market is the availability of sufficient information 
about the characteristics of timber being offered for sale in such 
markets to all buyers such that the seller and no individual buyer 
has an unfair advantage. The more significant the uncertainty about 
the quality of the timber, the higher risk that the uncertainty will 
result in lower prices for the timber in such markets. As a 
consequence, the Department will examine whether potential buyers in 
the reference market have the opportunity to survey the timber or 
there are commercial services available that will survey the timber 
in order to eliminate any potential advantages that preferential 
access to information about a given stand might otherwise confer.
    c. Direction of the Causal Link. The province must demonstrate 
that the prices established in the reference market are determined 
independently (i.e., independent of any influence from distortions 
associated with provincial administered timber policies or the 
effects from pricing of stumpage on long-term tenures on provincial 
land). More to the point, in any attempt to translate prices 
established in an independently functioning market to stumpage 
charged on the administered portion of a province's timber, the 
Department will want to ensure that it is the prices found in 
private or otherwise independently functioning markets that is 
dictating the prices on the administered portion of the harvest 
(i.e., that causality runs from auction sales or private markets to 
administered sales), rather than the reverse.
    Thus, for example, in the case of a province that chooses to 
rely on a market for private timber within the province as a 
reference point for establishing prices on the administered portion 
of its harvest, the province must demonstrate that its pricing model 
ensures that firms or individuals with significant long term tenures 
cannot artificially force down prices in the private market to lower 
stumpage charged on the administered portion of the harvest.
    d. Barriers to Entry or Exit in the Market. The province must 
demonstrate that there are no significant barriers to entry or exit 
into the reference market for either sellers (private woodlot 
owners, log traders, and, potentially, tenure holders) or buyers 
(lumber, pulp and paper mills, or other processors). Thus, for 
example, the Department will want to examine whether there are 
participation constraints that limit competition such as nationality 
requirements, conditions requiring that a bidder own a sawmill, or 
barriers to inter-provincial or international trade in private 
sector logs that affect the market to be used as a reference point.
    e. Safeguards Against Collusive Behavior. In addition to 
examining the structure of the reference market for establishing the 
stumpage on the administered portion of its harvest, the Department 
must be assured that the market is free of any collusive behavior 
and that the province has in place adequate safeguards against such 
behavior. Such safeguards are particularly important when 
considering the design of any auction system for sales of public 
timber, but that is not the only environment in which such 
safeguards are relevant. Beyond auction design lies the 
consideration whether the market a province uses as a reference 
point on prices is protected against collusive behavior. The 
question is both one of law and of the enforcement activities of 
authorities responsible for administering the relevant 
jurisdiction's laws designed to ensure competition.

2. Transparency

    Transparency is a key feature of both markets and sound 
administrative practice that the Department will examine with 
respect to any pricing system. The following discussion highlights 
three areas in which transparency will be factored into the 
Department's analysis of whether a timber sales system is market-
based.
    a. Transparency in the Functioning of the Market Used as a 
Reference Point for Market Prices. A factor in considering the 
adequacy of any reference market is the transparency with which that 
market operates. For example, in the case of the auction of public 
timber, one of the key features of the market for standing timber 
that such a system generates is the timely publication of the 
results of the auctions so that all participants in the market have 
adequate information on which to set expectations for succeeding 
bids. At the same time, publication of the results will assist in 
providing a verifiable set of prices in a sufficiently robust market 
to afford an adequate basis for setting stumpage prices on the 
administered portion of the province's harvest.
    Similarly, in the case of log markets, adequate public 
information about the transactions on the market would be essential 
to the ability of participants in the market to rely on the results 
in setting expectations for future bidding on logs. The Department 
would need to see a similar degree of transparency in the reporting 
of prices on transactions in a log market to be able to assess 
whether the market could serve as an adequate reference point for 
setting stumpage rates on public lands or otherwise provide 
assurances of the adequacy of remuneration.
    To serve as an adequate reference market, a log market must 
place the logs for sale on reasonable terms to any bidder and 
operate on price, as opposed to ``swaps,'' with sufficient volume 
moving through the market to ensure that it provides an adequate 
basis for setting stumpage. As reflected in the discussion above 
with respect to the number of market participants and entry and exit 
barriers, prices must result from a competitive process open to all 
interested buyers and sellers. In addition, the log markets must 
establish a way of ensuring that information about individual 
transactions is accurately reported and publicly available in order 
to inform market participants regarding the going rates for certain 
logs, as well as to serve as a useful reference point for setting 
stumpage on the public harvest.
    Most private transactions for timber in Canada are conducted 
through a series of bilateral negotiations between buyers and 
sellers. While there is a good deal of information available on the 
going rates that certain market participants might offer or pay in 
the market, there is generally no systematic reporting of such 
transactions, through an active public exchange for example, that 
would ensure both a stronger market and a more reliable reference 
point for setting stumpage rates on the administered portion of a 
province's harvest. Demonstrating transparency in such markets would 
provide significant confidence in the results that the market 
produced and, therefore, in the market's reliability as a reference 
point. Transparency will also be critical in markets where previous 
transactions were not on a price basis, e.g., log swaps.
    b. Application of Prices Observed in Independently Functioning 
Markets to Stumpage Set on the Administered Portion of

[[Page 37460]]

a Province's Harvest. The province must also demonstrate that the 
mechanism by which it translates the reference prices to the 
administered portion of the harvest is transparent. The Department 
can determine that a timber sales system is market-based only if the 
mechanism by which market references prices are applied in the 
administered pricing system is transparent and accurate.
    In determining whether a system is transparent, the Department 
will consider the extent to which--(1) the province relies on 
publicly available information on market prices as a starting point 
for setting stumpage; (2) the province collects information from 
private market participants in a rigorous, systematic, and 
verifiable manner and regularly publishes this information; (3) 
information on adjustments and the basis for those adjustments is 
publicly available; (4) the calculation involved in adjusting market 
prices to apply to the harvest on public lands, while taking into 
account the appropriate adjustments, produces an observable result 
consistent with the reference point in the market and is based on 
objective verifiable information, including where possible market-
determined costs; and (5) the results of the calculation (i.e., the 
resulting stumpage fees) are publicly available to all market 
participants so that they can serve, in some respects, as a 
safeguard of the stumpage system.
    Adjustments should be kept to the minimum necessary, and must be 
fully and economically justified, and transparent so as to maintain 
a close and accurate link between market-determined and administered 
prices and avoid adjustments that might lead to the over- or under-
valuation of timber.
    To the extent that prices and costs in the reference market are 
identified and translated using surveys of private transactions, 
great care must be exercised in survey design. Surveys should be 
representative, timely, and reflective of the commercial experience 
of buyers, sellers, and other commercial intermediaries to ensure 
there is no opportunity for reporting bias. Moreover, as discussed 
below, the tremendous information requirements needed for accurate 
transmission of stumpage prices raise the need for an extensive 
information collection and reporting function.
    Given the significant variation in stumpage prices associated 
with the numerous characteristics of each plot, an accurate 
transmission from the reference market to the administered harvest 
requires a significant amount of information. The Department must be 
satisfied that all relevant characteristics of the administered 
portion of the harvest are adequately accounted for in the reference 
market. These factors could include, among others, the biophysical 
characteristics of the different plots of trees subject to stumpage 
transactions; different harvesting conditions, and different 
industry characteristics (i.e., large and small producers of 
different types of products). Because of this, the information 
requirements from the reference market are quite high.
    c. Comparability of Obligations Imposed on Purchaser. The terms 
and conditions that apply to sales of timber in reference markets 
are likely to be different from those that apply to the purchase of 
standing timber under a long-term tenure on provincial land. The use 
of reference markets will therefore necessarily require some 
adjustment for the differences in the terms and conditions 
applicable to the two forms of timber sales contract. Transparency 
in the calculation and application of those adjustments will be 
essential for the Department to determine that the administered 
pricing system properly translates the references prices to the 
provincial harvest in a manner that ensures that the provinces 
receive adequate remuneration.

II. Examples of Market-Based Timber Sales

    As noted above, market reference prices may come from a single 
source (e.g., competitive auctions) or multiple sources (auctions, 
private market transactions, within or outside the province). The 
Department recognizes that some provinces may choose to rely on a 
variety of mechanisms to facilitate the operation of market forces 
within the province. Regardless of the mechanism adopted, consistent 
with Part I of this Policy Bulletin, market reference prices must 
come from open, competitive, independently functioning markets and 
ensure that provinces receive adequate remuneration for all 
provincial timber. What follows is a series of examples of how the 
Department would apply its policy guidance in the context of a 
specific market.

A. Auctions of Provincial Timber

    One means of establishing a market price for standing timber as 
a reference price for setting stumpage would involve selling a 
substantial portion of a province's own timber at auction. That, 
combined with the elimination of the constraints currently in place 
on the ability of the tenure holders to respond to changing market 
conditions, could provide a sufficient basis for finding that the 
system was market-based, thereby ensuring that a province received 
adequate remuneration for its timber, and providing the legal basis 
for revocation of the outstanding order with respect to that 
province.

1. Example of Auction Sales

    Province A eliminates existing constraints on tenure holders in 
the form of minimum cut requirements, appurtenancy clauses, and mill 
closure limitations. Province A also eliminates or reforms any 
minimum processing requirements in order to ensure that market 
forces are fully at play within the province and between the 
province and other jurisdictions. In addition, Province A makes its 
tenures freely divisible and transferable and fully subject to 
competition policy. In addition, Province A manages its harvest, 
particularly its annual allowable cut, on the basis of sound 
forestry and full rotational economics, rather than as a means of 
artificially expanding supply.
    With respect to pricing, Province A implements an auction system 
for sales of provincial timber that ensures a sufficient volume of 
timber and a representative sample of transactions to permit the 
auction prices to serve as an open, competitive and independently 
functioning market and as an adequate (i.e., statistically reliable) 
reference point for setting stumpage prices on the administered 
portion of the harvest. Province A manages its harvest and locates 
its auctions in a manner best designed to maximize participation and 
competition for the fiber, and introduces other reforms in its 
timber allocation system that have the effect of increasing the 
share of competitive sales progressively over time.
    To encourage participation by all market participants in the 
auction process, Province A ensures that there are no barriers to 
eligibility for bidding or the use of fiber other than those 
necessary to ensure that the bidder can fulfill the contract. Tenure 
reforms undertaken by Province A ensure that a sufficient portion is 
sold through competitive markets, either as timber or logs, to 
provide the number and range of transactions necessary to 
extrapolate accurately from the auction sales to prices charged for 
stumpage on the administered portion of the harvest. Tenure reforms 
undertaken by Province A result in the need for all, or virtually 
all, market participants to, obtain a significant share of their 
fiber from the reference market or competitive log markets on an 
ongoing basis.
    In terms of auction design, Province A constructs the auction on 
the basis of sealed bids. Province A also adopts adequate procedures 
to ensure against collusive bidding. Prices for all auction sales 
are published regularly for the benefit of all market participants. 
Auction winners should be required to harvest the timber within a 
specified period.
    Province A can demonstrate that it ties its stumpage rates, 
accounting for any necessary adjustments, directly and accurately to 
the prices observed in auctions for similar stands of timber. 
Province A publishes stumpage charged so that the information is 
broadly available to all market participants.
    In addition, in an effort to expand the competition for fiber 
throughout the province generally, Province A reinforces the 
operation of log markets within the province on the basis of price, 
rather than fiber swaps. Province A ensures that increasing amounts 
of fiber will flow through such log markets by virtue of eliminating 
the constraints on tenure that would currently prevent sales on log 
markets, rather than swaps. Province A ensures that information on 
log market transactions are broadly available to all interested 
market participants by establishing the means for all transactions 
to be recorded with the province and then made available to the 
public. Administered timber volumes that flow through fully open and 
competitive log markets, unrestricted in market participants or by 
minimum processing requirements, would count towards the overall 
portion of crown timber subject to competitive pressure and help 
ensure that Province A receives adequate remuneration on all timber 
sales.

2. Analysis

    If all the conditions outlined above and those discussed 
elsewhere in the Policy Bulletin were met, the Department would 
revoke the current countervailing duty order with respect to that 
province. Province A would have to demonstrate that it had the

[[Page 37461]]

two essential elements of a market-based system of timber pricing 
that would assure the Department that the province was receiving 
adequate remuneration within the meaning of the law. First, Province 
A would have eliminated all or virtually all of the current 
constraints on companies operating in the province that currently 
prevent them from adjusting to changing market conditions. Second, 
Province A would have introduced and implemented a system of 
auctions that were sufficient to establish market prices that could 
be used to set stumpage on the administered portion of its harvest, 
ensuring that the province received adequate remuneration on all 
timber sales.
    More specifically, by eliminating the minimum cut requirements, 
mill closure limitations and appurtenancy clauses, as well as making 
its tenures freely divisible and transferable, Province A has 
ensured not only that firms are not compelled to produce when 
markets would otherwise dictate against it, but also removed 
barriers to the increased flow of fiber from tenure holders onto 
competitive markets, whether in the form of transfers of tenure, 
sales of standing timber, or sales of logs. The ability to move 
timber through those various forms of competitive market will also 
have the effect of increasing the value of those markets as 
indications of stronger competition for fiber within the province. 
As a result of these and other changes, the typical manufacturer 
will participate in competitive timber and log markets for a 
sizeable portion of their fiber requirements on an ongoing basis 
under all market conditions.
    In addition, by eliminating any minimum processing requirements 
within the province, and potentially between the province and other 
jurisdictions, Province A has increased the ability of markets 
within the province to transmit information about prices and sales 
opportunities that the minimum processing requirements previously 
foreclosed. A subsidiary benefit of eliminating the minimum 
processing requirements and permitting purchases of the province's 
logs by buyers from outside the province, Province A would expand 
the opportunities for arbitrage between markets in different 
jurisdictions and thereby preclude the ability of producers in 
Province A to benefit from changes in provincial policies without 
the competitive benefit of those changes in policy flowing to 
competitors in other jurisdictions.
    With respect to pricing, Province A will have ensured that it 
has a reliable point of reference in a range of market transactions 
that is representative of the harvest within the province. By 
ensuring that there are only the minimum necessary requirements to 
be eligible to bid on the province's timber, Province A will have 
eliminated one of the main barriers created by the long-term tenure 
system--the barrier to new entrants into the market for Province A's 
timber. Similarly, by introducing tenure reforms that have the 
effect of ensuring that virtually all market participants have to 
participate in the auction system or competitive log markets for a 
sizeable portion of their fiber, Province A will ensure that firms 
within the province face competitive pressures akin to those faced 
elsewhere in the North American market. To the extent that the 
tenure reforms, over time, also yield a reduction in the percentage 
of the harvest that is subject to long-term tenures relative to that 
portion of the harvest that is sold at auction or through open and 
competitive log markets, Province A will reinforce the competition 
for timber on private and Crown land as well.
    By ensuring that the information on prices established at 
auction is broadly available to all market participants, Province A 
will have increased the quality of information available on 
alternative commercial opportunities. It will have ensured that the 
maximum amount of information about transactions in the market place 
is flowing back to market participants to inform their decision not 
only about future auctions, but about prices reflected in other 
competitive markets within the jurisdiction.
    Province A will also have ensured, in the process, that the 
adjustments needed to translate the prices observed at auction into 
stumpage charged on the administered portion of the harvest 
accurately and solely reflect the different terms and conditions 
between auction sales and the administered portion of the harvest. 
In doing so, Province A will ensure that the stumpage charges on the 
administered portion of the harvest ultimately reflect the value of 
the fiber in an open, competitive market, which is necessary to 
demonstrate that the province is receiving adequate remuneration for 
its timber.
    By reinforcing the operation of log markets within the province, 
even though they would not be used as a reference point for setting 
stumpage, Province A would have helped create an effective outlet 
for fiber that will become increasingly available on the market as a 
result of the elimination of the constraints currently imposed on 
tenure holders. In addition, by providing a means by which log 
market transactions are made publicly available to market 
participants, Province A has fostered a more competitive market 
within the province for fiber, which would tend to reinforce the 
utility of the auctions as a reference point for the pricing of 
stumpage on the administered portion of Province A's harvest. That 
result would flow directly from the ability of the log markets to 
improve the range of alternative commercial opportunities available 
to market participants. To the extent that Province A improves the 
ability of the log markets to function by shifting licenses or 
tenures toward new market participants in the future, it will have 
the effect of expanding the competitive forces at work in the market 
by easing the entry of new competitors.

B. Comparison With Prices Established in Markets in Other 
Jurisdictions

    Another alternative mechanism a province might use to ensure 
that it received adequate remuneration within the meaning of the 
statute would be to use prices generated in a market outside its 
jurisdiction. While taking into account the need for adjustments in 
order to ensure a fair comparison between standing timber sold in 
the two jurisdictions, prices generated in auctions from public 
lands or private markets, for example, could serve as an adequate 
reference point for setting stumpage on the administered portion of 
a province's harvest, if combined with adequate policy reforms in 
other areas of the province's timber sales program.

1. Example of Prices Established in Markets in Other Jurisdiction(s)

    Province B eliminates any existing minimum cut, mill closure, 
appurtenancy, and minimum processing requirements. Province B also 
provides for the divisibility and free transfer of tenure. Province 
B manages its harvest, particularly its annual allowable cut, on the 
basis of sustainable forestry, rather than as a means of 
artificially expanding supply.
    Province B relies on prices from the sale of standing timber in 
open, competitive markets in an adjacent jurisdiction, or 
jurisdictions, to establish the reference point for setting stumpage 
on the administered portion of its harvest. The independently 
functioning markets for standing timber in the other jurisdiction, 
or jurisdictions, have no barriers to entry or exit, provide for the 
publication of price information to all market participants, include 
appropriate safeguards against collusive bidding, and provide a 
representative range of prices for standing timber comparable to 
that sold in Province B.
    In addition, Province B reinforces the operation of the private 
market for standing timber within the province through the changes 
in conditions applicable to tenures on provincial lands. Province B 
also develops a mechanism for gathering and publishing the 
information on pricing in that private market, which is currently 
characterized by a series of bilateral negotiations between buyers 
and sellers. Province B commits not to reduce the share of 
competitive sales and should increase the share of competitive sales 
progressively over time.
    Province B ensures that it adopts a transparent means, with the 
appropriate adjustments, to translate the prices established by 
open, competitive, and independently functioning markets in the 
adjacent jurisdiction into stumpage charged on the administered 
portion of Province B's harvest.

2. Analysis

    By eliminating those conditions that prevent companies from 
adjusting to changes in the market, in the form of minimum cut, mill 
closure limitations, appurtenancy clauses, and minimum processing 
requirements, Province B ensures that firms participating in its 
market can respond appropriately to market signals from downstream 
product markets. Firms would be free to adjust their production 
accordingly.
    Similarly, by providing for the divisibility and transferability 
of tenure, Province B encourages competition for timber within the 
province. In effect, Province B has eliminated the principal barrier 
to entry or exit from the market for standing timber within the 
province. It also ensures that a greater volume of timber or logs 
will enter the private market for fiber within the province.
    By linking its stumpage system to open and competitive markets 
in an adjacent jurisdiction that satisfies the criteria outlined in 
the example, Province B also ensures that

[[Page 37462]]

it has a reference point in an independently functioning market to 
use in setting stumpage on the administered portion of its harvest. 
Province B has thus adopted a reference point that ensures that it 
receives adequate remuneration for its timber. Any adjustments 
should be kept to the minimum necessary, and must be fully and 
economically justified, and transparent so as to maintain a clear 
and observable relationship between market-determined and 
administered prices.
    The province's efforts to strengthen its private market are 
intended to address the reference points it might use to set 
stumpage at a later date. In the interim, Province B's efforts in 
that regard will also serve to improve the functioning of the market 
within the province by lowering barriers to entry into the market by 
new market participants. It also ensures a more competitive market 
for additional fiber that may flow through the private market as a 
result of changes in the conditions applicable to tenures on 
provincial land by providing all market participants with 
information regarding alternative commercial opportunities. While 
not directly relevant to the question of whether Province B has made 
those changes necessary to pursue a changed circumstances review, 
the effort to strengthen the private market does serve to increase 
the confidence the Department may have in the operation of the 
province's stumpage system and its ability to ensure that Province B 
receives Adequate remuneration for its timber.
    The key issue for Province B under the facts set out in the 
example is likely to be the transparency it can introduce into the 
means by which it translates prices from auctions of standing timber 
in the adjacent jurisdiction to stumpage charged for comparable 
sales of timber on the administered portion of the province's 
harvest. It will be essential for Province B to establish the 
validity of the mechanism or calculation it uses in translating the 
prices from the adjacent jurisdiction to Province B's harvest--it 
must be transparent in the sense that it is publicly available and 
that the potential adjustments are known and appropriate to the 
task.
    Equally important, it will be essential that the province make 
the results of both its methodology and the stumpage charged on 
sales of standing timber available to all market participants. 
Market price signals are the key means for distilling information 
about market conditions and the province must ensure that, 
consistent with the other changes it has made to eliminate 
constraints on the ability of firms to adjust to market conditions, 
the province has made available the key information that should 
guide firms in making those adjustments.
    Under the circumstances outlined above, the Department would 
revoke the countervailing duty order with respect to imports of 
softwood lumber manufactured from the timber harvested in Province 
B.

C. Other Timber Sales Methods Designed To Achieve Adequate 
Remuneration

    The Department acknowledges that there may be market 
circumstances unique to a province such that the provincially 
administered portion of the harvest constitutes the vast majority of 
available supply and the provincial forest industry is dominated by 
a single integrated forestry firm. In such circumstances it would be 
difficult to establish an independently functioning market, either 
in the form of auction of crown timber or reliance in private sales, 
in the province. Moreover, the bio-physical characteristics of the 
forest resource, and its remote location, render the use of 
independently functioning markets in other jurisdictions highly 
problematic due to the magnitude of necessary adjustments.
    Where such unique circumstances exist, the Department will 
examine whether the province's means of setting stumpage on the 
administered portion of its harvest achieves the equivalent economic 
effects of the alternatives set out above and ensures that the 
province receives adequate remuneration. Such an alternative would 
have to be independently evaluated based on its merits. Where, 
however, a province eliminated the conditions imposed on tenures as 
outlined in the discuss in Part I above, and implemented a method of 
timber valuation that afforded the province adequate remuneration 
with in the meaning of the statute, the Department would, consistent 
with the conditions outlined above and discussed elsewhere in the 
Policy Bulletin, revoke the current countervailing duty order with 
respect to that province.

III. Changed Circumstances Review

A. Timing

    A Province may submit a request for a changed circumstances 
review at any time. Prior to filing such a request, at the request 
of a province, the Department will consult with the province over 
the contents of such a request.

B. Content of Request

    The Department will initiate a changed circumstances review upon 
receipt of an application containing the following information:
    1. Appropriate documentation (e.g., laws, regulations) 
demonstrating elimination of any policies and practices that inhibit 
market response, as defined in section A.1, above; and
    2. A detailed explanation of the design and operation of the 
market-based provincial timber pricing system with supporting 
documentation and data showing that system meets the standards set 
forth in this policy bulletin.
    3. Consistent with the examples set out above, evidence that 
provinces submit in support of their request for review should 
include, as appropriate--
    [sbull] Evidence that the conditions a province currently 
imposes on tenures set out in Part I have been eliminated or 
reformed, as a matter of law, and that such changes in the 
conditions have been fully implemented in the timber sales program;
    [sbull] Evidence that demonstrates that the reference markets a 
province chooses to use for purposes of setting stumpage on the 
administered portion of its harvest operates in a manner that is 
open and competitive, particularly with respect to the number of 
market participants, the volume of timber sold through the reference 
market, ease of entry and exit by market participants, the quality 
of information available to market participants, barriers to 
individuals or firms artificially lowering prices in the reference 
market as a means of lowering stumpage charged on the administered 
portion of the harvest, and the transparency of the operation of the 
market;
    [sbull] Evidence that demonstrates how the prices observed in 
the reference market are accurately and transparently translated to 
the stumpage charged on the administered portion of the harvest 
consistent with the examples set out above, particularly with 
respect to any adjustments made between the timber sold in the 
reference market and that sold on the administered portion of 
provincial lands; and
    [sbull] Evidence regarding stumpage charges on the administered 
portion of the harvest before and after the provincial reforms are 
implemented that reflects the impact of the changes on stumpage 
prices and evidence that demonstrates that stumpage charged on the 
administered portion of the harvest is consistent with the range of 
prices observed in other open and competitive markets for timber 
sales of similar species, quality, and market conditions.
    [sbull] Any other relevant evidence concerning the operation of 
the provincial timber sales system.
    Although the Department may issue supplemental requests for 
information, the application should, to the fullest extent possible, 
contain all of the information necessary to determine whether the 
provincial timber sales system is market-based so that the 
Department may determine whether there is evidence of changed 
circumstances sufficient to warrant a review.

C. Evidentiary Standard

    The Department has made a final determination that the Canadian 
provinces provide a subsidy to lumber producers by selling timber 
for less than adequate remuneration. In a changed circumstances 
review, the burden is on the province to establish that those 
circumstances have changed such that revocation of the order with 
respect to that province is warranted. Specifically, the province 
must establish the basis for revocation through substantial, 
verifiable evidence demonstrating, in accordance with this Policy 
Bulletin and as required by U.S. law, that the provincial timber 
sales system has been revised and is operating so as to ensure that 
the province receives adequate remuneration within the meaning of 
the U.S. countervailing duty law.

D. Conduct of the Review

    The Department will conduct the Changed Circumstances Review in 
accordance with sections 351.216 and 351.221 of the Department's 
regulations. Pursuant to those regulations, the Department will, 
within 270 days, issue a final results of review. The Department may 
issue requests for information and will verify information submitted 
in the application and any responses to requests for additional 
information. The Department will, upon request by an interested 
party, hold a public hearing, pursuant to 19 CFR 351.310.

[[Page 37463]]

E. Effective Date of Revocation

    As reflected in section III.B, the Department anticipates that, 
on the date the application for the changed circumstance review is 
filed (``application date''), the reforms of the provincial timber 
sales system will be in place and operating so as to ensure that the 
province receives adequate remuneration. Accordingly, if the 
Department determines, as a result of the review, that revocation of 
the order with respect to the province is warranted, the Department 
will normally order revocation of the countervailing duty order with 
respect to all unliquidated entries of the subject merchandise 
produced in the province from timber harvested in the province that 
is entered, or withdrawn from warehouse, on or after the application 
date. If, however, reforms necessary to demonstrate a market-based 
timber sales program are not in effect or operational at the time of 
a province's application date, the Department may alter the 
effective date of the revocation to reflect the date on which such 
reforms took effect during the period of the changed circumstance 
review.
[FR Doc. 03-15931 Filed 6-23-03; 8:45 am]
BILLING CODE 3510-DS-P