Prior documents in this proceeding: Notice of Hearing issued on January 25, 2005 and published in the January 28, 2005 issue of the Federal Register (70 FR 4041), and a Recommended Decision issued on November 18, 2005, and published in the November 29, 2005, issue of the Federal Register (70 FR 71734).

This 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.

The proposed amendments are based on the record of a public hearing held on February 15 and 16, 2005, in Fresno, California. The hearing was held to consider the proposed amendment of the orders. The hearing was held pursuant to the provisions of the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601 et seq. ) hereinafter referred to as the “Act,” and the applicable rules of practice and procedure governing the formulation of marketing agreements and marketing orders (7 CFR part 900). The notice of hearing contained numerous proposed order changes jointly proposed by the Nectarine Administrative Committee, the Peach Commodity Committee, and the Control Committee (order 917), which are responsible for local administration of orders 916 and 917. Marketing order 917 regulates both California pears and peaches. However, the proposed amendments to order 917 only apply to peaches. The pear provisions of the order have been suspended since 1994. Because the Pear Commodity Committee and the pear provisions are suspended, the Pear Commodity Committee did not participate in any amendment discussions.

The proposed amendments to marketing orders 916 and 917 would:

1. Allow hybrid fruit that exhibits the characteristics of nectarines or peaches and is subject to cultural practices common to such fruit be subject to marketing order regulations under both orders.

2. Specify that the act of packing be considered a handling function under both orders.

3. Change the marketing season for nectarines from May 1 through November 30 to April 1 through November 30.

4. Allow the duties and responsibilities of the Control Committee under order 917 to be transferred to one Commodity Committee if the provisions for the other commodity are suspended.

5. Increase membership on the NAC from eight to thirteen members and revise the procedures that constitute quorum and voting requirements to conform to the increased committee size. The proposal would also add to both orders that the Committees may vote by facsimile and set forth voting requirements for video conferencing.

6. Eliminate the Shippers' Advisory Committee under the nectarine order.

7. Modify the definition of grower under both orders to clarify that officers of grower corporations are eligible to serve as committee grower members.

8. Add a definition of “pure grower” for purposes of eligibility for membership on the Committees. This proposal would also allow alternative methods to conduct nominations, change the date for holding nominations, authorize positions for pure growers and add tenure requirements for Committee members.

9. Authorize nominees to state their willingness to serve on the Committees prior to the selection.

10. Change the district boundaries under the nectarine order and redefine the peach districts.

11. Change the names and the composition of the districts of the Peach Commodity Committee.

12. Allow for interest and/or late payments for assessments not paid timely under both orders and authorize the Peach Commodity Committee to borrow money.

13. Clarify that subcommittees may be established by the Peach Commodity Committee.

The Fruit and Vegetable Programs of AMS proposed to allow such changes as may be necessary to the orders, if any of the proposed changes are adopted, so that all of the orders' provisions conform to the effectuated amendments. None were deemed necessary.

One proposed amendment was not recommended for adoption. That amendment would have provided authority to recommend different regulations for different market destinations of the products.

Upon the basis of evidence introduced at the hearing and the record thereof, the Administrator of AMS on November 18, 2005, filed with the Hearing Clerk, U.S. Department of Agriculture, a Recommended Decision and Opportunity to File Written Exceptions thereto by December 19, 2005.

One exception was filed on behalf of the proponents during the exception period. The exception expressed general support for the proposals, including modifications to those proposals recommended by USDA in its recommended decision. This decision adopts these amendments as proposed in the recommended decision.

Pursuant to the requirements set forth in the Regulatory Flexibility Act (RFA), the Agricultural Marketing Service (AMS) has considered the economic impact of this action on small entities. Accordingly, AMS has prepared this initial regulatory flexibility analysis.

The purpose of the RFA is to fit regulatory actions to the scale of business subject to such actions so that small businesses will not be unduly or disproportionately burdened. Marketing orders and amendments thereto are unique in that they are normally brought about through group action of essentially small entities for their own benefit. Thus, both the RFA and the Act are compatible with respect to small entities.

Small agricultural growers are defined by the Small Business Administration (SBA)(13 CFR 121.201) as those having annual receipts of less than $750,000. Small agricultural service firms, which include handlers regulated under the order, were defined at the time of the hearing as those with annual receipts of less than $5,000,000. The definition of small agricultural service firm has subsequently changed to one with annual receipts of $6,000,000.

According to the record, there are approximately 207 California nectarine and peach handlers (combined) and approximately 1,500 growers (combined nectarines and peaches) in the production area, the State of California. A majority of these handlers and growers may be classified as small entities.

Based on calculations made by the Peach and Nectarine Committees' staff, witnesses indicated that about 26 handlers (13 percent) would qualify as large business entities under the SBA definition of a large agricultural service firm ($5,000,000). For the 2004 season, it was estimated that the average handler price received was eight dollars per container or container equivalent of nectarines or peaches. Thus, a handler would have to ship at least 625,000 containers to have annual receipts of 5 million dollars. Given data on shipments presented at the hearing and the estimated 8 dollar average handler price received during the 2004 season, small handlers represented approximately 87 percent of all the handlers within the industry. Under the 6 million dollar definition, more than 87 percent of handlers would qualify as small handler entities.

Record evidence also indicated that less than 20 percent of the combined number of California nectarine and peach growers could be defined as other than small entities. The Committees estimated that the average 2004 grower price received for nectarines and peaches was 5 dollars per container or a container equivalent. A grower would have to produce at least 150,000 containers of nectarines and peaches to have annual receipts of 750,000 dollars. Given data maintained by the Committees' staff and the 5 dollar estimated average grower price received during the 2004 season, the staff estimates that more than 80 percent of growers can be classified as small growers.

Evidence presented at the hearing indicates an average 2004 grower price of 5 dollars per container or container equivalent for both nectarines and peaches, and a combined pack-out of approximately 40,422,900 containers. Thus, the value of the 2004 pack-out is estimated to be $202,114,500. Dividing this total estimated grower revenue by the estimated number of combined nectarine and peach growers (1,500) yields an estimate of 2004 average revenue per grower of about $134,743. Because many growers produce both commodities, industry nectarine and peach production statistics were presented at the hearing as combined totals.

National Agricultural Statistical Service (NASS) data presented at the hearing provides the following production profile for California nectarines and peaches, respectively (all numbers are two-year averages for the 2003 crop year and preliminary data for 2004): bearing acres, 36,500 of nectarines and 37,000 of peaches; yield per acre of utilized production, 7.19 tons and 10.84 tons; annual utilized production, 262,500 tons and 401,000 tons. Utilized production of both nectarines and peaches was less than total production in 2004; utilized production data was therefore used in the computation. Two-year (2003 and 2004) average grower prices per ton for nectarines and peaches were $391 and $309.50 respectively. However, $309.50 is the peach price per ton for both fresh and processed uses. Approximately one third of California freestone peaches are sold for processing at a price lower than growers receive for fresh market sales. Therefore, a better estimate of the price per ton for fresh peach sales is to use the U.S. estimated grower price for fresh peaches of 27 cents per pound ($540 per ton) for 2003, the most recent year for which a U.S. fresh peach price was available from the Economic Research Service of the USDA.

This NASS and ERS data is used to compute an additional estimate of average annual sales revenue per producer. By assuming that growers of nectarines are also growers of peaches, the 2004 average acreage for these crops (dividing the sum of nectarine and peach bearing acres by 2) is equal to 36,750 acres. Dividing this number by the number of combined peach and nectarine growers reported by CTFA (1,500) yields an estimate of 24.5 acres as the average size of a sample nectarine or peach farm in 2004. If the sample farm's acreage was split evenly between nectarines and peaches (12.5 acres of each fruit) and production yields equal to the statewide average (reported above), that farm would have produced and sold 89.88 tons of nectarines and 134.42 tons of peaches. The value of production for that sample farm would have been $35,143 for nectarines and $72,587 for peaches, or $107,730 total. This figure is lower than the $134,743 estimate using industry data. However, both computations confirm that the average nectarine or peach grower qualifies as a small grower under the SBA definition.

The proposed amendments would: update definitions and districts in both orders; increase membership of the Nectarine Administrative Committee from 8 to 13 members and modify sections of the order to conform to the increased membership; eliminate the Shippers Advisory Committee (M.O. No. 916); allow the Control Committee under M.O. No. 917 to be suspended if the provisions of one commodity are suspended and transfer applicable duties and responsibilities to the remaining Commodity Committee; and authorize interest and late payment charges on assessments that are paid late.

All of the proposals are intended to streamline and improve the administration, operation, and functioning of the programs. Many of the proposed amendments would up-date the language of these two orders, thus better representing, and conforming with, current practices in these industries. The proposed amendments are not expected to result in any significant cost increases for growers or handlers. More efficient administration of program activities may result in cost savings for the Peach and Nectarine Committees.

Proposal 1 would amend the order to allow hybrid fruit that exhibits the characteristics of nectarines or peaches and is subject to cultural practices common to nectarines and peaches to be subject to marketing order regulations. This proposed amendment provides a procedure for the Committees to recommend to USDA the specific hybrids to be included under the definitions and subject to order provisions.

The cultivation of hybrid fruit has been a practice of the nectarine and peach industries. The improvement in breeding technology provides for the development of fruit and fruit trees with more favorable characteristics, such as disease resistance. As breeding technology becomes more sophisticated, it is anticipated that nectarines and peaches will be crossbred with other tree fruit, such as apricots and plums.

The proposal would require that all hybrids for which regulation is contemplated would need to be recommended to USDA by the Committees. If this amendment is adopted, the Committees would identify hybrids currently in production that have characteristics of nectarines or peaches. The characteristics of the fruit would help determine whether the hybrid should be regulated. The Committees would also consider the cultural practices used on that specific hybrid, as cultural practices differ among various fruit trees. USDA would then proceed with rulemaking, as appropriate, as to what hybrids would be included under the order.

The proposed amendment would provide flexibility in including hybrids as they are developed and provides sufficient safeguards to ensure compliance of order provisions. Incorporating specific reference to hybrid fruit into the definitions of “nectarine” and “peach” is not expected to result in any significant increase in costs to growers or handlers. There may be slight increases in the administration costs of the nectarine and peach orders in terms of program oversight, but it is expected that any increases would be offset by the benefits of including hybrids under the orders' provisions.

Proposal 2 would specify that the act of “packing” nectarines and peaches would be a handling function under the orders. Most packers already assume all of the responsibilities of a handler, except the selling of the fruit and thus, this proposal is not expected to result in any significant increases in costs and would likely result in efficiencies that would benefit the administration of marketing orders 916 and 917.

Proposal 3, which seeks to extend the marketing season for nectarines, would more accurately reflect the nectarine industry's current production and marketing season and would conform to current handling regulations. The proposed amendment would change the current marketing season from May 1 through November 30 to April 1 through November 30. According to record evidence, aligning the marketing year with current production would not result in any increases in costs.

Proposal 4 would allow for the temporary suspension of the Control Committee, the oversight committee for peaches and pears under marketing order 917, when one of the commodity programs is suspended. Since the pear program has been suspended, the duties of the Control Committee have been lessened, as there is only one Commodity Committee that is active under the marketing order program. In the Pear Commodity Committee's absence, the Peach Commodity Committee has continued to operate in conjunction with the Control Committee. The proposed amendment would also allow the Control Committee to become active again if both commodity groups were to become active under the order. This amendment is not expected to result in any increases in costs to growers or handlers.

Proposal 5 would increase the membership on the NAC from eight to thirteen members and revise quorum requirements. Proposal 5 would also provide for voting by facsimile and holding meetings via video teleconference for both the Nectarine and Peach Commodity Committees. Record evidence indicated that these amendments were necessary in order to update the business practices of the Nectarine and Peach Committees to include current day technology. The increase in Committee members from 8 to 13 would allow for greater industry participation and would provide for a larger pool of committee members to attend meetings and meet quorum requirements. This amendment is not expected to result in any significant increases in costs to growers or handlers.

Regarding the increase in committee membership, this proposal would benefit growers by allowing more growers to be appointed to the Committee, thereby increasing industry participation in the marketing order program functions.

Regarding the use of facsimile and video teleconference, this provision would allow both the Nectarine and Peach Committees to take advantage of technology that is available currently, but was not known when the orders were promulgated. Amendments proposed under this material issue are not expected to result in any significant increases in costs to growers or handlers.

Proposal 6 would eliminate the Shipper's Advisory Committee under the nectarine marketing order and bring the language of the order into conformance with current day operations of the program. Record evidence indicates that the Shipper's Advisory Committee has not been active for over 30 years and, while it once served a function under the marketing order program, it is no longer necessary. This amendment is not expected to result in any increases in costs to growers or handlers.

Proposal 7 would modify the definition of grower to specify that both employees of growers and corporate officers of growers are eligible to serve on the Nectarine and Peach Committees in grower positions. This proposed amendment would be a clarifying change and would bring the language of the order into conformance with current-day operations of the program. This amendment is not expected to result in any increases in costs to growers or handlers.

Proposal 8 would add a definition for pure grower to both the nectarine and peach orders. If implemented, pure growers would be defined as growers that grow their own product (and are not employees or officers of a packing business) or, that grow and pack primarily their own product. If they do pack for other growers, the total production packed from other growers cannot exceed 25 percent of the total production packed for that marketing season for that pure grower's packing facility. Pure growers, who only pack a limited amount of fruit for other growers, are still essentially dependent on their own production, which is the essential component of being a pure grower.

Proposal 8 would also modify the current nomination procedures for the Committees, as well as modify the deadline for conducting the nominations, add a 50-percent pure grower membership requirement for the Committees and establish tenure requirements for members. According to the hearing record, nomination procedures would be modified to provide for mailings of ballots and would change the beginning date of the nomination period from February 15 to January 31. The change in the beginning date would be necessary in order to provide extra time for the mailing of ballots.

While some increases in administration costs could arise as a result of the mailing of ballots, record evidence indicates that the benefit of increased industry participation would merit that expense.

Proposal 9 would modify the current acceptance procedure for persons nominated to serve on the Nectarine and Peach Committees. Currently, the acceptance procedure for persons nominated and selected to serve on the Committees involves a two-step process. If this amendment were implemented, the two steps could be combined into one, thus resulting in less paperwork, a shorter acceptance procedure and improved efficiency in the acceptance process. This amendment is not expected to result in any increases in costs to growers or handlers.

Proposal 10 would modify the Fresno and Tulare districts under the peach marketing order by moving Kings County from the Fresno district to the Tulare district and by including all of Tulare County in the Tulare district, and would also modify district boundaries under the nectarine order. This change would also serve as the basis for modifying committee representation for the Tulare district under the peach order, as discussed under Proposal 11. These amendments are not expected to result in any significant increases in costs to growers or handlers.

Proposal 11 would modify the names of the peach producing districts under that marketing order and change district representation on the Peach Commodity Committee to reflect the modified districts discussed under Proposal 10. This proposal would provide for more accurate representation of current-day peach production. This amendment is not expected to result in any significant increases in costs to growers or handlers.

Proposal 12 would provide for interest and penalty provisions for late payment of assessments to be added to both the nectarine and peach orders and would authorize the borrowing of funds for administration of the peach order. These amendments would strengthen the assessment collection functions of the orders and, in the case of peaches, allow access to additional funds. The implementation of interest and late payments would serve as an incentive for handlers to pay their assessments in a timely manner. The authority to borrow funds under marketing order 917 would allow the Control and Peach Committees access to additional funds to administer the order when the carry forward of assessment monies is inadequate. While these amendments are expected to result in some costs under the marketing orders, the more timely assessment payments and the authority to borrow funds (for peaches) are expected to benefit the industries.

Lastly, Proposal 14 would clarify that “other committees” established by the Peach Committee would be referred to as “subcommittees.” This amendment is not expected to result in any increases in costs to growers or handlers.

The proposals put forth at the hearing would streamline program operations, but are not expected to result in a significant change in industry production, handling or distribution activities. In discussing the impacts of the proposed amendments on growers and handlers, record evidence indicates that the changes are expected to be positive because the administration of the programs would be more efficient, and therefore more effective, in executing Committee duties and responsibilities. There would be no significant cost impact on either small or large growers or handlers.

Interested persons were invited to present evidence at the hearing on the probable regulatory and informational impact of the proposed amendments to the order on small entities. The record evidence is that the amendments are designed to increase efficiency in the functioning of the orders.

USDA has not identified any relevant Federal rules that duplicate, overlap or conflict with this proposed rule. These amendments are designed to enhance the administration and functioning of marketing orders 916 and 917 to the benefit the California nectarine and peach industries.

Current information collection requirements for Parts 916 and 917 have been previously approved by the Office of Management and Budget (OMB) under OMB number 0581-0189, “Generic Fruit Crops.” The proposed changes would have an insignificant impact on total burden hours currently approved under this information collection.

Specifically, the proposed amendment to increase the Nectarine Administrative Committee (committee) from 8 to 13 members would require an additional 5 members and 5 alternates to complete existing confidential background and acceptance statements every 2 years. Increasing committee members from 16 (8 members and 8 alternates) to 26 (13 members and 13 alternates) would result in an increase of .43 burden hours, or 26 minutes. In addition, because the Shipper's Advisory Committee is being recommended to be abolished, form FV-75, “Confidential California Tree Fruit Agreement Questionnaire”, which is currently approved under OMB No. 0581-0189 for 1.99 burden hours, would no longer be needed. Removing this form would result in an overall decrease of 1.56 burden hours.

Also, the proposal would authorize nominees under the nectarine order to state their willingness to serve on the committee prior to their selection, which would result in the combining of Confidential Background statement and the acceptance statement, which are already approved by OMB. There would be no change in the burden hours by combining these forms.

The Peach Commodity Committee proposed to amend the provisions relating to the Control Committee under marketing order 917 to allow the duties and responsibilities of the Control Committee to be transferred to one commodity committee if the provisions of the other commodity committee are suspended. If this change was implemented, and the Peach Commodity Committee was to assume the duties and responsibilities of the Control Committee, some forms used by the Control Committee would require a modification in the name of the committee using those forms. However, the functioning of the forms and the current burden would remain the same.

In addition, any changes to forms, or increased burden generated in nominating and selecting pure growers on the Committees would be submitted to OMB for approval prior to implementation.

AMS is committed to compliance with the Government Paperwork Elimination Act (GPEA), which requires Government agencies in general to provide the public the option of submitting information or transacting business electronically to the maximum extent possible.

As with all Federal marketing order programs, reports and forms are periodically reviewed to reduce information requirements and duplication by industry and public sector agencies. Witnesses stated that existing forms could be adequately modified to serve the needs of the Nectarine and Peach Commodity Committees.

The amendments to Marketing Agreement Nos. 124 and 85 and Order Nos. 916 and 917 proposed herein have been reviewed under Executive Order 12988, Civil Justice Reform. They are not intended to have retroactive effect. If adopted, the proposed amendments would not preempt any State or local laws, regulations, or policies, unless they present an irreconcilable conflict with this proposal.

The Act 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 file with USDA 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 law and request a modification of the order or to be exempted therefrom. A handler is afforded the opportunity for a hearing on the petition. After the hearing, USDA 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 his or her principal place of business, has jurisdiction to review USDA's ruling on the petition, provided an action is filed not later than 20 days after the date of the entry of the ruling.

The material issues, findings and conclusions, rulings, and general findings and determinations included in the Recommended Decision set forth in the November 29, 2005, issue of the Federal Register are hereby approved and adopted.

Annexed hereto and made a part hereof is the document entitled “Order Amending the Orders Regulating the Handling of Nectarines and Peaches Grown in California.” This document has been decided upon as the detailed and appropriate means of effectuating the foregoing findings and conclusions.

It is hereby ordered, That this entire decision be published in the Federal Register .

It is hereby directed that referenda be conducted in accordance with the procedure for the conduct of referenda (7 CFR 900.400 et seq. ) to determine whether the annexed order amending the orders regulating the handling of nectarines and peaches grown in California is approved or favored by growers, as defined under the terms of the orders, who during a representative period were engaged in the production of nectarines and peaches in the production areas.

The representative period for the conduct of such referenda is hereby determined to be March 1, 2005 through February 28, 2006.

The agents of the Secretary to conduct such referenda are hereby designated to be Laurel May and Kurt Kimmel, California Marketing Field Office, Marketing Order Administration Branch, Fruit and Vegetable Programs, AMS, USDA, 2202 Monterey Street, Suite 102B, Fresno, California 93721; telephone (559) 487-5901.

The findings hereinafter set forth are supplementary to the findings and determinations which were previously made in connection with the issuance of the marketing agreements and orders; and all said previous findings and determinations are hereby ratified and affirmed, except insofar as such findings and determinations may be in conflict with the findings and determinations set forth herein.

Pursuant to the provisions of the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601 et seq. ), and the applicable rules of practice and procedure effective thereunder (7 CFR part 900), a public hearing was held upon the proposed amendments to the Marketing Agreement Nos. 124 and 85 and Order Nos. 916 and 917 (7 CFR parts 916 and 917), regulating the handling of nectarines and peaches grown in California, respectively. Upon the basis of the evidence introduced at such hearing and the record thereof, it is found that:

(1) The marketing agreements and orders, as amended, and as hereby proposed to be further amended, and all of the terms and conditions thereof, would tend to effectuate the declared policy of the Act;

(2) The marketing agreements and orders, as amended, and as hereby proposed to be further amended, regulate the handling of nectarines and peaches grown in the production areas in the same manner as, and are applicable only to, persons in the respective classes of commercial and industrial activity specified in the marketing agreements and orders upon which a hearing has been held;

(3) The marketing agreements and orders, as amended, and as hereby proposed to be further amended, are limited in their application to the smallest regional production areas which are practicable, consistent with carrying out the declared policy of the Act, and the issuance of several orders applicable to subdivisions of the production areas would not effectively carry out the declared policy of the Act;

(4) The marketing agreements and orders, as amended, and as hereby proposed to be further amended, prescribe, insofar as practicable, such different terms applicable to different parts of the production areas as are necessary to give due recognition to the differences in the production and marketing of nectarines and peaches grown in the production areas; and

(5) All handling of nectarines and peaches grown in the production area as defined in the marketing agreements and orders is in the current of interstate or foreign commerce or directly burdens, obstructs, or affects such commerce.

It is therefore ordered, That on and after the effective date hereof, all handling of nectarines and peaches grown in California shall be in conformity to, and in compliance with, the terms and conditions of the said order as hereby proposed to be amended as follows:

The provisions of the proposed marketing agreements and order amending the orders contained in the Recommended Decision issued by the Administrator on November 18, 2005, and published in the Federal Register on November 29, 2005, will be and are the terms and provisions of this order amending the orders and are set forth in full herein.

1. The authority citation for 7 CFR part 916 continues to read as follows:

This proposed rule is issued under Marketing Agreement No. 98 and Marketing Order No. 945, both as amended (7 CFR part 945), regulating the handling of Irish potatoes grown in certain designated counties in Idaho, and Malheur County, Oregon, hereinafter referred to as the “order.” The order is effective under the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), hereinafter referred to as the “Act.”

The Department of Agriculture (USDA) is issuing this rule in conformance with Executive Order 12866.

This proposed rule has been reviewed under Executive Order 12988, Civil Justice Reform. This action is not intended to have retroactive effect. This proposed rule would not preempt any State or local laws, regulations, or policies, unless they present an irreconcilable conflict with this rule.

The Act 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 file with USDA 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 law and request a modification of the order or to be exempted therefrom. A handler is afforded the opportunity for a hearing on the petition. After the hearing USDA 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 his or her principal place of business, has jurisdiction to review USDA's ruling on the petition, provided an action is filed not later than 20 days after the date of the entry of the ruling.

This proposed rule invites comments on removing the exception for yellow fleshed Finnish-type potatoes from the minimum quantity exemption paragraph of the handling regulations issued under the order. The minimum quantity exemption in the regulation allows handlers to ship up to five hundredweight of potatoes without regard to the inspection and assessment requirements of the order. Included in the minimum quantity exemption is an exception for yellow fleshed Finnish-type potatoes which allows up to 200 hundredweight to be shipped without regard to inspection or assessment requirements. The Committee unanimously recommended the removal of the exception at its meeting on November 2, 2005.

Section 945.42 of the order provides the authority to assess first handlers of potatoes to provide funds to cover the expenses of the Committee. Sections 945.51 and 945.52 provide the authority for the establishment and modification of regulations applicable to the handling of potatoes, including required inspections. Section 945.54 provides the authority to establish exemptions from the regulations based on shipment size.

Section 945.341 establishes minimum quality, maturity, pack, and inspection requirements for potatoes handled subject to the order. Paragraphs (e), (f), and (g) of § 945.341 delineate the circumstances in which the shipment of potatoes subject to the order may be granted an exemption from the regulation. Paragraph (g) of that section specifies that shipments of potatoes, except yellow fleshed Finnish-type, weighing five hundredweight or less may be shipped without regard to the inspection or assessment requirements of the order. An exception included in that paragraph increases the minimum quantity exemption threshold to 200 hundredweight for yellow fleshed Finnish-type potatoes.

At its meeting on November 2, 2005, the Committee unanimously recommended the removal of the special exception for yellow fleshed Finnish-type from the handling regulations. In its deliberations, the Committee commented that yellow fleshed Finnish-type potatoes are no longer produced within the production area and that the exception is no longer needed.

The exception to the minimum quantity exemption for yellow fleshed Finnish-type potatoes was added to the regulation in 1987, specifically to promote the production and marketing of this new type potato by relieving shipments of less than 200 hundredweight from inspection and assessment requirements. Nonetheless, the production of yellow fleshed Finnish-type potatoes declined over time and is currently nonexistent. The Committee noted, however, that the production of other colorful varieties (some with yellow flesh but not Finnish-type) has increased and that the exception, if retained, may cause confusion to industry participants. Since the niche market for which the exception was intended no longer exists, and there is the potential for misunderstanding within the industry, the Committee believes the exception should be removed from the regulation.

Pursuant to the requirements set forth in the Regulatory Flexibility Act (RFA), the Agricultural Marketing Service (AMS) has considered the economic impact of this action on small entities. Accordingly, AMS has prepared this initial regulatory flexibility analysis.

The purpose of the RFA is to fit regulatory actions to the scale of business subject to such actions in order that small businesses will not be unduly or disproportionately burdened. Marketing orders issued pursuant to the Act, and rules issued thereunder, are unique in that they are brought about through group action of essentially small entities acting on their own behalf. Thus, both statutes have small entity orientation and compatibility.

There are approximately 48 handlers of Idaho-Eastern Oregon potatoes who are subject to regulation under the order and about 1,000 potato producers in the regulated area. Small agricultural service firms, which include potato handlers, are defined by the Small Business Administration (SBA) (13 CFR 121.201) as those having annual receipts of less than $6,000,000, and small agricultural producers are defined as those whose annual receipts are less than $750,000.

Based on a three-year average fresh potato production of 33,623,000 hundredweight as calculated from Committee records, a three-year average of producer prices of $4.64 per hundredweight reported by the National Agricultural Statistics Service, and 1,000 Idaho-Eastern Oregon potato producers, the average annual producer revenue is approximately $156,000. It can be concluded, therefore, that a majority of these producers would be classified as small entities.

In addition, based on Committee records and 2004-05 f.o.b. shipping point prices ranging from about $4.00 to $28.00 per hundredweight reported by USDA's Market News Service, most of the Idaho-Eastern Oregon potato handlers do not ship over $6,000,000 worth of potatoes. In view of the foregoing, it can be concluded that a majority of the handlers would be classified as small entities as defined by the SBA.

This rule would remove the exception for yellow fleshed Finnish-type potatoes from the minimum quantity exemption in the order. The exception was added to the regulation in 1987 to allow less restrictive requirements for yellow fleshed Finnish-type potatoes. The intent was to facilitate the production and marketing of this new experimental type potato. In the years that have followed, though, the production and marketing of that type potato has shifted to other potato producing regions. Consequently, yellow fleshed Finnish-type potatoes are currently not produced within the production area covered by the order and the exception to the minimum quantity exemption in handling regulations is no longer warranted. Authority for the establishment and modification of a minimum quantity exemption is provided in § 945.54 of the order.

At the November 2, 2005, meeting, the Committee discussed the impact of this change on producers and handlers. Since there currently is not any production of the type of potato covered by the exception, producers and handlers should not be adversely impacted. In addition, there should be no increased costs associated with this modification of the handling regulations.

As an alternative to the proposal, the Committee discussed leaving the handling regulation as currently issued. The Committee rejected this idea because it would have left outdated language in the rules and regulations. They also felt that the exception, if unchanged, could be misinterpreted by the industry. No other alternatives were discussed.

This rule would not impose any additional reporting or recordkeeping requirements on either small or large potato handlers or importers. As with all Federal marketing order programs, reports and forms are periodically reviewed to reduce information requirements and duplication by industry and public sectors. The USDA has not identified any relevant Federal rules that duplicate, overlap, or conflict with this proposed rule.

Further, the Committee's meeting was widely publicized throughout the potato industry, and all interested persons were invited to attend the meeting and participate in Committee deliberations. Like all Committee meetings, the November 2, 2005, meeting was a public meeting and all entities, both large and small, were able to express their views on this issue. Finally, interested persons are invited to submit information on the regulatory and informational impacts of this action on small businesses.

A small business guide on complying with fruit, vegetable, and specialty crop marketing agreements and orders may be viewed at the following Web site: http://www.ams.usda.gov/fv/moab.html. Any questions about the compliance guide should be sent to Jay Guerber at the previously mentioned address in the FOR FURTHER INFORMATION CONTACT section.

A 60-day comment period is provided to allow interested persons to respond to this proposal. All written comments timely received will be considered before a final determination is made on this matter.

For the reasons set forth above, 7 CFR part 945 is proposed to be amended as follows:

This decision recommends adoption of amendments that would: (1) Establish a limit on the volume of milk a handler may pool during the months of April through February to 125 percent of the volume of milk pooled in the prior month; (2) Establish a limit on the volume of milk a handler may pool during the month of March to 135 percent of the volume of milk pooled in the prior month; and (3) Allow the market administrator to increase the maximum administrative assessment rate up to 8 cents per hundredweight on all pooled milk if necessary to maintain the required fund reserves.

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.

The amendments to the rules proposed herein have been reviewed under Executive Order 12988, Civil Justice Reform. They are not intended to have a retroactive effect. If adopted, the proposed amendments would 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 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.

During August 2004, the month during which the hearing occurred, there were 15,802 dairy producers pooled on and 60 handlers regulated by the UMW order. Approximately 15,608 producers, or 97 percent, were considered small businesses based on the above criteria. Of the 60 handlers regulated by the UMW during August 2004, 49 handlers, or 82 percent, were considered small businesses.

The recommended amendments for adoption of the pooling standards serve to revise established criteria that determine those producers, producer milk, and plants that have a reasonable association with and consistently serve the fluid needs of the UMW 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, by doing so, determine those producers who 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. Administrative assessments are similarly charged without regard to the size of any dairy industry organization or entity. Therefore, the 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 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 recommended 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 approved forms are routinely used in most business transactions. The 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.

Interested parties are invited to submit comments on the probable regulatory and informational impact of this proposed rule on small entities. Also, parties may suggest modifications of this proposal for the purpose of tailoring their applicability to small businesses.

Notice of Hearing: Issued June 15, 2004; published June 23, 2004 (69 FR 34963).

Notice of Hearing Delay: Issued July 14, 2004; published July 21, 2004 (69 FR 43538).

Tentative Partial Decision: Issued April 8, 2005; published April 14, 2005 (70 FR 19709).

Interim Final Rule: Issued May 26, 2005; published June 1, 2005 (70 FR 31321).

Final Partial Decision: Issued September 29, 2005; published October 5, 2005 (70 FR 58086).

Notice is hereby given of the filing with the Hearing Clerk of this recommended decision with respect to proposed amendments to the tentative marketing agreement and the order regulating the handling of milk in the UMW 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, U.S. Department of Agriculture, STOP 9200—Room 1031, 1400 Independence Avenue, SW., Washington DC 20250-9200, by April 24, 2006. Six 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. Some evidence was received that specifically addressed these issues and some of the evidence encompassed entities of various sizes.

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

The proposed amendments set forth below are based on the record of a public hearing held at Bloomington, Minnesota, on August 16-19, 2004, pursuant to a notice of hearing issued June 16, 2004, published June 23, 2004, and a notice of hearing delay issued July 14, 2004, and published July 21, 2004.

The material issues on the record of hearing relate to:

This recommended decision specifically addresses proposals published in the hearing notice as Proposals 3, 4, 5 and features of Proposal 2 that seek to establish a limit on the volume of milk that can be pooled on the order, features of Proposal 6 intending to clarify the Producer definition by providing a definition of “temporary loss of Grade A approval,” and Proposal 7 which seeks to increase the order's maximum administrative assessment rate. As published in the hearing notice, Proposals 1, 6, and a portion of Proposal 2 concerning diversion limit standards and transportation credits were addressed in a tentative partial decision published on April 14, 2005 (70 FR 19709). For the purpose of this recommended decision, references to Proposal 2 will only pertain to the first portion regarding de-pooling and references to Proposal 6 will only pertain to establishing a definition of “temporary loss of Grade A approval.”

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

Federal milk marketing orders rely on the tools of classified pricing and marketwide pooling to assure an adequate supply of milk for fluid (Class I) use and to provide for the equitable sharing of the revenues arising from the classified pricing of milk. Classified pricing assigns a value to milk according to how the milk is used. Regulated handlers who buy milk from dairy farmers are charged class prices according to how they use the farmer's milk. Dairy farmers are then paid a weighted average or “blend” price. The blend price that dairy farmers are paid for their milk is derived through the marketwide pooling of all class uses of milk in a marketing area. Thus each producer receives an equal share of each use class of milk and is indifferent as to the actual Class for which the milk was used. The Class I price is usually the highest class price for milk. Historically the Class I use of milk provides the additional revenue to a marketing area's total classified use value of milk.

The series of Class prices that are applicable for any given month are not announced simultaneously. The Class I price and the Class II skim milk price are announced prior to the beginning of the month for which they will be effective. Class prices for milk in all other uses are not determined until on or before the 5th day of the following month. The Class I price is determined by adding a differential value to the higher of either an advanced Class III or Class IV value. These values are calculated based on a formula using National Agricultural Statistics Service (NASS) survey prices of cheese, butter, and nonfat dried milk powder for the first two weeks of the preceding month. For example, the Class I price for August is announced in late July and is based on the higher of the Class III or IV value computed using NASS commodity price surveys for the first two weeks of July.

The Class III and IV prices for the month are determined and announced after the end of the month based on the NASS survey prices for the selected dairy commodities during the month. For example, the Class III and IV prices for August are based on NASS survey commodity prices during August. A large increase in the NASS survey price for the selected dairy commodities from one month to the next can result in the Class III or IV price exceeding the Class I price. This occurrence is commonly referred to by the dairy industry as a “Class price inversion.” A producer price inversion generally refers to when the Class III or IV price exceeds the classified use value, or blend price, of milk for the month. Price inversions have occurred with increasing frequency in Federal milk orders since the current pricing plan was implemented on January 1, 2000, despite efforts made during Federal Order Reform to reduce such occurrences. Price inversions can create an incentive for dairy farmers and manufacturing handlers who voluntarily participate in the marketwide pooling of milk to elect not pool their milk on the order. Class I handlers do not have this option; their participation in the marketwide pool is mandatory.

The producer price differential, or PPD, is the difference between the Class III price and the weighted average value of all Classes. In essence, the PPD is the dairy farmer's share of the additional/reduced revenues associated with the Class I, II and IV milk pooled in the market. If the value of the Class I, II and IV milk in the pool is greater than the Class III value, dairy farmers receive a positive PPD. However a negative PPD can occur if the value of the Class III milk in the pool exceeds the value of the remaining classes of milk in the pool. This can occur as a result of the price inversions discussed above.

The UMW Federal order operates a marketwide pool. The Order contains pooling provisions which specify criteria that, if met, allow dairy farmers to share in the benefits that arise from classified pricing through pooling. The equalization of all class prices among handlers regulated by an order is accomplished through a mechanism known as the producer settlement fund (PSF). Typically, Class I handlers pay the difference between the blend price and their use-value of milk into the PSF. Manufacturing handlers typically receive a draw from the PSF, usually the difference between the Class II, III or IV price and the blend price. In this way, all handlers pay the Class value for milk and all dairy farmer supplies receive at least the order's blend price.

When manufacturing class prices of milk are high enough to result in a use-value of milk for a handler that is higher than the blend price, manufacturing handlers may choose to not pool their milk receipts. Opting to not pool their milk receipts allows these handlers to avoid the obligation of paying into the PSF. The choice by a manufacturing handler to not pool their milk receipts is commonly referred to as “de-pooling”. When the blend price rises above the manufacturing class use-values of milk these same handlers again opt to pool their milk receipts. This is often referred to as “re-pooling”. The ability of manufacturing handlers to de-pool and re-pool manufacturing milk is viewed by some market participants as being inequitable to both producers and handlers.

Proponents are in agreement that milk marketing orders should contain provisions that will tend to deter the practice of de-pooling. Four proposals intending to deter the de-pooling of milk were considered in this proceeding. The proposals offered different degrees of deterrence against de-pooling by establishing limits on the amount of milk that can be re-pooled. The proponents of these four proposals are generally of the opinion that de-pooling erodes equity among producers and handlers, undermines the orderly marketing of milk and is detrimental to the Federal order system.

Two different approaches on how to best limit de-pooling are represented by these four proposals. The first approach, published in the hearing notice as Proposals 2 and 5, addresses de-pooling by limiting the volume of milk a handler can pool in a month to a specified percentage of what the handler pooled in the prior month. The second approach, published in the hearing notice as Proposals 3 and 4, addresses de-pooling by establishing what is commonly referred to as a “dairy farmer for other markets” provision. These proposals would require milk of a producer that was de-pooled to not be able to be re-pooled by that producer for a defined time period. All proponents agreed that while none of the proposals would completely eliminate de-pooling, they would likely deter the practice.

Of the four proposals received that would limit de-pooling, this decision recommends adoption of Proposal 2, offered by Mid-West Dairymen's Company (Mid-West) on behalf of Cass-Clay Creamery Inc. (Cass-Clay), Dairy Farmers of America, Inc. (DFA), Foremost Farms USA Cooperative (Foremost Farms), Land O'Lakes Inc. (LOL), Milwaukee Cooperative Milk Producers (MCMP), Manitowoc Milk Producers Cooperative (MMPC), Swiss Valley Farms Company (Swiss Valley), and Woodstock Progressive Milk Producers Association (Woodstock). Hereinafter, this decision will refer to these proponents as “Mid-West, et al.” Although Foremost Farms was a proponent of Proposal 2, no testimony was offered on their behalf. At the hearing, Plainview Milk Products Cooperative and Westby Cooperative Creamery also supported the testimony given on behalf of Mid-West, et al. The proponents of Proposal 2 are all cooperatives representing producers whose milk supplies the milk needs of the marketing area and is pooled on the UMW order.

Specifically, adoption of Proposal 2 will limit the volume of milk a handler could pool in a month to no more than 125 percent of the volume of milk pooled in the prior month during the months of April through February, and to no more than 135 percent of the prior month's pooled volume in the month of March. Milk diverted to nonpool plants in excess of this limit will not be pooled, and milk shipped to pool distributing plants will not be subject to the 125 or 135 percent limitation

As published in the hearing notice, Proposal 5, offered by Dean Foods Company (Dean), addresses de-pooling in a similar manner as Proposal 2, but would establish a limit on the total volume of milk a handler could pool in a given month to 115 percent of the volume that was pooled in the prior month. Dean is a handler who operates manufacturing plants and distributing plants in the UMW marketing area. Producer milk shipped to and physically received at a pool distributing plant, and producer milk that was pooled continuously on another Federal Order during the previous six months, would not be subject to this pooling standard. Proposal 5 is not recommended for adoption.

As published in the hearing notice, Proposals 3 and 4, also offered by Dean, address de-pooling by establishing defined time periods during which de-pooled milk could not be pooled. Proposal 3 would require an annual pooling commitment by a handler to the UMW market. As advanced in Proposal 3, if the milk of a producer is de-pooled in a month, the milk of a producer could not re-establish eligibility for pooling on the order during the following 11 months unless 10 days' milk production of a producer was delivered to a pool distributing plant during the month. Under Proposal 3, handlers that de-pool milk have limited options to return milk to the pool, either shipping 10 days' milk production of a producer to a pool distributing plant during the month or waiting 11 months to regain pooling eligibility

Proposal 4 is similar to Proposal 3 but is less restrictive. Under Proposal 4, as modified at the hearing, if a producer's milk is de-pooled in any of the months of February through June, or during any of the preceding three months, or during any of the preceding months of July through January, the equivalent of at least 10 days' milk production would need to be physically received at a pool distributing plant in order to pool all of the dairy farmer's production for the month. Additionally, if the milk of a dairy farmer is de-pooled in any of the months of July through January, or in a preceding month, at least 10 days' milk production of the dairy farmer would need to be delivered to a pool distributing plant to have all the milk of the dairy farmer pooled for the month.

The current Producer milk provision of the UMW order considers the milk of a dairy farmer to be producer milk when it is delivered directly from farms to pool plant or diverted by a pool plant or cooperative handler to a nonpool plant. Milk is not eligible for diversion to nonpool plants unless at least one days' production of such dairy farmer is received at a pool plant anytime during the initial qualifying month, often referred to as “touching-base”. To be eligible to pool all of its milk receipts, the pooling handler must ship at least 10 percent of its milk receipts to a pool distributing plant, producer-handler, a partially regulated distributing plant, or a pool distributing plant regulated by another Federal order. A handler's diversion of milk to nonpool plants can only be made to nonpool plants located in the States of Illinois, Iowa, Minnesota, Wisconsin, North Dakota, South Dakota, and the Upper Peninsula of Michigan, or to a distributing plant regulated under another Federal order. Milk that is subject to inclusion in another marketwide equalization program operated by a state government is not considered producer milk. The order currently does not limit a handler's ability to de-pool milk.

The proponents of Proposals 2, 3, 4 and 5 are all of the opinion that the current pooling standards are inadequate because they enable manufacturing handlers to de-pool milk when advantageous to do so and immediately re-pool milk in a following month if advantageous to do so. According to the proponents, the UMW blend price is lowered when large volumes of sometimes higher valued milk used for manufacturing is de-pooled and when the large volumes of de-pooled milk returns to the pool. Furthermore, the witnesses argued that de-pooling handlers do not account to the UMW pool at the order's classified prices and therefore face different costs than their similarly situated pooling competitors. The proponents insisted that the pooling standards of the order need to be amended to ensure producer and handler equity, even though the proposals differed on how best to meet this end.

A witness appearing on behalf of Mid-West, et al., testified in support of Proposal 2. The witness was of the opinion that the underlying principles of the Federal order program are to supply milk to the fluid market, equitably share pool proceeds among all participating producers, and promote orderly marketing. The witness explained that the Federal order program achieves these objectives through classified pricing, through which Class I milk generates revenue for the pool; and marketwide pooling, which equalizes payments to all participating producers who serve the market regardless of how the milk of any single producer is utilized.

The Mid-West, et al., witness said that currently milk utilized at manufacturing plants can be de-pooled and again pooled in a subsequent month when it is economically beneficial to the handler. When choosing to pool or not to pool, the witness explained, handlers assess whether participating in the marketwide pool would require them to make a payment into or receive a payment from the PSF. According to the witness, milk utilized as Class I must always be pooled regardless of whether the pooling handler would make a payment into, or receives a payment from, the PSF.

The Mid-West, et al., witness testified that because manufacturing milk can freely exit and return to the pool, producers who regularly and consistently service the UMW fluid market are not being treated equitably under the terms of the order. According to the witness, these producers receive a lower blend price because the value of the milk that was de-pooled was not shared equitably among all the market's producers.

The Mid-West, et al., witness maintained that the ability of manufacturing handlers to de-pool milk creates inequities among handlers and producers. The witness said that when the PPD is negative, dairy farmers receive different payments for their milk depending on if their milk was pooled, and handlers are not required to account to the pool at classified prices depending on their pooling decisions. Class I handlers who must pool their milk receipts always have a disadvantage when the PPD is negative, explained the witness, because a manufacturing handler can opt to de-pool and avoid paying into the PSF. According to the witness this results in higher prices that can be paid to the producers supplying the manufacturing handler. The witness contrasted that when the PPD is positive, milk that had been de-pooled seeks to return to the pool. According to the witness, this also dilutes the blend price paid to producers who had been supplying the Class I handler.

The Mid-West, et al., witness, relying on Market Administrator statistics, noted that in May 2004, all producer milk pooled on the order was subject to a negative $1.97 per hundredweight (cwt) PPD. However, the witness emphasized that a manufacturing handler who chose to de-pool their milk supply and did not have to account to the pool at classified prices had an imputed PPD of zero. In other words, the witness explained, milk used in manufactured products was worth more than milk used in fluid products. Relying on additional Market Administrator statistics, the witness demonstrated that if 100 percent of eligible Class III milk had pooled in July 2003 through May 2004, the estimated PPD would have averaged a negative $0.098 per cwt rather than the actual average PPD of negative $0.773 per cwt.

The Midwest, et al., witness explained how adoption of Proposal 2 would improve both producer and handler equity. The witness said that Proposal 2 would only limit the amount of milk a handler could pool up to 125 or 135 percent of the previous month's pooled volume and clarified that any milk delivered to a distributing plant would not be subject to the 125 or 135 percent pooling calculation. If Proposal 2 were adopted, the witness claimed, no current handler would have to change the physical operations of their plant. While adoption of this proposal would not end the practice of de-pooling, speculated the witness, it would establish financial consequences for handlers who might not otherwise consistently pool their milk receipts.

In explaining why adoption of Proposal 2 would be reasonable and appropriate for the UMW order, the Mid-West, et al., witness said that a 125 percent standard should accommodate any change in the potential growth of a handler's pooled milk volume resulting from seasonal fluctuations in milk supply or the addition of new producers, assuming that the handler did not de-pool. Additionally, the witness added that to ensure no handler would need to change its physical operations, Proposal 2 allows a 135 percent re-pooling standard in March because of the fewer calendar days in February. The witness stressed that the 125 and 135 percent standards allow a handler to de-pool a portion of its milk supply and over a period of months, regain the ability to again pool its entire supply. The witness added that the proposal does not restrict the volume of milk able to be pooled in August since this is generally considered the start of the new marketing year

The Mid-West, et al., witness also emphasized that establishing a standard on the basis of the prior month's pooled volume has been done in other orders. The Northeast order has a “producer for other markets” provision that restricts the ability to pool the milk of a producer if the milk of that producer had been previously de-pooled, noted the witness. Furthermore, the witness said, milk orders in the south and southeastern part of the country had provisions which limited the sharing of marketwide returns in the spring months to only those producers whose milk served the fluid market during the fall months.

The Mid-West, et al., witness predicted that price volatility would continue in the future and result in negative PPD's and the further de-pooling of milk. The witness was of the opinion that price volatility and de-pooling have created emergency marketing conditions that would warrant the Department to omit issuing a recommended decision.

A witness from DFA, appearing on behalf of Mid-West, et al., testified in support of Proposal 2. The witness testified that DFA engages in the practice of de-pooling when warranted to earn sufficient revenue to pay their producer members a competitive milk price. The DFA witness emphasized that de-pooling creates disorderly marketing conditions and supported Proposal 2 as the best option to deter the practice of de-pooling. The witness offered scenarios that demonstrated the financial incentives available to handlers who de-pool milk. The witness asserted that the current pooling standards of the UMW order where producers qualify for pooling by meeting a one-day touch base standard allow handlers the opportunity to reap financial rewards from the market by de-pooling and re-pooling their milk receipts.

The DFA witness explained that Proposal 2 was a compromise position among all the entities of Mid-West, et al., noting that its adoption would improve the current disorderly market conditions arising from the practice of de-pooling. The witness noted that many alternatives were considered but the proponents were of the opinion that Proposal 2 is a significant improvement to the order's pooling provisions while still allowing handlers to make their own pooling decisions.

Witnesses from LOL, Swiss Valley, Cass-Clay, MMPC, and DFA Central Council, all appearing on behalf of Mid-West, et al., testified in support of Proposal 2. Many of the witnesses testified that their respective organizations engage in the practice of de-pooling when it is to their advantage but that they recognize that the practice has a negative impact on the PPD and creates disorderly marketing conditions. Consequently, they are of the opinion that while a moderate level of de-pooling should be tolerated, a set of standards should be established to deter de-pooling in order to maintain orderly marketing conditions.

The Mid-West, et al., witnesses identified above expressed support for Proposal 2 as an acceptable and moderate approach to limiting the practice of de-pooling. The proposal would allow flexibility in making pooling decisions, explained the witnesses, but would also establish significant consequences for those who opt to de-pool large volumes of their producer milk supply. In this regard, the witnesses said that Proposal 2 would result in ensuring more equity among handlers and producers during times of price inversions.

A DFA dairy farmer member, whose milk is pooled on the UMW order, testified in support of Proposal 2. The witness was of the opinion that if a dairy farmer wants to participate in the UMW marketwide pool and share in the revenue generated from the market, they should be prepared to service the market every month. When handlers engage in the practice of de-pooling their milk receipts, the witness said, the results are severe price fluctuations and larger negative PPDs that negatively impact the price paid to pooled producers. The witness was of the opinion that the adoption of Proposal 2 would result in more stable pooled milk volumes and consequently would lessen the severe and volatile price changes that producers have experienced.

A dairy farmer appearing on behalf of MCMP, whose milk is pooled on the UMW order, testified in support of Proposal 2. The witness said that their farm income was negatively impacted during May 2004 as a result of the negative $1.97 per cwt PPD. The witness added that neighboring farms that shipped milk to other handlers reported receiving a higher price for their milk. The opinion of the witness was that the practice of de-pooling has led to non-uniform prices received by farmers and that adoption of Proposal 2 would restore price equity among producers.

A witness appearing on behalf of Dean testified in opposition to Proposal 2. The witness said that the pooling standards of Proposal 2 are too liberal and that unlimited pooling in the month of August could allow handlers to again take advantage of the pooling system.

A witness appearing on behalf of Northwest Dairy Association (NDA) testified in opposition to Proposal 2. NDA is a dairy cooperative that markets 7 billion pounds of milk annually with members in the States of Washington, Oregon, Idaho, and Northern California. The witness explained that NDA engages in the practice of de-pooling in other Federal orders as a way to recover costs in their manufacturing of butter and cheese because the Class III and IV make allowances that do not adequately reflect such costs. The NDA witness was of the opinion that the practice of de-pooling should be addressed at a national hearing that would also consider other issues such as the make allowances used in the Class III and IV price formulas.

A witness appearing on behalf of Dean testified in support of Proposals 3, 4, and 5. The witness asserted that the intent of the Federal order system is to ensure a sufficient supply of milk for fluid use and provide for uniform payments to producers who stand ready, willing, and able to serve the fluid market. While some entities are of the opinion that the Federal order system should ensure a sufficient milk supply to all plants, the Dean witness was of the opinion that the Federal order system addresses only the need for ensuring a milk supply to distributing plants. The witness elaborated on this opinion by citing examples of order provisions that stress providing for a regular supply of milk to distributing plants as a priority of the Federal milk order program.

The Dean witness was of the opinion that for the Federal milk order system to ensure orderly marketing, orders need to provide adequate economic incentives that will attract milk to fluid plants and also need to properly define regulations to determine the milk of those producers who can participate in the marketwide pool. The witness argued that a major flaw in the current regulations is that they allow handlers to choose when to participate in the pool. In this regard, the witness said, the order lacks the economic incentive for pool participation by its lack of an economic disincentive to the practice of de-pooling.

The Dean witness testified that Proposals 3, 4, and 5 are designed to establish proper economic incentives for supplying the fluid market and maintain equity among handlers and producers. While each proposal offered a slightly different solution to the problem, the witness said Dean Foods supports their adoption in the following order or preference: Proposal 3, Proposal 4, and then Proposal 5.

A second witness appearing on behalf of Dean testified in support of Proposals 3, 4, and 5. The witness argued that when handlers engage in the practice of de-pooling it creates a burden on the producers who consistently serve the Class I needs of the market. According to the witness, when the PPD is negative, there is an incentive for handlers to de-pool Class III and Class IV milk. When a handler opts to de-pool, it decreases the amount of pooled milk and makes the PPD more negative than it would have been had all milk been pooled, the witness said. When the PPD is positive, milk previously de-pooled seeks to be re-pooled which increases the volume of pooled milk valued at lower classified prices and lowers the blend price paid to all producers, the witness asserted. The major “losers” in this process, concluded the witness, are the producers whose milk is continuously pooled regardless of the PPD.

The second Dean witness said that Proposal 3 was designed to increase the availability of milk for fluid use and ensure that pool proceeds are only shared among producers who consistently service the fluid market. The witness said that if Proposal 3 is adopted, de-pooled milk could again become pooled as long as the producer delivered ten-day's milk production to a pool distributing plant for twelve consecutive months. Once that standard was met, the witness added, the producer's milk could then be pooled under the more flexible provisions of the UMW order.

The Dean witness asserted that there are three benefits to adoption of Proposal 3: (1) When the PPD is negative, more Class III milk would stay in the pool resulting in a less negative PPD; (2) Some Class III de-pooled milk would never be re-pooled which would result in a more positive PPD; and (3) Class III de-pooled milk would have to demonstrate regular and significant deliveries to distributing plants in order to be re-pooled.

In explaining Proposal 4 as an alternative to Proposal 3, the second Dean witness indicated that the difference in the two proposals is the number of months that the ten-day touch base provision would be applicable before de-pooled milk could again be pooled under normal circumstances. The witness was of the opinion that Proposal 4 would discourage some de-pooling, however, the harm caused by the practice of de-pooling would be better prevented by the adoption of Proposal 3.

The Dean witness also discussed Proposal 5 as a less desirable alternative to Proposals 3 and 4. According to the witness, Proposal 5 would limit the amount of milk that can be pooled to 115 percent of the handler's previous month's pooled milk volume. The witness explained that the greater the volume of de-pooled milk, the more time needed under Proposal 5 for a handler to re-pool all its milk receipts. This, the witness said, ensures that the entities that benefit the most from the practice of de-pooling would not receive an immediate benefit that would otherwise occur when re-pooling.

A third witness appearing on behalf of Dean testified in support of Proposal 3. The witness said that the current liberal pooling standards of the UMW order are one source of disorderly marketing and are preventing all producers from sharing equally in pool proceeds. The witness asserted that the Federal milk order system was designed so that through marketwide pooling all producers would share equally in pool proceeds, and that through classified pricing milk would move to the market's highest-valued use.

Relying on Market Administrator statistics for January 2000 through June 2004, the witness asserted that the volume of pooled Class III milk varied from 1.5 billion pounds in January 2004 to 11 million pounds in April 2004. Furthermore, the witness said, the blend price in April 2004 would have been $2.97 higher if all Class III milk had been pooled. The witness was of the opinion that these large swings in the volume of pooled milk results in the disorderly marketing condition of inequitable sharing of pool proceeds among producers.

A witness appearing on behalf of Oberweis Dairy testified in support of Proposals 2 and 3. Oberweis Dairy operates a distributing plant with approximately 40 dairy farmer suppliers and 32 ice cream stores in the Chicago and St. Louis area markets. The witness was of the opinion that it is inequitable to producers and Class I handlers when manufacturing handlers engage in the practice of de-pooling. The witness was of the opinion that either all handlers should be able to engage in the practice of de-pooling or de-pooling should be prohibited. While no proposal at the hearing proposed such a restriction, the witness was of the opinion that Proposal 3 would be the best option to restore equity among producers. Nevertheless, the witness said that Oberweis would support the adoption of Proposal 2 if the Department finds it to be more appropriate.

A witness appearing on behalf of the Wisconsin Farmers Union, Minnesota Farmers Union, and the North Dakota Farmers Union testified about the negative effects of de-pooling on dairy producers. These organizations represent farmers of various agricultural products in their respective States. The witness asserted that when a cooperative engages in the practice of de-pooling, dairy farmers are negatively impacted because the revenue a cooperative gains from de-pooling is not paid to producers by the cooperatives. The witness insisted that the practice of de-pooling should be curbed so that producers are adequately paid for the total value of their milk.

A witness appearing on behalf of Galloway Company (Galloway) testified in support of all proposals that would limit the practice of de-pooling. Galloway owns and operates a dairy manufacturing plant in the UMW marketing area. The witness was of the opinion that large negative PPD's are due, in part, to de-pooling and that has a negative impact on the income of Galloway. The witness was of the opinion that changes to order provisions to limit the ability to re-pool are necessary but had no opinion as to which proposal would be the best option.

A post-hearing brief submitted by Dean reiterated their opinion that the pooling standards of the order need to be amended to correct the disorderly marketing conditions arising from the practice of de-pooling. The brief argued that the practice of de-pooling is disorderly because a handler who de-pools milk avoids accounting to the pool at classified prices and is not required to pay its suppliers the minimum blend price. However, asserted Dean, a pooled handler not only accounts to the pool at classified prices and pays its suppliers the minimum blend price, the handler also finds it necessary to pay large premiums to keep its suppliers.

According to the Dean brief, negative PPD's and the resulting practice of de-pooling are not a national issue, noting that de-pooling typically occurs in markets with low Class I utilization such as the UMW. The Dean brief predicted that the practice of de-pooling would occur in the future and therefore concluded that the disorderly marketing conditions arising from the practice of de-pooling warrant emergency action from the Department by omitting a recommended decision.

A post hearing brief submitted on behalf of Lamers Dairy, Inc. (Lamers) asserted that the ability of some handlers to engage in the practice of de- pooling when it is economically advantageous is a disorderly marketing condition. Furthermore, the brief expressed the opinion that de-pooling causes inequitable treatment among handlers because pooling handlers must account to the PSF at minimum classified prices while handlers who de-pool their milk receipts do not. The Lamers brief supported adoption of Proposal 3 as the most appropriate solution to limit the practice of de-pooling.

A witness appearing on behalf of Mid-West, et al., testified in opposition to Proposal 3. According to the witness, requiring a producer whose milk was de-pooled to deliver 10-day's milk production to a pool distributing plant is a standard that would be extremely difficult to meet. The witness stressed that finding access to a pool distributing plant for 10-day's production would not only be extremely difficult, it would also be costly. The Mid-West, et al., brief also contended that the proposals offered by Dean would require physical changes in plant operations that are not necessary to address the practice of de-pooling in the UMW market.

The Mid-West, et al., brief disagreed with others who were of the opinion that the de-pooling issue should be addressed at a national hearing. The brief explained that historical Federal milk order policy is that the pooling provisions of orders be reflective of each order's individual marketing conditions. Therefore, the brief concluded, it is appropriate to address the practice of de-pooling on an individual order basis.

A witness appearing on behalf of Associated Milk Producers, Inc. (AMPI) testified in opposition to all proposals intended to limit the practice of de-pooling as specified in Proposals 2, 3, 4, and 5. The witness' testimony was given on behalf of Alto Dairy Cooperative, Bongards' Creameries, Ellsworth Cooperative Creamery, Family Dairies USA, First District Association, Davisco Foods, Valley Queen Cheese Company and Wisconsin Cheesemakers Association (WCA). The members consist of cooperative associations and handlers who market or purchase milk in the UMW marketing area. Hereinafter, this coalition of members will be referred to collectively as “AMPI, et al.”

The AMPI, et al., witness testified that the option to engage in the practice of de-pooling in response to price inversions has been a longstanding part of the Federal milk order system. The witness testified that as a result of timing differences in announcing classified prices, a lag between changes in the market value of milk used in manufacturing and corresponding changes in the Federal order Class I price sometimes results in price inversions. The witness explained that the occasional price inversion is caused by the announcement of the Class I price approximately two weeks prior to the month and the announcement of the price for milk used in Class II, III, and IV products occurring after the close of the month—a difference of six weeks. The witness drew attention to April 2004 where the value of Class III milk increased $6.02 per cwt during the six-week lag. This resulted in a blend price that was substantially less than the estimated Class III price, resulting in a large amount of de-pooled Class III milk because, the witness said, there was no incentive for manufacturing handlers to pool all of their milk receipts.

The AMPI, et al., witness asserted that the argument that de-pooled milk does not serve, nor is available to serve, the fluid market is false. According to the witness, milk that is de-pooled is available to the Class I market during the month it is marketed and a decision to de-pool the milk is made after the end of the month when the Class II, III and IV prices are known. Additionally, the witness asserted that fluid milk plants always receive a continuous supply of fluid milk because of their contractual supply agreements.

The AMPI, et al., witness characterized the proposals under consideration to address the practice of de-pooling as designed to penalize handlers who engage in de-pooling their Class III milk. AMPI, et al., the witness stated, is strongly opposed to this change in pooling philosophy. The witness was of the opinion that the Federal order system should continue to provide for the marketwide sharing of money derived from sales of Class I milk since it is Class I sales that historically generate additional revenue to producers. However, the witness said, the order should not force handlers to share money generated from manufactured milk products to offset a low Class I price.

The AMPI, et al., witness was of the opinion that the practice of de-pooling is a national issue that should be addressed in a national hearing. The witness believed that a better solution to the practice of de-pooling would be to eliminate the advanced pricing of Class I milk and instead announce all Class prices after the end of the month.

The AMPI, et al., witness also testified that emergency marketing conditions do not exist to warrant the omission of a recommended decision by the Department. The witness stressed that price inversions and the practice of de-pooling have occurred in the Federal order system for decades and any major change in Department policy regarding this practice should be addressed in a recommended decision where interested parties can file comments and exceptions.

A post-hearing brief submitted on behalf of AMPI, et al., reiterated their opposition to all of the proposals that seek to deter de-pooling. The brief argued that the AMAA intended for the government to only require the sharing of the revenues generated from fluid sales. According to the brief, requiring manufactured milk to remain pooled oversteps the authority of the AMAA. The brief also expressed the opinion that Proposals 3, 4, and 5 are designed to limit a producer's access to the market and should therefore be denied. Furthermore, the brief stressed that Proposals 3 through 5 would unfairly increase costs of some UMW handlers because of the increased transportation and capital investment that would be needed to comply with the proposed amendments.

A witness appearing on behalf of WCA, testified in opposition to all proposals intended to limit the practice of de-pooling as specified in Proposals 2, 3, 4, and 5. The witness testified that WCA represents dairy manufacturers and marketers with 32 of its members operating 42 pooled dairy facilities on the UMW order. According to the witness, 30 of the 42 pooled dairy facilities are small businesses and if the proposals to limit the practice of de-pooling were adopted, these small businesses would face new and significant costs to comply with the proposed new standards without benefit to their dairy farmer suppliers.

The WCA witness expressed concern that Proposal 2 addressed the practice of de-pooling without regard to the cause of negative PPD's, specifically the inversion of classified prices. The witness also said that Proposals 2, 3, 4 and 5 would put an additional administrative burden on handlers by requiring them to designate which producers would remain pooled or de-pooled. The witness asserted that access to distributing plants in the UMW market is very limited and it would be hard for a de-pooled producer to re-associate with a distributing plant in order to be eligible to again pool their milk on the order.

The WCA witness was of the opinion that Proposals 3 and 4 also would add additional transportation costs, administrative costs, and the potential need for additional silo capacity to accommodate the increased volume of milk that would be needed to meet the 10-day production delivery standard at a pool distributing plant. The witness explained that many WCA members do not have the capacity to accommodate meeting a 10-day production delivery standard for each month. The witness was also of the opinion that existing supply contracts provide ample milk supplies for the Class I market and concluded that additional deliveries to pool plants are not needed to assure an adequate supply to Class I facilities.

A witness appearing on behalf of the National Family Farm Coalition, an organization representing family farms located in 32 states including those states comprising the UMW marketing area, testified in opposition to all proposals at the hearing. The witness was of the opinion that the entire Federal order system was in need of a complete reform. The witness asserted that the proponents of the proposals being heard were entities whose past actions have lowered prices received by family farmers.

A post-hearing brief submitted on behalf of Alto Dairy (Alto), a cooperative with 580 dairy farmer members in Wisconsin and Michigan, reiterated their opposition to all proposals seeking to limit the practice of de-pooling. The brief stressed that a decision to de-pool is made separately from the decision to adequately supply the Class I needs of the market.

An Extension Dairy Marketing Specialist at the University of Wisconsin testified on the issues surrounding the practice of de-pooling but did not support or oppose any specific proposal. The witness referred to and explained a research paper which identified and explained problems arising in the UMW marketing area by pooling distant milk, the practice of de-pooling, and the resulting economic impacts to producers. The witness said that if manufacturing prices for milk rapidly increase during the month there will be a negative PPD but as prices begin to decline, the PPD will again become positive over time. The witness also explained that a negative PPD does not mean that producers lost money. Rather, the witness clarified, the PPD is a calculation of the difference between the Class III price and the blend price that producers receive. However, concluded the witness, the ability to engage in the practice of de-pooling does result in volatile PPD's and gives rise to inequities among producers and handlers.

All Federal milk marketing orders require the pooling of milk received at pool distributing plants—which is predominantly Class I milk—and all pooled producers and handlers on an order share in the additional revenue arising from higher valued Class I sales. Manufacturing handlers and cooperatives of Class II, III and IV uses of milk who meet the pooling and performance standards make all of their milk receipts eligible to be pooled and usually find it advantageous. Manufacturing handlers and cooperatives who supply a portion of their total milk receipts to Class I distributing plants receive the difference between their use-value of milk and the order's blend price. Federal milk orders, including the UMW order, establish limits on the volume of milk eligible to be pooled that is not used for fluid uses primarily through diversion limit standards. However, manufacturing handlers and cooperatives are not required, as are Class I handlers, to pool all their eligible milk receipts.

According to the record, manufacturing handlers and cooperatives have opted to not pool their milk receipts when the manufacturing class prices of milk are higher than the order's blend price—commonly referred to as being “inverted.” During such months, manufacturing handlers and cooperatives have elected to not pool all of their eligible milk receipts because doing so would require them to pay into the PSF of the order, the mechanism through which handler and producer prices are equalized. When prices are not inverted, handlers would pool all of their eligible receipts and receive a payment or draw from the PSF. In receiving a draw from the PSF, such handlers will have sufficient money to pay at least the order's blend price to their supplying dairy farmers.

When manufacturing handlers and cooperatives opt to not pool all of their eligible milk receipts in a month, they are essentially avoiding a payment to the PSF. This, in turn, enables them to avoid the marketwide sharing of the additional value of milk that accrues in the higher-valued uses of milk other than Class I. When the Class I price again becomes the highest valued use of milk, or when other class-price relationships become favorable, the record reveals that these same handlers opt to again pool their eligible milk receipts and draw money from the PSF. It is the ability of manufacturing handlers and cooperatives opting to not pool milk and thereby avoid the marketwide sharing of the revenue accruing from non-Class I milk sales that is viewed by proponents as giving rise to disorderly marketing conditions. According to proponents, producers and handlers who cannot escape being pooled and priced under the order are not assured of equitable prices.

The record reveals that since the implementation of Federal milk marketing order reform in January 2000, and especially in more recent years, large and rapid increases in manufactured product prices during certain months have provided the economic incentives for manufacturing handlers to opt not to pool eligible milk on the UMW order. For example, during the three-month period of February to April 2004, the Class III price increased over 65 percent from $11.89 per cwt to $19.66 per cwt. During the same time period, total producer milk pooled on the UMW order decreased by over 60 percent from 1.94 billion pounds to 608 million pounds. When milk volumes of this magnitude are not pooled the impacts on producer blend prices are significant. Producers who incur the additional costs of consistently servicing the Class I needs of the market receive a lower return than would otherwise have been received if they did not continue to service the Class I market. Prices received by dairy farmers who supplied the other milk needs of the market are not known. However, it is reasonable to conclude that prices received by dairy farmers were not equitable or uniform.

The record reveals that “inverted” prices of milk are generally the result of the timing of Class price announcements. Despite changes made as part of Federal milk order reform to shorten the time period of setting and announcing Class I milk prices and basing the Class I price on the higher of the Class III or Class IV price to avoid price inversions, large month-to-month price increases in Class III and Class IV product prices sometimes trumped the intent of better assuring that the Class I price for the month would be the highest-valued use of milk. In all orders, the Class I price (and the Class II skim price) is announced prior to or in advance of the month for which it will apply. The Class I price is calculated by using the National Agricultural Statistics Service (NASS) surveyed cheese, butter, nonfat dry milk and dry whey prices for the two most current weeks prior to the 24th day of the preceding month and then adding a differential value to the higher of either the advanced Class III or Class IV price.

Historically, the advance pricing of Class I milk has been used in all Federal orders because Class I handlers cannot avoid regulation and are required to pool all of their Class I milk receipts, they should know their product costs in advance of notifying their customers of price changes. However, milk receipts for Class III and IV uses are not required to be pooled thus, Class III and IV product prices (and the Class II butterfat value) are not announced in advance. These prices are announced on or before the 5th of the following month. Of importance here is that manufacturing plant operators and cooperatives have the benefit of knowing all the classified prices of milk before making a decision to pool or not pool eligible receipts.

The record reveals that the decision of manufacturing handlers or cooperatives to pool or not pool milk is made on a month-to-month basis and is generally independent of past pooling decisions. Manufacturing handlers and cooperatives that elected to not pool their milk receipts did so to avoid making payments to the PSF and they anticipated that all other manufacturing handlers and cooperatives would do the same. However, the record indicates that normally pooled manufacturing handlers and cooperatives met the pooling standards of the order to ensure that the Class I market was adequately supplied and that they established eligibility to pool their physical receipts, including diversions to nonpool plants. Opponents to proposals to deter de-pooling are of the view that meeting the pooling standards of the order and deciding how much milk to pool are unrelated events. Proponents took the view that participation in the marketwide pool should be based on a long-term commitment to supply the market because in the long-term it is the sales of higher priced Class I milk that adds additional revenue to the pool.

The producer price differential, or PPD, is the difference between the Class III price and the weighted average value of all Class I, II and IV milk pooled. In essence, the PPD is the residual revenue remaining after all butterfat, protein and other solids values are paid to producers. If the pooled value of Class I, II and IV milk is greater than the Class III value, dairy farmers receive a positive PPD. While the PPD is usually positive, a negative PPD can occur when class prices rise rapidly during the six-week period between the time the Class I price is announced and the time the Class II butterfat and III and IV milk prices are announced. When manufacturing prices fall, this same lag in the announcement of class prices yields a positive PPD.

As revealed by the record, when manufacturing plants and cooperatives opted to not pool milk because of inverted price relationships, PPD's were much more negative. When this milk is not pooled, a larger percentage of the milk remaining pooled will be “lower” priced Class I milk. When manufacturing milk is not pooled the weighted average value of milk decreases relative to the Class II, III or IV value making the PPD more negative. For example, record evidence demonstrated that in April 2004, a month when a sizeable volume of milk was not pooled, the PPD was a negative $4.11 per cwt. If all eligible milk had been pooled, the PPD would have been $2.97 per cwt higher or a negative $1.14 per cwt.

The record reveals that when manufacturing handlers and cooperatives opt to not pool milk, unequal pay prices may result to similarly located dairy farmers. For example, Dean noted that when a cooperative delivers a high percentage of their milk receipts to a distributing plant, it lessens their ability to not pool milk, making them less competitive in a marketplace relative to other producers and handlers. Other evidence in the record supports conclusions identical to Dean that when a dairy farmer or cooperative is able to receive increased returns from shipping milk to a manufacturing handler during times of price inversions, other dairy farmers or cooperatives who may have shipped more milk to a pool distributing plant are competitively disadvantaged.

The record of this proceeding reveals that the ability of manufacturing handlers and cooperatives to not pool all of their eligible milk receipts gives rise to disorderly marketing conditions and warrants the establishment of additional pooling standards to safeguard marketwide pooling. Current pooling provisions do not require or prohibit handlers and cooperatives from pooling all eligible milk receipts. However, the record reveals that when handlers and cooperatives opt to not pool milk inequities arise among producers and handlers that are contrary to the intent of the Federal milk marketing order program—maintaining orderly marketing conditions.

The record contains extensive testimony regarding the effects on the milk order program resulting from advance pricing and the priority the milk order program has placed on the Class I price being the highest valued use of milk. It remains true that the Class I use of milk is still the highest valued use of milk notwithstanding those occasional months when milk used in usually lower-valued classes may be higher. This has been demonstrated by an analysis of the effective Class I differential values—the difference in the Class I price at the base zone of Cook County, Illinois, and the higher of the Class III or Class IV price—for the 65 month period of January 2000 through May 2005 performed by USDA. 1 These computations reveal that the effective monthly Class I differential averaged $1.76 per cwt. Accordingly, it can only be concluded that in the longer-term Class I sales continue to be the source of additional revenue accruing to the pool even when, in some months, the effective differential is negative.

Price inversions occur when the wholesale price for manufactured products rises rapidly indicating a tightening of milk supplies to produce those products. It is for this reason that the Department chose the higher of the Class III or Class IV prices as the mover of the Class I price. Distributing plants must have a price high enough to attract milk away from manufacturing uses to meet Class I demands. As revealed by the record, this method has not been sufficient to provide the appropriate price signals to assure an adequate supply of milk for the Class I market. Accordingly, additional measures are needed as a means of assuring that milk remains pooled and thus available to the Class I market. Adoption of Proposal 2 is a reasonable measure to meet the objectives of orderly marketing.

This decision does find that disorderly marketing conditions are present when producers do not receive uniform prices. Handlers and cooperatives opting to not pool milk do not account to the pool at the classified use-value of those milk receipts. They do not share the higher classified use-value of their milk receipts with all other producers who are pooled on the order, primarily the producers who are pooled on the order are incurring the additional costs of servicing the Class I needs of the market. This is not a desired or reasonable outcome especially when the same handlers and cooperatives will again pool all of their eligible receipts when class-price relationships change in a subsequent month. These inequities borne by the market's producers are contrary to the intent of the Federal order program's reliance on marketwide pooling—ensuring that all producers supplying the market are paid uniform prices for their milk regardless of how the milk of any single producer is used.

It is reasonable that the order contain pooling provisions intended to deter the disorderly conditions that arise when de-pooling occurs. Such provisions maintain and enhance orderly marketing. Accordingly, this decision finds it reasonable to recommend adoption of provisions that would limit the volume of milk a handler or cooperative may pool during the months of April through February to 125 percent of the total volume pooled by the handler or cooperative in the prior month and to 135 percent of the prior month's pooled volume during the month of March. Adoption of this standard will not prevent manufacturing handlers or cooperatives from electing to not pool milk. However, it should serve to maintain and enhance orderly marketing by encouraging participation in the marketwide pooling of all classified uses of milk.

Consideration was given on whether de-pooling should be considered at a national hearing with other, broader national issues of milk marketing. However, each marketing area has unique marketing conditions and characteristics which have area-specific pooling provisions to address those specific conditions. Because of this, pooling issues are considered unique to each order. This decision finds that it would be unreasonable to address pooling issues, including de-pooling on a national basis.

Some manufacturing handlers and cooperatives argue that their milk did perform in meeting the Class I needs during the month and this occurred before making their pooling decisions. They argue that the Class I market is therefore not harmed and that the intents and goals of the order program are satisfied. With respect to this proceeding and in response to these arguments, this decision finds that the practice of de-pooling undermines the intent of the Federal order program to assure producers uniform prices across all uses of milk normally associated with the market as a critical indicator of orderly marketing conditions. Similarly, handlers and cooperatives that de-pool purposefully do so to gain a momentary financial benefit (by avoiding making payments to the PSF) which would otherwise be equitably shared among all market participants. While the order's performance standards tend to assure that distributing plants are adequately supplied with fresh, fluid milk, the goals of marketwide pooling are undermined by the practice of de-pooling. Producers and handlers who regularly and consistently serve the Class I needs of the market will not equitably share in the additional value arising momentarily from non-fluid uses of milk. These same producers and handlers will, in turn, be required to share the additional revenue arising from higher-valued Class I sales in a subsequent month when class-price relationships change.

The four proposals considered in this proceeding to deter the practice of de-pooling in the UMW order have differences. They all seek to address the market disorder arising from the practice of de-pooling. However, this decision does not find adoption of the two “dairy farmer for other market” proposals—Proposals 3 and 4—reasonable because they would make it needlessly difficult for milk to be re-pooled and because their adoption may disrupt prevailing marketing channels or cause the inefficient movement of milk. Likewise, Proposal 5, to restrict pooling in a month to 115 percent of the prior month's volume pooled by the handler, is not recommended for adoption. Adoption of this proposal would disrupt current marketing conditions beyond what the record justifies. Therefore, this decision recommends adoption of Proposal 2 to limit the pooling of milk by a handler during the months of April through February to 125 percent of the total milk receipts the handler pooled in the prior month and to 135 percent of the prior month's pooled volume during the month of March because it provides the most reasonable measure to deter the practice of de-pooling.

Consideration was given to omitting a recommended decision on the issue to de-pooling. The record does not support a conclusion that adoption of measures to deter de-pooling warrant emergency action. The recommended adoption of provisions to limit the volume of milk that can be pooled during the month on the basis of what was pooled in the preceding month warrant public comments before a final decision is issued.

A proposal published in the hearing notice as Proposal 6, seeking to specify the length of time a dairy farmer may lose Grade A status before losing producer status on the order, is not recommended for adoption. Proposal 6, offered by Dean, would amend the Producer definition by explicitly stating that a dairy farmer may lose Grade A status for up to 21 calendar days per year before needing to requalify as a producer on the order. The UMW order currently does not specify the specific length of time a dairy farmer may lose Grade A status before needing to requalify as a producer on the order. Currently, a dairy farmer must deliver one day's milk production to a pool plant during the first month a producer is to be pooled in order to have their milk pooled and priced under the terms of the order.

A witness appearing on behalf of Dean testified in support of Proposal 6. The witness said the UMW order currently does not specify how long a dairy farmer who temporarily loses their Grade A status can retain producer status before they must requalify as a producer on the order. Proposal 6, the witness stated, sets a reasonable limit to the number of days a producer can lose Grade A status within a calendar year.

A witness appearing on behalf of Mid-West, et al., testified in opposition to Proposal 6. The witness said that many situations could arise where a producer is unable to regain Grade A status in less than 21 days due to damages resulting from situations beyond their control. The current order language provides for waivers in pooling standards for pool plants due to such “acts of God” and, in the witness' opinion, is adequately provided for in the Producer definition of the current order language.

The Producer definition of the UMW order does not define the length of time a producer may lose Grade A status before needing to requalify for producer status on the order. The issue of qualifying for producer status is important since it determines which producers and which producer milk is entitled to share in the revenues arising from the marketwide pooling of milk on the UMW order.

The definition of “temporary” used by the Market Administrator has accommodated the Upper Midwest market by giving producers a reasonable amount of time to regain Grade A status without burdening the market with excessive touch-base shipments or recordkeeping requirements. Limiting the time period a producer can lose Grade A status would require handlers and the Market Administrator to track the producer's loss of Grade A status throughout the year to determine when the 21 day limit is reached.

This decision finds that the additional touch-base shipments that would be required for a dairy farmer to requalify for producer status on the order would cause uneconomic shipments of milk. Additionally, the increased recordkeeping requirements would burden handlers without contributing to the goals and application of the proposed amendments to the pooling standards contained in this decision. Accordingly, Proposal 6 is not recommended for adoption.

A proposal, published in the hearing notice as Proposal 7, seeking to increase the maximum assessment rate of the UMW order, should be adopted. Specifically, the maximum administrative assessment rate should be increased from the current rate of 5 cents per cwt to 8 cents per cwt. At the time of the hearing, the administrative assessment rate of 5 cents per cwt applied to all milk pooled on the order and was the maximum assessment rate that could be charged. Adoption of this proposal will not increase the administrative assessment above the current rate but it will give the market administrator the ability to increase the assessment up to a maximum 8 cents per cwt, if necessary. 2

According to the Market Administrator, Proposal 7 was offered because there is not sufficient milk volume being consistently pooled on the UMW order to generate adequate funding for the proper administration of the order. Administration of the UMW order generates substantial costs for the many services provided to UMW marketing area participants including pooling, auditing, gathering market information, and providing market services such as laboratory testing, explained the witness. The witness noted that there are also fixed expenses such as salaries and office leases and that the order must maintain a specified minimum level of operating reserves.

The Market Administrator stated that from 2000 to 2002, the amount of producer milk on the UMW order ranged from 1.7 to 1.95 billion pounds per month. According to the witness, this volume of pooled milk generated sufficient funds for the administration of the order for the 4-cent per cwt assessment rate being assessed on pooled milk during that time. However, the witness said, from July through November 2003 almost 6.2 billion pounds of producer milk was de-pooled which resulted in the loss of nearly $2.5 million in potential revenue for the administration of the order. According to the Market Administrator, this loss of revenue caused the assessment rate to be increased from 4 cents to 5 cents per cwt. The Market Administrator stressed that substantial de-pooling occurred again from March through May 2004 when nearly 4.7 billion pounds of producer milk was de-pooled.

The Market Administrator emphasized that the UMW order still services the de-pooled milk because handlers make decisions to de-pool their milk receipts after the end of the month after already utilizing many of the UMW order services. According to the Market Administrator, the UMW order must sometimes service an approximately 2 billion pound market per month while only collecting an assessment on 600 to 700 million pounds of milk. At the current assessment rate of 5 cents per cwt, noted the Market Administrator, the order needs approximately 1.5 billion pounds of pooled producer milk per month to operate and provide the services expected by market participants.

The Market Administrator said that actions to reduce operating costs have taken place but an increase in the maximum assessment rate is needed to ensure the proper administration of the order and to maintain necessary operating reserves. The Market Administrator explained that increasing the maximum administrative assessment rate to 8 cents per cwt would not necessarily be the actual rate that would be charged to pooling handlers. The Market Administrator stressed that the proposed 8-cent assessment rate is a maximum level, and the actual assessment rate charged would only be as high as needed to operate the order.

The Mid-West, et al., brief expressed support of the Proposal 7 but emphasized that the assessment rate should be viewed as a maximum. The brief speculated that if Proposal 2 is adopted, the volume of milk pooled consistently will stabilize making it unnecessary to raise the assessment rate. The brief also discussed the option of having the assessment rate vary to ensure that milk which is consistently pooled does not pay for services on milk that is de-pooled and does not pay an assessment.

A witness appearing on behalf of Dean viewed Proposal 7 as an extra tax on those producers who already pay for the administration of the order every month, unlike those producers whose milk is de-pooled. The witness contended that if Proposal 3, 4, or 5 were adopted, the amount of milk being de-pooled on the UMW order would decrease significantly, thus giving the Market Administrator a more consistent income stream. However, asserted the witness, if the Department decided to increase the administrative assessment, Dean would encourage an amended provision that would charge a higher assessment on milk not pooled in the previous month.

Dean's post-hearing brief reiterated support for increasing the maximum administrative rate while maintaining that adoption of Proposal 3 would prevent the need to actually increase the administrative assessment rate. The brief proposed that if the administrative assessment rate is increased, the Market Administrator should be granted the authority to insulate continuously pooled producers from paying the increased assessment.

A witness appearing on behalf of WCA testified in opposition to Proposal 7. The witness asserted that the Market Administrator should use other means to address what the witness characterized as short-term funding declines.

A witness representing Oberweis Dairy also opposed adoption of Proposal 7 because it would increase costs to producers.

The hearing record reveals that fluctuations in the volume of milk pooled on the UMW order attributed to de-pooling can reduce the Market Administrator revenues to a level too low for proper administration of the order. At the current assessment rate of 5 cents per cwt, 1.5 billion pounds of pooled milk is needed to generate sufficient funds for the administration of the order. However, de-pooling has resulted in pooled volumes far below that needed to generate an adequate revenue stream.

The recommended adoption of a proposal to deter the de-pooling of milk should result in a more stable revenue stream for the administration of the UMW order. Nevertheless, it is reasonable to increase the maximum administrative assessment rate to ensure that the Market Administrator has the proper funds to carry out all of the services provided by the UMW order. While the maximum administrative rate should be increased to 8 cents per cwt, the actual rate charged will only be as high as necessary to properly administer the order and provide the necessary services to market participants.

Briefs and proposed findings and conclusions were filed on behalf of certain interested parties. These briefs, proposed findings and conclusions, 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 UMW 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) The tentative marketing agreement and the 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 tentative 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 tentative marketing agreement and the 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, the marketing agreement upon which a hearing has been held.

The recommended marketing agreement is not included in this decision because the regulatory provisions thereof would be the same as those contained in the order, as hereby proposed to be amended. The following order amending the order, as amended, regulating the handling of milk in the UMW marketing area is recommended as the detailed and appropriate means by which the foregoing conclusions may be carried out.

For the reasons set forth in the preamble, 7 CFR part 1030, is proposed to be amended as follows:

This decision recommends adoption of amendments that would: (1) Increase supply plant performance standards to 25 percent for the months of August through February and to 20 percent for the months of March through July; (2) Require the non-pool side of a split plant to maintain nonpool status for 12 months; (3) Amend the “touch-base” feature of the order to require that at least one day's production of the milk of a dairy farmer be received at a pool plant in each of the months of January, February, and August through November, to be eligible for diversion to non-pool plants; (4) Lower the diversion limit standards by five percentage points, from 80 percent to 75 percent, for the months of August through February, and by five percentage points, from 85 percent to 80 percent for the months of March through July; and (5) Establish provisions that would limit the volume of milk a handler may pool in a month to 125 percent of the volume of milk pooled in the prior month.

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. The amendments to the rules proposed herein have been reviewed under Executive Order 12988, Civil Justice Reform. It is not intended to have a retroactive effect. If adopted, the proposed rule would 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 (the Act), 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 of Agriculture (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.

During January 2005, there were 5,778 dairy producers pooled on, and 23 handlers regulated by, the Central order. Approximately 5,365 producers, or 92.9 percent, were considered “small businesses” based on the above criteria. Of the 23 handlers regulated by the Central order during January 2005, 11 handlers, or 47.8 percent, were considered “small businesses.”

The recommended amendments regarding the pooling standards serve to revise established criteria that determine those producers, producer milk, and plants that have a reasonable association with and consistently serve the fluid needs of the Central milk marketing area. Criteria for pooling are established on the basis of performance levels that are considered adequate to meet the Class I fluid needs of the market and, by doing so, determine those producers who 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. Therefore, the 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 no impact on reporting, record keeping, 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 recommended 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.

Interested parties are invited to submit comments on the probable regulatory and informational impact of this proposed rule on small entities. Also, parties may suggest modifications of this proposal for the purpose of tailoring their applicability to small businesses.

Notice of Hearing: Issued September 17, 2004; published September 22, 2004 (69 FR 56725).

Notice of Hearing Delay: Issued October 18, 2004; published October 13, 2004 (69 FR 61323).

Notice is hereby given of the filing with the Hearing Clerk of this recommended decision with respect to the proposed amendments to the tentative marketing agreement and the order regulating the handling of milk in the Central marketing area. This notice is issued pursuant to the provisions of the Agricultural Marketing Agreement Act (AMAA) 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, United States Department of Agriculture, Room 1031-Stop 9200, 1400 Independence Avenue, SW., Washington, DC 20250-9200, by the [insert date 60 days after publication of this decision in the Federal Register .] Six (6) 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. Some evidence was received that specifically addressed these issues, and some of the evidence encompassed entities of various sizes.

A public hearing was held upon proposed amendments to the marketing agreement and the order regulating the handling of milk in the Central 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 governing the formulation of marketing agreements and marketing orders (7 CFR part 900).

The proposed amendments set forth below are based on the record of a public hearing held in Kansas City, Missouri, on December 6-8, 2004, pursuant to a notice of hearing issued September 17, 2004, published September 22, 2004 (69 FR 56725), and a notice of a hearing delay issued October 13, 2004, published October 18, 2004, (69 FR 61323).

The material issues on the hearing record relate to:

1. Pooling Standards.

A. Performance standards for supply plants.

B. The “Split plant” provision.

C. System pooling for supply plants.

D. Elimination of the supply plant provision.

E. Standards for producer milk.

2. Establishing pooling limits.

3. Transportation and assembly credits.

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

A portion of a proposal, published in the hearing notice as Proposal 1, seeking to increase supply plant performance standards by five percentage points, from 20 percent to 25 percent, for the months of August through February, and from 15 percent to 20 percent for the months of March through July, is recommended for adoption. A portion of another similar proposal, published in the hearing notice as Proposal 5, seeking to increase supply plant performance standards by 20 percentage points, from 15 percent to 35 percent, for the month of July, by 15 percentage points, from 20 percent to 35 percent, for the months of August through January and by 10 percentage points, from 15 percent to 25 percent, for the month of March is not recommended for adoption. Currently, the Central order requires a supply plant to ship 20 percent of its total receipts to a distributing plant during the months of August through February, and 15 percent of its total receipts during the months of March through July, in order for the total receipts of the supply plant to be pooled.

Proposal 1 was offered jointly by Dairy Farmers of America, Inc., (DFA), and Prairie Farms Cooperative (PF), hereafter referred to as DFA/PF. DFA/PF are member-owned Capper-Volstead cooperatives that pool milk on the Central order. Proposal 1 would increase the amount of milk a supply plant would be required to ship to a distributing plant by five percentage points, from 20 percent to 25 percent, for the months of August through February, and from 15 percent to 20 percent for the months of March through July, in order to pool all of its receipts on the Central order.

The proponents are of the opinion that current supply plant performance standards enable milk that does not demonstrate a consistent and reliable service to the Class I market to be pooled on the order. The proponents contend that the pooling of this additional milk is causing an unwarranted lowering of the order's blend price.

A witness appearing on behalf of DFA/PF testified in support of Proposal 1. The DFA/PF witness stated that increasing the volume of milk a supply plant is required to ship to a pool distributing plant in order to have all the receipts of the supply plant pooled, combined with other proposed changes to the Central order pooling provisions, will better identify milk ready, willing and able to service the fluid milk needs of the Central marketing area.

The DFA/PF witness testified that the proposed increase in the performance standards for supply plants would increase the blend price received by dairy farmers whose milk is pooled and priced on the Central order. The witness was of the opinion that an increase in the blend price will serve to attract and retain milk supplies that are otherwise shipped from the Central order area to neighboring marketing areas. The witness asserted that increasing supply plant performance standards will ensure that the Class I needs of the Central marketing area are being met.

The DFA/PF witness testified that current supply plant performance standards allow far more milk to be pooled on the Central order than is necessary. Relying on market administrator data, the witness noted that the projected Class I utilization of 50.1 percent, anticipated during Federal order reform for the consolidated marketing area, was not achieved. The witness added that the average Class I utilization in the Central marketing area has ranged from a low of 26 percent in 2002 to nearly 33 percent in 2003. The witness was of the opinion that these average Class I utilization levels demonstrate that reserve supplies of milk in the marketing area of 74 and 67 percent, respectively, for 2002 and 2003, far exceed the 49-50 percent reserve levels projected during Federal order reform. In addition, the witness noted that increased supply plant performance standards implemented in 2001 have not been effective in reducing the excess reserve supply of milk in the marketing area. The witness concluded that this data confirms that the current performance standards of the Central order provide opportunities for milk not regularly and consistently serving the Class I market to be pooled on the order.

The DFA/PF witness described concerns regarding the geography of the Central marketing area and explained that higher prices are received for milk in the bordering Southeast and Appalachian marketing areas. According to the witness, higher milk prices in the Appalachian and Southeast orders tend to attract milk from the Central marketing area and create localized supply imbalances within the eastern portion of the marketing area. The witness testified that increasing supply plant performance standards would deter milk originating from within the Central order boundaries from pooling on the Appalachian and Southeast orders. According to the witness this would tend to increase the blend price paid to dairy farmers whose milk is pooled on the Central order.

A number of DFA member dairy farmers whose milk is pooled on the Central order testified in support of the portion of Proposal 1 that would increase supply plant performance standards. The dairy farmer witnesses were of the opinion that increasing supply plant performance standards will raise the level of Class I utilization and in turn, increase the blend price.

A witness from National All-Jersey (NAJ) representing AMPI, et al., (Associated Milk Producers Inc., Central Equity Cooperative, Land O” Lakes, Inc., First District Association, Foremost Farms USA, joined by Wells Dairy, Inc., Milnot Holdings and National All-Jersey), testified in opposition to the portion of Proposal 1 that would increase supply plant performance standards. NAJ is a national organization whose mission is to promote milk pricing equity and increase the value and demand for the milk produced by the Jersey breed. The NAJ witness was of the opinion that increasing supply plant performance standards would result in inefficient movements of milk and pass the costs of regulatory inefficiencies to consumers.

In their post hearing brief, DFA/PF reiterated their support for Proposal 1. The brief asserted that adoption of the portion of Proposal 1 that would increase supply plant performance standards would more accurately identify the milk of producers servicing the fluid needs of the market. According to the brief, increasing supply plant performance standards will increase the blend price for the producers who provide regular and consistent service to the Class I market. The DFA/PF brief reiterated support for not pooling milk which does not provide regular and consistent service to the fluid milk needs of the Central marketing area.

A brief from Select Milk Producers, Inc. (Select) and Continental Dairy Products, Inc. (Continental) supported adoption of the higher performance standard features of Proposal 1. Select and Continental are member-owned Capper-Volstead cooperatives whose milk is pooled on the Central order. The brief noted that adoption of higher performance standards would deter the pooling of milk on the order not servicing the fluid needs of the market.

A portion of Proposal 5, advanced by Dean Foods (Dean) (who described themselves as the largest processor and distributor of fluid milk in the United States, owning and operating nine distributing plants regulated by the Central order,) would increase supply plant performance standards by 20 percentage points, from 15 percent to 35 percent, for the month of July, by 15 percentage points, from 20 percent to 35 percent, for the months of August through January and by 10 percentage points, from 15 percent to 25 percent, for the month of March. These proposed changes to supply plant performance standards are not recommended for adoption.

Two witnesses appeared on behalf of Dean in support of increasing supply plant performance standards. The witnesses were of the opinion that current supply plant performance standards are inadequate to assure a reasonable supply of fluid milk to the order's distributing plants. The witnesses were of the opinion that increasing supply plant performance standards as they proposed to the levels advanced would better attract an adequate milk supply for Class I use to the marketing area.

The first Dean witness testified that marketwide pooling and classified pricing are built on the assumption that Class I milk is the highest priced class and that pool revenues generated from Class I sales will attract a regular and consistent milk supply. The witness was of the opinion that current supply plant performance standards allow handlers to pool milk on the Central order that does not regularly and consistently serve the Class I market. According to the witness, low supply plant performance standards reduce the blend price paid to producers who consistently serve the needs of the Central order fluid market by allowing lower-valued milk to be pooled on the order.

The first Dean witness was of the opinion that adoption of higher performance standards would increase the volume of milk available to the Class I market. The witness further testified that if the USDA adopted higher performance standards for supply plants, adoption of Proposals 9 and 10, or Proposals 11, 12, and 13 would also be necessary. (Proposals 9, 10, 11, 12, and 13 are discussed later in this decision.)

The second Dean witness also was of the opinion that increasing supply plant performance standards would help to ensure that the fluid milk needs of the marketing area are being met. According to the witness, increasing supply plant performance standards would decrease the volumes of milk in lower-valued uses pooled on the order, thereby increasing the order's blend price. The witness testified that increasing supply plant performance standards would assist fluid milk handlers located in St. Louis and southern Illinois, who compete with handlers located in the Appalachian and Southeast orders, obtain needed milk supplies.

A brief submitted on behalf of DFA/PF opposed adoption of the level of performance standards for supply plants offered by Dean. DFA/PF noted that increasing supply plant performance standards to the levels advanced in Proposal 5 are unnecessarily high and are more restrictive than current market conditions could reasonably justify.

A brief submitted by AMPI, et. al., reiterated the group's opposition to increased performance standards for supply plants as advanced by both Dean and DFA/PF. The brief highlighted the contention that increased performance standards for supply plants would unfairly penalize reserve suppliers of the marketing area by restricting their ability to share in the benefits of the marketwide pool.

A proposal from Dean, published in the hearing notice as Proposal 10, seeking to require the nonpool side of a split plant to maintain nonpool status for 12 months, is recommended for adoption. Another Dean proposal, published in the hearing notice as Proposal 9, seeking to eliminate the split plant provision is not recommended for adoption.

The current split plant 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. Current provisions afford handlers operating a split plant the option of maintaining nonpool status or qualifying the nonpool side of the plant for pooling on a monthly basis.

The Dean witness testified that the nonpool side of a split plant can facilitate the pooling of milk that does not demonstrate a regular and consistent service to the fluid milk needs of the Central marketing area. The witness stated that if Proposal 10 was adopted, then Proposal 4, a proposal to eliminate all supply plant provisions, and Proposal 9, a proposal to eliminate split plants, would not be needed.

The Dean witness testified that Proposal 10 would require the nonpool side of a split plant to maintain nonpool status for a 12-month interval. According to the witness, adoption of this provision would deter pooling milk that does not regularly and consistently serve the Class I market. The witness added that Proposal 10 was advanced as an alternative to Proposal 9. The witness testified that as advanced in Proposal 9, a split plant plant could either be a pool plant or a nonpool plant but not both. The witness stated that if USDA did not eliminate split plants then Dean would seek the adoption of Proposal 10.

In a post hearing brief, Select and Continental supported adoption of Proposal 10. The brief stated that Proposal 10 would deter the pooling of milk that does not regularly and consistently serve the Class I market. According to the brief, split plants should be prohibited from using milk receipts in the nonpool side of the plant from being pooled without demonstrating actual service to the Class I market. The brief expressed the opinion that reducing the volume of milk that a split plant could pool on the order from its nonpool side would tend to increase the Central order blend price.

The Select and Continental brief however, opposed the elimination of split plants as advanced in Proposal 9. The brief stated that requiring a split plant to elect non-pool status for 12 months for its nonpool side would provide sufficient incentive to prevent the pooling of excess milk through split plants.

DFA/PF commented on brief that Dean's Proposals 4-13 in general “go too far, too fast” given the current market conditions of the Central marketing area. According to the brief, DFA/PF contend that the adoption of the Dean proposals would not serve the needs of small dairy farms. The brief noted that some small producers may not have alternative markets for their milk if Dean's proposal to eliminate the split plant provision was adopted.

The AMPI, et al., brief opposed elimination of the split plant provision or requiring a 12 month pooling commitment from operators of split plants. Their opposition was based on the view that elimination of split plants, or imposing a 12 month pooling commitment for split plant operators, would unfairly restrict their ability to pool milk on the order.

Three proposals presented by Dean, published in the hearing notice as Proposals 11, 12 and 13, and modified at the hearing, are not recommended for adoption. Proposal 11 would eliminate providing for supply plant systems. Proposal 12 would require a supply plant system to be operated by only one handler. Proposal 13 would require that every plant participating in a system be required to ship 40 percent of the system's qualifying shipment as if they had been operating as separate plants. Proposal 13 also would prohibit using milk shipped directly from producer farms as qualifying shipments. Current Central order provisions provide the ability for 2 or more supply plants (subject to certain additional conditions) to operate as a “system” in meeting the qualifications for pooling in the same manner as a single plant.

The Dean witness testified that system pooling affords handlers the ability to link several supply plants together in an effort to qualify producer milk for pooling on the order. According to the witness, current system pooling provisions allow plants and farms close to distributing plants to deliver producer milk on behalf of more distant plants, thereby providing for the pooling of milk that does not regularly and consistently serve the Class I market. According to the witness, adoption of Proposal 11 would require plants to transfer milk to obtain and maintain eligibility for pool qualification. The witness stated that Proposal 11 would require every handler to pool their producers on the basis of actual deliveries to distributing plants.

The Dean witness testified in support of Proposal 12 in the event supply plant systems were not eliminated as advanced in Proposal 11. According to the witness, Proposal 12 would limit the use of supply plant systems to a single handler rather than multiple handlers as currently provided in the order. The witness testified that allowing only a single handler to qualify pool supply plants through system pooling provisions would ensure that each handler is willing and able to demonstrate regular and consistent service to the fluid milk needs of the Central marketing area.

The Dean witness testified that Proposal 13 would require each plant in a supply plant system to meet at least 40 percent of the total performance standard required for pooling. According to the witness, Proposal 13 is similar to Proposal 11 in that it would prohibit the use of milk shipped directly from producer farms to qualify a supply plant system. However, the witness stated that Proposal 13 also would require every supply plant in a supply plant system to ship a significant volume of milk to the fluid market. The witness noted that qualification of distant milk would be discouraged by adoption of Proposals 12 and 13 since the use of milk shipped directly from producer farms for qualification purposes would be prohibited. The Dean witness expressed preferences for the adoption of Proposal 11 over Proposal 12, and adoption of Proposal 12 over Proposal 13.

A witness from DFA/PF expressed opposition to Proposals 11, 12, and 13, because their adoption would eliminate or overly restrict the operation of supply plant systems. On brief, DFA/PF noted that, as with elimination of the split plant provision, some small producers may not have alternative markets for their milk if supply plant systems are eliminated or are made overly restrictive.

In a post hearing brief, AMPI, et al., reiterated opposition to Proposals 11, 12, and 13. The AMPI, et al., brief opposed restrictions on pooling milk of producers ready, willing, and able to serve the Class I needs of the Central marketing area. The brief opposed elimination or restriction of supply plant systems contending such action would eliminate markets for the milk of small dairy farmers without alternative markets available.

Select and Continental also opposed adoption of Proposals 11, 12 and 13 in their post-hearing brief. The brief opposed eliminating or restricting supply plant systems on the basis that no verifiable evidence was presented demonstrating that supply plant systems do not provide consistent and reliable service to the Class I market.

A proposal by Dean, published in the hearing notice as Proposal 4, seeking to eliminate the supply plant provision, is not recommended for adoption.

A Dean witness characterized Proposal 4 as a preferred alternative to increasing supply plant performance standards sought in Proposals 1 and 5. The witness explained that if Proposal 4 is adopted, then Proposals 9-13, seeking to increase performance standards for supply plants and supply plant systems would not be needed. The witness testified that while the role of supply plants in the milk order system is to supply the needs of distributing plants, the milk supply of plants for the Central marketing area is only of residual concern because it provides an outlet for reserve producers when their milk is not needed for fluid use.

The Dean witness testified that supply plants no longer represent the most efficient means for supplying distributing plants. According to the witness, supply plants play a minor role in the Central marketing area, representing less than 5 percent of the milk shipped to distributing plants. According to the witness, milk assembled from farms must be received at a supply plant, cooled and stored, and reloaded and delivered to distributing plants. The witness stated that the increased handling of milk through supply plants reduces its quality compared with milk that is direct delivered from farms. The witness said that direct delivery from farms to distributing plants is a superior method for ensuring that milk pooled on the order serves the Class I needs of the market. The witness was of the opinion that supply plants inappropriately facilitate pooling milk that does not regularly and consistently serve the Class I market.

A witness representing NAJ testified in opposition to the elimination of supply plants. According to the witness, elimination of the supply plant provision also would reduce the ability of dairy farmers to pool milk on the Central order. The witness was of the opinion that eliminating the supply plant provision would have a negative impact on the income of the cooperatives represented by NAJ. The witness stated that supply plants provide a legitimate means by which producers continue to serve the Class I market of the Central marketing area.

A witness for DFA/PF testified in opposition to the elimination of supply plants. According to the witness, provisions for supply plants should be provided because they continue to play a role in supplying milk to distributing plants. DFA/PF reiterated this opposition to Proposal 4 in their post-hearing brief. AMPI, et al., joined DFA/PF in opposing this proposal.

Several amendments to the Producer milk provision of the Central order are recommended for adoption. The amendments were largely contained in Proposal 1. Changes to the producer milk provision are necessary to more accurately identify the milk of those dairy farmers that are regularly and consistently serving the Class I needs of the market. The recommended amendments for adoption include: (1) Increasing the touch-base standard so that one day's milk production of a dairy farmer must be delivered to a pool plant in each of the months of January, February and August through November for the milk of the dairy farmer to be eligible for diversion to a nonpool plant; and (2) Decreasing the diversion limit standards to not more than 75 percent of receipts during August through February, and not more than 80 percent of receipts for March through July.

The feature of Proposal 1 to geographically limit the location of nonpool plants eligible to receive diverted milk to those plants in States located in the marketing area and New Mexico is not recommended for adoption.

Proposal 1 would increase the touch-base standard to require the equivalent of at least one days' milk production of a dairy farmer be physically received at a pool plant in each of the months of January, February and August through November. If the touch-base standard is not met, the milk would have to be physically received at a pool plant in each of the months of March through July and December. The current touch-base standard of the Central order specifies a one-time only delivery standard.

The DFA/PF witness explained that the current one-time touch-base standard of the Central order should be replaced by the strengthened touch-base feature of Proposal 1. The witness continued that the months of January, February, and August through November, were added to the proposed touch-base standard to correspond with periods of higher Class I demands. The DFA witness explained that requiring one day's milk production of a producer to be delivered to a pool plant in each of these six months should increase milk available for Class I use. The DFA/PF witness was opposed to any touch-base standard of more than one day per month for the six months advanced by the proposal, as being overly restrictive.

The DFA/PF witness testified that increasing the touch-base standard and lowering the diversion limit standards of the Central order will help to ensure that milk that could not consistently and reliably demonstrate service to the Class I market is not pooled on the order. The witness testified that the pooling of such milk on the order reduces the blend price paid to producers who consistently and reliably serve the Class I needs of the Central marketing area.

The DFA/PF witness acknowledged that amendments to the pooling provisions of the Central order implemented in 2003 reduced the volume of milk pooled that was not serving the Class I needs of the market. However, the witness noted that those changes did not contemplate that milk from the Mountain States might seek to be pooled on the Central order. The witness was of the opinion that the current touch-base and diversion limit standards were inadequate to prevent the sharing of Class I revenue with the milk of producers that could not possibly serve the Class I market of the Central marketing area. The witness was of the opinion that if milk located far from the Upper Midwest marketing area  1 and currently pooled on the Upper Midwest order were to seek an alternative order on which to pool, the current pooling standards of the Central order make it the most likely candidate among Federal milk orders. The witness testified that the current pooling standards of the Central order can not adequately prevent such milk from pooling because the pooling standards are too liberal. According to the witness, this milk can not demonstrate regular and reliable service to the Class I market.

The DFA/PF witness illustrated that milk produced in Idaho, for example, cannot profitably be delivered to distributing plants located in the Central marketing area. According to the witness, milk produced in this region would need to travel more than 680 miles for delivery at the nearest distributing plant of the order located in Denver. The witness asserted that the current one-time touch-base standard combined with the existing diversion limit standards of the order provide the incentive for milk located far from the marketing area to be profitably pooled on the order which otherwise would not be economically feasible.

The witness provided a scenario where a single 50,000-pound load of milk delivered once to Denver could cause one million pounds of milk to be pooled on the Central order through the diversion process but delivered to plants far from the marketing area. According to the witness' calculations, a 50,000-pound load of milk delivered once to a pool plant located in Denver would incur a loss $4,640. However, the witness explained that each additional load of milk, up to one million pounds now qualified for diversion to nonpool plants located near producers farms, would return an additional $7,081. The witness emphasized that the milk portrayed in this example would rely solely on the liberal pooling standards of the order. The milk would never consistently and reliably supply the Central marketing area.

In another scenario, the DFA/PF witness illustrated the impact of 25 million pounds of milk a month shipped from southern Idaho that would be pooled on the Central order through the diversion process by meeting the one-time touch-base standard during the months of November 2003-January 2004. The witness explained that pooling this volume of milk would have reduced the Central order's blend price by $0.25 per cwt.

In a third scenario, the DFA/PF witness demonstrated how milk located in southern Idaho can be pooled every month through the diversion process by meeting the one-time touch-base standard of the Central order. The witness said that this scenario was based on the 58-month period of January 2000 to October 2004. The witness explained that this scenario assumes that a single 50,000-pound load of milk was shipped to a distributing plant located in the Central marketing area and all other milk diverted to nonpool plants are located in Idaho. The witness testified that the shipping handler would receive a positive return averaging $0.348 per cwt per month ($201,000 over the 58-month period) on the total volume of milk pooled. The DFA/PF witness concluded that from their scenarios, the current Central order diversion limit and touch-base standards encourage pooling of milk that can not and does not regularly and consistently supply the Class I needs of the market.

A brief submitted by Select and Continental supported the producer milk amendments called for in Proposal 1, except for limiting diversions to nonpool plants that are located in the States comprising the Central marketing area. The brief noted that the goal of the Federal order program should be to ensure that milk pooled on the order actually serves the Class I market.

Features of Proposal 5, offered by Dean, regarding diversion limits and touch-base standards should not be adopted. Proposal 5 seeks to raise the touch-base standard to 4 days in each month of the year and decrease diversion limits to 65 percent for the months of July through January, and 75 percent during the months of February through June. A Dean witness stated that increasing the touch base requirement would ensure the increased availability of milk to serve the needs of the fluid market. The witness testified that adopting higher touch-base and lower diversion limit standards would ensure that pool plants would keep their facilities operating at a higher level of output than would be the case if more milk were diverted.

The diversion limit standard feature of Proposal 5 was modified by Dean on brief. The modification specified that milk would not be eligible for diversion “unless” (instead of “until”) milk has been physically received as producer milk at a pool plant, and the exception for a loss of Grade A status was changed to a period not to exceed 21 rather than 10 days in a calendar year.

The witness from NAJ, on behalf of AMPI, et al., testified in opposition to increasing the touch-base and lowering the diversion limit standards as advanced. The witness stated that the proposed lowering of diversion limits together with increasing supply plant performance standards as called for in Proposal 5 would have negative consequences for dairy farmer income, if adopted. The NAJ witness was of the opinion that the aim of Proposal 5 was to deter milk from being pooled on the order. It was the witness' opinion that the adoption of Proposal 5 would create marketing inefficiencies and additional costs for members of NAJ. The witness also was of the opinion that the adoption of Proposal 5 would discourage available milk supplies in the milkshed from pooling on the Central order.

The record reveals that the current pooling provisions of the Central order suggest that distributing plants in certain areas of the marketing area are having difficulty obtaining reliable milk supplies. Because this decision does not recommend the adoption of transportation credits (discussed later in this decision) for the movement of milk to distributing plants, increasing the performance standards for supply plants is a reasonable measure to better assure that all distributing plants of the order are adequately supplied. Additionally, other measures should be taken to prevent the pooling of milk which can not demonstrate regular and consistent service in supplying the Class I needs of the marketing area. The pooling of such milk would result in an unwarranted lowering of the blend price returned to those producers who demonstrate regular and consistent service in supplying the Class I needs of the market.

The pooling standards of all Federal milk marketing orders, including the Central order, are intended to ensure that an adequate supply of milk is available to meet the Class I needs of the market and provide the criteria for determining the producer milk that has demonstrated service in meeting the Class I needs of the market and thereby receive the order's blend price. The pooling standards of the Central order are represented in the Pool plant, Producer, and the Producer milk provisions of the order and are based on performance, specifying standards that if met, qualify a producer, the milk of a producer, or a plant to share in the benefits arising from the classified pricing of milk.

Pooling standards that are performance-based provide the only viable method for determining those producers eligible to share in the marketwide pool. It is usually the additional revenue generated from the higher-valued Class I use of milk that adds additional income to producers, and it is reasonable to expect that only those producers who consistently bear the costs of supplying the market's fluid needs should share in the returns arising from higher-valued Class I sales. An important objective of pooling standards is identifying the milk that serves the fluid milk needs of the market, a feature which if ineffective can result in pooling milk that is not providing such service. Record evidence supports finding that certain features of pooling standards of the Central order relating to performance standards for supply plants, diversion limits, touch-base, and split plants need to be amended given the pooling of milk that does not regularly and consistently serve the Class I needs of the Central marketing area.

The most recent amendments to the Central order (published in the August 27, 2003, Final Decision (68 FR 51640)) intended to correct similar inadequacies of the supply plant pooling provisions and diversion limit standards for the consolidated Central order. However, the record reveals that the combination and features adopted for pool plants in 2003, have not been as effective as intended to reasonably assure that only milk of producers who regularly and consistently serve the Class I market is pooled on the order.

Record evidence reveals that the performance and pooling standards of the Central order are inadequate to ensure that the benefits of consistently and reliably servicing the Class I market are shared equitably among those producers who actually bear the costs of serving that market. The record evidence demonstrates that milk distant from the Central marketing area does not provide reasonable service to the Class I market but can be pooled on the order because of current pooling standards. This evidence shows that pooling large volumes of milk at lower class-use values has lowered the order's blend price. Specifically, the record shows that the current one-time touch-base standard and the diversion limit standard of the order does not properly identify the milk of producers who reliably and consistently serve the Class I market.

The record demonstrates that current pooling standards of the Central order make it the most logical order for distant milk—such as in Southern Idaho—to be pooled. The record shows that the current performance standards of the Central order are insufficient to prevent milk from qualifying for pooling while not performing service to the Class I market.

In addition, the record provides evidence that milk produced in areas distant from the marketing area cannot profitably be delivered to distributing plants in the Central marketing area. However, the current liberal touch-base and diversion limit standards make pooling on the Central order attractive while reducing the blend price of the order for those producers who actually provide service to the Class I market.

Record evidence reveals the continued importance of supply plants for producers whose milk provides consistent and reliable service to the Class I market. According to the record, opposition to restrictive supply plant standards beyond those advanced in Proposals 1 and 10 was based on the continued need for supply plant service to distributing plants in the marketing area. Similarly, the record reveals a consensus among producers concerning their continued support for supply plant systems as an integral part of milk supply networks in the Central marketing area. Opposition to the elimination or additional restriction of supply plants and supply plant systems in Proposals 4, 11, 12, and 13, is revealed by the record to be based on the continued importance of supply plant systems to supplying the Class I market.

Record evidence from proponents and opponents of limiting diversions to supply plants located in the marketing area or New Mexico supports concluding that dairy farmers in some regions of the Central marketing area rely on supply plants to market their milk. In addition, the record contains evidence that supply plants and supply plant systems continue to provide necessary service to the Class I market without regard to the location of those plants or plant systems. According to the record, distant milk may use the pooling standards of the Central order as a means to pool milk that will never perform service to the Class I market. However, the record does not show clearly that milk diverted to supply plants outside the marketing area or New Mexico cannot be part of the legitimate reserve of the market which may require additional pooling safeguards. Performance rather than plant location continues to be the standard for identifying the milk of producers who should share in the benefits of pooling. In that regard, this decision finds agreement with the opponents of limiting diversions to supply plants located within the marketing area or New Mexico, as sought in Proposal 1, to serve the legitimate needs of the market.

This decision finds that several of the performance standards advanced in Proposal 1 are reasonable in light of other recommended changes to the order's pooling provisions. The combination of amendments increasing supply plant performance standards, modifying the split plant provision, reducing diversion limit standards and increasing the touch-base standard are appropriate in light of denying proposals to establish transportation and assembly credits. The recommended amendments should more accurately identify the milk of those producers that provide a consistent and reliable supply of milk to the Class I needs of the Central marketing area and assure that distributing plants are adequately supplied.

The record indicates that milk located either inside or outside the marketing area can be reported as diverted milk by a pooled handler. This milk is eligible to receive the order's blend price. Under the current pooling provisions, this can occur after a one-time delivery to a Central marketing area pool plant. After the initial delivery, however, such milk need never again be physically delivered to a Central marketing area pool plant. The record evidence confirms that usually this milk is delivered to a nonpool plant located nearer the farms of producers located far from the marketing area who cannot serve the Class I market. It is therefore appropriate to amend the order's diversion provisions to ensure that milk pooled through the diversion process is part of the legitimate reserve supply of the pool plant from which it was diverted. It is necessary to safeguard against excessive milk supplies becoming associated with the market through the diversion process to prevent the unwarranted reduction of the order's blend price.

However, the record does not support finding that diversions to plants not located within the marketing area or New Mexico cannot be part of the legitimate reserve supply for the marketing area. In this regard, the proposed limitation on diversions based on plant location is not reasonable. Based on the record, the proposed increase in the touch-base standard and lowering of the diversion limitation standard should be adequate to ensure that milk consistently and reliably serving the Class I market is properly identified. Accordingly, the portion of Proposal 1 seeking to limit diversions to plants located in the marketing area or New Mexico is not recommended for adoption.

This decision finds that the touch-base standard should be amended so that at least one days' milk production of a dairy farmer is physically received at a pool plant during January, February, and August through November for the milk of the dairy farmer to be eligible for diversion to a nonpool plant. Amending the touch-base standard should reduce the ability of milk not performing a consistent and reliable service to the Class I market from being pooled. The months of January, February, and August through November are, according to the record, the high demand months for fluid milk. Adoption of the one-day touch base standard for each of these three months would tend to more properly identify the milk of those producers serving the market's Class I needs. Accordingly, the proposal is recommended for adoption.

Record evidence does not support finding that the 4-day touch base standard advanced by Dean would improve the identification of dairy farmers whose milk serves beyond what a 1-day standard would provide within the context of current marketing conditions. This will be reinforced by the other amendments to the order's pooling standards recommended for adoption.

The proposal requiring a handler to make a 12-month commitment if opting to create a split plant would ensure that the milk shipped from the pool side of a split-plant serves the Class I market. This proposal (Proposal 10, advanced by Dean) is a reasonable modification of the split plant feature for supply plants to provide for orderly marketing and maintain the integrity and intent of the order's performance standards. The proposal retains the principle that milk regularly and consistently demonstrating service to the Class I needs of the market should benefit from being pooled on the order. Accordingly, Proposal 10 is recommended for adoption.

The Federal milk order system recognizes that there are costs incurred by producers in servicing an order's Class I market. The primary reward to producers for performing such service is receiving the order's blend price. Taken as a whole, the amended pooling provisions will ensure that milk seeking to be pooled consistently demonstrates service in meeting the marketing area's Class I needs. Consequently, adoption of these amended pooling provisions will provide for more equitable sharing of revenue generated from Class I sales among those producers who bear those costs and assure Class I handlers of a regular and reliable supply for fluid use.

Federal milk marketing orders rely on the tools of classified pricing and marketwide pooling to assure an adequate supply of milk for fluid (Class I) use and to provide for the equitable sharing of the revenues arising from the classified pricing of milk. Classified pricing assigns a value to milk according to how the milk is used. Regulated handlers who buy milk from dairy farmers are charged class prices according to how they use the farmer's milk. Dairy farmers are then paid a weighted average or “blend” price. The blend price that dairy farmers are paid for their milk is derived through the marketwide pooling of all class uses of milk in a marketing area. Thus each producer receives an equal share of each use class of milk and is indifferent as to the actual Class for which the milk was used. The Class I price is usually the highest class price for milk. Historically, the Class I use of milk provides the additional revenue to a marketing area's total classified use value of milk.

The series of Class prices that are applicable for any given month are not announced simultaneously. The Class I price and the Class II skim milk price are announced prior to the beginning of the month for which they will be effective. Class prices for milk in all other uses for the month are not determined until on or before the 5th day of the following month. The Class I price is determined by adding a differential value to the higher of either an advanced Class III or Class IV value. These values are calculated based on formula using National Agricultural Statistics Service (NASS) survey prices of cheese, butter, and nonfat dried milk powder for the first two weeks of the prior month. For example, the Class I price for August is announced in late July and is based on the higher of the Class III or IV value computed using NASS commodity price surveys for the first two weeks of July.

The Class III and IV prices for the month are determined and announced after the end of the month based on the NASS survey prices for the selected dairy commodities during the month. For example, the Class III and IV prices for August are based on NASS survey commodity prices during August. A large increase in the NASS survey price for the selected dairy commodities from one month to the next can result in the Class III or IV price exceeding the Class I price. This occurrence is commonly referred to by the dairy industry as a “Class price inversion.” A producer price inversion generally refers to when the Class III or IV price exceeds the average classified use value, or blend price, of milk for the month. Price inversions have occurred with increasing frequency in Federal milk orders since the current pricing plan was implemented on January 1, 2000, despite efforts made during Federal Order Reform to reduce such occurrences. Price inversions can create an incentive for dairy farmers and manufacturing handlers who voluntarily participate in the marketwide pooling of milk to elect not to pool their milk on the order. Class I handlers do not have this option; their participation in the marketwide pool is mandatory.

The producer price differential, or PPD, is the difference between the Class III price and the weighted average value of all Classes. In essence, the PPD is the dairy farmer's share of the additional/reduced revenues associated with the Class I, II and IV milk pooled in the market. If the value of Class I, II and IV milk in the pool is greater than the Class III value, dairy farmers receive a positive PPD. However, a negative PPD can occur if the value of the Class III milk in the pool exceeds the value of the remaining classes of milk in the pool. This can occur as a result of the price inversions discussed above.

The Central Federal order operates a marketwide pool. The Order contains pooling provisions which specify criteria that, if met, allow dairy farmers to share in the benefits that arise from classified pricing through pooling. The equalization of all class prices among handlers regulated by an order is accomplished through a mechanism known as the producer settlement fund (PSF). Typically, Class I handlers pay the difference between the blend price and their use-value of milk into the PSF. Manufacturing handlers typically receive a draw from the PSF, usually the difference between the Class II, III or IV price and the blend price. In this way, all handlers pay the Class value for milk and all dairy farmer suppliers receive at least the order's blend price.

When manufacturing class prices of milk are high enough to result in a use-value of milk for a handler that is higher than the blend price, handlers of manufacturing milk may choose to not pool their milk receipts. Opting to not pool their milk receipts allows these handlers to avoid the obligation of paying into the PSF. The choice by a manufacturing handler to not pool their milk receipts is commonly referred to as “de-pooling”. When the blend price rises above the manufacturing class use-values of milk these same handlers again opt to pool their milk receipts. This is often referred to as “re-pooling”. The ability of manufacturing handlers to de-pool and re-pool manufacturing milk is viewed by some market participants as being inequitable to both producers and handlers.

Proponents are in agreement that milk marketing orders should contain provisions that will tend to deter the practice of de-pooling. Four proposals intending to deter the de-pooling of milk were considered in this proceeding. The proposals offered different degrees of deterrence against de-pooling by establishing limits on the amount of milk that can be re-pooled. The proponents of these four proposals are generally of the opinion that de-pooling erodes equity among producers and handlers, undermines the orderly marketing of milk and is detrimental to the Federal order system.

Two different approaches to deter de-pooling are represented by these four proposals. The first approach, published in the hearing notice as Proposals 2 and 8, addresses de-pooling by limiting the volume of milk a handler can pool in a month to a specified percentage of what the handler pooled in the prior month. The second approach, published in the hearing notice as Proposals 6 and 7, addresses de-pooling by establishing what is commonly referred to as a “dairy farmer for other markets” provision. These proposals would require milk of a producer that was de-pooled to not be able to be re-pooled by that producer for a defined time period. All proponents agreed that while none of the proposals would completely eliminate de-pooling, they would likely deter the practice.

Of the four proposals received that would limit de-pooling, this decision recommends Proposal 2, offered by DFA/PF, for adoption. Specifically, adoption of the proposal would limit the volume of milk a handler could pool in a month to no more than 125 percent of the volume of milk pooled in the prior month. Milk diverted to nonpool plants in excess of this limit would not be pooled, and milk shipped to pool distributing plants would not be subject to the 125 percent limitation. The 125 percent limitation may be waived at the discretion of the Market Administrator for a new handler on the order or for an existing handler whose milk supply changes due to unusual circumstances.

As published in the hearing notice, Proposal 8, offered by Dean Foods, addresses de-pooling in a similar manner as Proposal 2, but would establish a limit on the total volume of milk a handler could pool in a given month to 115 percent of the volume that was pooled in the prior month. This proposal was modified at the hearing to allow for pooling the milk receipts of a new handler on the order without volume restrictions.

As published in the hearing notice, Proposals 6 and 7, also offered by Dean Foods would address de-pooling by establishing defined time periods during which de-pooled milk could not be pooled. Proposal 6 essentially would require an annual pooling commitment by handler to the market. Under Proposal 6, if the milk of a producer is de-pooled in a month, then the milk of the producer could not re-establish eligibility for pooling on the order during the following eleven months unless ten days milk production was delivered to a pool distributing plant. Under Proposal 6, handlers that de-pool milk have limited options to return milk to the pool, either shipping ten days milk production of a producer to a pool distributing plant or waiting eleven months for eligibility to re-pool.

Under Dean's Proposal 7, a handler that de-pools milk cannot re-pool for a 2 to 4 month time period, depending on the month in which de-pooling occurred. Proposal 7 also provides the option to return milk to the pool by shipping ten days milk production of a producer to a pool distributing plant. Proposals 6 and 7 were modified at the hearing.

A witness appearing on behalf of DFA/PF testified in support of Proposal 2 and in general opposition to the practice of de-pooling. The witness testified that adoption of Proposal 2 would minimize the practice of de-pooling since not all the milk that was de-pooled could immediately return to the pool in the following month. The witness noted that both DFA and Prairie Farms de-pool milk when advantageous but stressed that the practice of de-pooling and re-pooling is detrimental to the Federal order system.

The DFA/PF witness testified that restricting the pooling of milk on the basis of prior performance is not a new concept in Federal milk marketing order provisions. The witness referenced the “dairy farmer for other markets” provision currently in place in the Northeast order as an example of pooling provisions based on prior performance. The witness noted that Proposal 2 is similar to a “dairy farmer for other markets” provision as it limits pooling based on the handler's previous month's pooled volume. The DFA/PF witness speculated that the manner in which Proposal 2 attempts to reduce the practice of de-pooling is too drastic for some and not strong enough for others. Nevertheless, adoption of Proposal 2, the witness stressed, would provide an appropriate economic consequence to discourage those entities that might otherwise choose to de-pool.

The DFA/PF witness was of the opinion that since the purpose of Federal milk marketing orders are to ensure an adequate supply of milk for the fluid market, equitably share pool proceeds, and promote orderly marketing, milk order provisions should attract milk to its highest valued use when needed and provide for milk to clear the market when not needed in higher-class uses. Since Class I milk cannot be de-pooled, the witness noted, Class I handlers can be at a disadvantage to handlers who can de-pool during periods of price inversions. Class I handlers are unable to maintain a competitive pay price for their milk supply, the witness explained, since Class II, III or IV handlers who de-pool may pay dairy farmers a higher price for their milk. The witness stressed that when the Class I price is not high enough to attract milk from other uses, disorderly conditions arise in the marketplace.

The DFA/PF witness asserted that when a Class II, III or IV handler de-pools milk, inequities arise for the dairy farmers who supplied the de-pooling handler. In the absence of provisions to discourage de-pooling, the witness explained, de-pooling becomes a rational economic practice since only Class I milk is required to be pooled and its value shared through the order's blend price.

The DFA/PF witness testified that the combination of de-pooling with recent increasingly volatile milk prices requires immediate regulatory measures to mitigate the disorderly effects that de-pooling has on market participants. The witness cited market administrator data showing that since implementation of Federal order reform in 2000 there have been 43 months when opportunities to de-pool existed for the Central order.

Relying on statistics provided by the market administrator, the witness illustrated that in April 2004 a handler in the Central order choosing to de-pool was able to pay over $4.00 per hundredweight (cwt) more for milk than a Class I handler unable to de-pool because the Class III price was $19.66 and the uniform price was $15.64. The witness characterized pricing differences of this magnitude as disruptive, disorderly and a competitive disadvantage for any Class I handler. When similarly situated handlers face disparate costs in procuring a supply of milk, the witness added, producers in common procurement areas are negatively affected. The witness asserted that this is a disorderly marketing condition.

Two DFA member dairy farmers from Nebraska testified in support of Proposal 2. Both witnesses maintained that they received smaller milk checks than they otherwise would have received if milk had not been de-pooled. The witnesses added that when fluid milk bottlers experience difficulties in obtaining a milk supply, the costs to supply that milk should be passed on to consumers, not dairy farmers. The witnesses also stated that in order to equalize returns from all classified uses of milk, there needs to be a commitment to have all milk pooled every month of the year.

Two DFA member dairy farmers from Missouri also testified in support of Proposal 2. The witnesses noted that de-pooling amplifies the problem of negative PPD's. The witnesses were of the opinion that de-pooling creates differences in pay prices among similarly located dairy farmers whose milk is pooled in the Central market, and that different pay prices represent a disorderly marketing condition. The witnesses stated that in order to enjoy the additional funds usually generated by the Class I market, handlers should be required to demonstrate that their milk is available for the Class I market by not de-pooling.

A dairy farmer from Kansas testified in opposition to the practice of de-pooling. The witness was of the opinion that a commitment to serve the Class I market should be required in order to share in the blend price. The witness stressed that in order to share in the returns generated from the marketwide pool handlers and cooperatives should participate in the pool every day not only when it may be profitable.

A witness testified on behalf of Dean in support of Proposal 8. The witness explained that Proposal 8 addresses the practice of de-pooling in a similar manner as Proposal 2 but would limit the pooling of milk to 115 percent of the volume that was pooled in the prior month. The witness was of the opinion that a monthly pooling limit would discourage the de-pooling of milk since the greater the proportion of a handler's milk that is de-pooled, the longer it will take to re-pool that milk. Accordingly, the witness concluded, those who benefit the most from de-pooling also would have the most difficulty in attempting to regain pool status.

A witness for Dean also testified in support of Proposals 6 and 7 which would establish defined time periods during which de-pooled milk could not be re-pooled. The witness testified that Dean prefers adoption of Proposal 6 over Proposal 7. Proposal 6 would impose a 12-month period during which de-pooled milk could not again be pooled while Proposal 7 would establish a 2 to 4 month period during which de-pooled milk could not again be pooled. Under Proposal 6, the witness explained, if the milk of a producer were de-pooled, the milk could only reassociate before the annual commitment period if ten days production of the milk of the producer was delivered to a pool distributing plant. According to the witness, Proposal 7 would provide an option for milk that had been de-pooled to return to the pool during certain specified months of the year depending on when the milk was de-pooled or by shipping ten days production of the milk of a producer to a pool distributing plant.

The Dean witness testified that a similar provision to those contained in Proposals 6 and 7 is currently in place in the Northeast order. The witness was of the opinion that defined time periods during which de-pooled milk cannot again become pooled causes handlers to behave differently by taking a longer term view of pooling. The witness explained that handlers in the Northeast order need to evaluate more than the current month's economic impacts of pooling or not pooling milk, along with possible future missed opportunities.

The Dean witness further contrasted the current “dairy farmer for other markets” provision effective in the Northeast to the standards proposed in Proposals 6 and 7. The witness testified that in the Northeast order, July is a month when de-pooled milk can return to the pool regardless of when the milk had been de-pooled during the previous year. Relying on market administrator data, the witness related that during the months of February through July 2004, large volumes of milk were de-pooled from the Northeast order. Because of the “dairy farmer for other markets” provision, the witness explained, milk that was de-pooled during the months of February through June could not return to the pool until July. During this period, noted the Dean witness, a large volume of milk usually pooled on the Northeast order was pooled on the Mideast order.

The Dean witness testified that Proposal 6 would require a handler that de-pooled milk in a month to remain off the pool for eleven additional months or ship 10 days milk production of a producer to a pool distributing plant in order for all milk of a producer to return to the pool, while Proposal 7 would provide the option to either return during designated months depending on the month in which milk was de-pooled, or ship 10 days milk production of a producer to a pool distributing plant in order for all milk of a producer to return to the pool.

A second Dean witness offered additional testimony in support of Proposal 6. The witness testified that Proposal 6 would exclude from the pool the milk of any dairy farmer not continuously pooled under a Federal milk order during the previous twelve months. The only exception to this exclusion would be a dairy farmer who temporarily lost Grade A status but was reinstated as a Grade A producer within 21 days, noted the additional Dean witness. The witness emphasized that the portion of Proposal 6 that would require delivery of 10 days milk production of a dairy farmer to a pool distributing plant in order for all milk of a producer to re-join the pool would discourage de-pooling. The 10 day delivery requirement would insure that participation in the pool was open to any dairy farmer for whom it was technically and economically feasible to supply milk for fluid use. According to the witness, Proposals 6 and 7 also would make more milk readily available to service the fluid needs of the market.

The additional Dean witness also stressed that adoption of Proposal 6 would not totally eliminate de-pooling but would make it more difficult to re-pool milk after it had been de-pooled. The Dean witness testified that producer milk continuously pooled on the Central, or any other Federal milk order, which shares in both the costs and benefits of pool participation on a continuous basis would not be affected by adoption of Proposal 6.

The second Dean witness added that adoption of Proposal 6 would increase returns to producers and provide for more orderly marketing conditions. The witness was of the opinion that adoption of Proposal 6 would cause Class II, III or IV milk to remain pooled during times when the blend price was lower than the respective class price. This would increase the PPD, by making it less negative, and raise the blend price received by all producers, the witness concluded. Adoption of Proposal 6 also would cause some Class III milk that is de-pooled to never return to the pool, the witness noted, since it would no longer be financially advantageous.

A Kansas dairy farmer testified in support of Proposal 6. The witness stated that de-pooling cost Kansas dairymen who supplied the needs of the fluid market $6.2 million between March 2004 and October 2004. The witness spoke in favor of any proposal that would require greater commitment to servicing the Class I needs of the Central marketing area.

A DFA member dairy farmer from Missouri testified that de-pooling hurts dairy farmers and was in favor of any proposal that would limit the ability for milk to return to the pool the immediate month after de-pooling. The witness stated that there should be a waiting period of at least 2 or 3 months to pool milk after the milk had been de-pooled or a limit on the milk volume that could return to the pool the month after de-pooling.

A witness appearing on behalf of Dean testified in opposition to Proposal 2. The witness was of the opinion that limiting pooling to 125 percent of receipts pooled during the previous month was too loose of a standard and urged the adoption of Proposal 6 or Proposal 8.

A witness appearing on behalf of AMPI, et al., testified in opposition to Proposals 2, 6, 7, and 8. The witness was of the opinion that de-pooling was an issue that was national in scope, and should be addressed in a national hearing. The witness testified that the voluntary option of pooling or not pooling milk delivered to a nonpool plant has been a mainstay of the Federal order system and should not be amended. The witness was of the opinion that Proposals 2, 6, 7, and 8 do not address the root cause of price inversions—advance Class I pricing—but rather only treats the symptom of the problem. Class I prices are announced by the USDA in advance, noted the witness, while milk prices for manufactured uses are announced after the month has passed. This can cause a lag between changes in the value of milk and changes in the advanced Class I price, added the witness, sometimes resulting in a Class III price that exceeds the uniform and Class I price, otherwise known as a price inversion. The witness added that it would be appropriate to reconsider whether advanced pricing remains sound regulatory policy.

The AMPI, et al., witness was also of the opinion that Federal order Class I price differentials are artificially high. Milk used to produce cheese, the witness noted, is priced entirely through the marketplace and receives benefit from the Federal order system only when the uniform price is higher than the Class III price. Adoption of Proposals 2, 6, 7 or 8, the witness noted, would penalize milk used in the production of cheese by limiting the amount of milk that could be pooled and was a radical change in Federal order pooling philosophy. The witness added that adoption of these proposals would require cheese manufacturers to estimate Federal order blend prices and PPDs in an effort to decide whether it was more profitable to de-pool, remain pooled or a combination of both.

The AMPI, et al., witness testified that the de-pooling of milk does not cause any reduction to the amount of milk available to serve the fluid market. The witness was of the opinion that when milk was de-pooled there was not a reduction in the amount of milk made available to service the fluid market since the de-pooled milk may rejoin the pool the next month. The AMPI, et al., witness added that the Federal order system should be sharing money derived from Class I handlers, not taking money from dairy farmers whose milk is used in the production of cheese simply to offset a low Class I price created by the timing of announcing Class prices.

The AMPI, et al., witness was also of the opinion that the Department should not consider Proposals 2, 6, 7 and 8 on an emergency basis. The witness testified that the proposed shift in regulatory policy as contained within these proposals should require the issuance of a recommended decision with opportunity for public comment.

A witness representing NAJ testified that the problems arising from de-pooling are a result of the timing of price announcements. The witness also stated that the de-pooling issue would best be addressed at a national hearing.

In a post hearing brief, DFA/PF reiterated the position that the pooling of milk in any month should not exceed 125 percent of the milk volume pooled in the previous month. The brief indicated that the pooling proposals (Proposals 6, 7, and 8) advanced by Dean are too restrictive for the current marketing conditions in the Central marketing area. According to the brief, Proposal 2 represents the least restrictive pooling proposal that could be supported by current marketing conditions while providing a reasonable deterrent to de-pooling.

A brief on behalf of AMPI, et al., reiterated the view that de-pooling and re-pooling should be addressed on a national basis and that pooling decisions should continue to be based on immediate market conditions. The brief expressed the view that the ability to de-pool continues to be unrelated to the willingness to serve the needs of the Class I market.

A brief by Select/Continental supported Proposal 6 as advanced by Dean. The brief noted that this “dairy farmer for other markets” proposal offered the most comprehensive means to eliminate the inequities of de-pooling while maintaining the strongest possible support for producers continuously and reliably serving the needs of the Class I market. The brief noted that Proposals 2 and 8, seeking to restrict the ability to pool to 125 percent and 115 percent of the previous month's volume respectively, was an improvement over current conditions but was not as robust as Proposal 6 which would require a 12-month pooling commitment by handlers. The brief found agreement with AMPI, et al., that de-pooling is an issue that should be addressed on a national basis.

The brief by Dean reiterated support for Proposals 6, 7 or 8, in order of preference, seeking to restrict the ability of handlers to de-pool and re-pool milk in the Central marketing area. The brief expressed the view that Class I handlers who are required to pool their milk receipts are at a constant financial disadvantage to those handlers who may opt to pool or not pool.

All Federal milk marketing orders require the pooling of milk received at pool distributing plants—which is predominantly Class I milk—and all pooled producers and handlers on an order share in the additional revenue arising from higher valued Class I sales. Manufacturing handlers and cooperatives of Class II, III and IV uses of milk who meet the pooling and performance standards make all of their milk receipts eligible to be pooled and usually find it advantageous. Manufacturing handlers and cooperatives who supply a portion of their total milk receipts to Class I distributing plants receive the difference between their use-value of milk and the order's blend price. Federal milk orders, including the Central order, establish limits on the volume of milk eligible to be pooled that is not used for fluid uses primarily through diversion limit standards. However, manufacturing handlers and cooperatives are not required, as are Class I handlers, to pool all their eligible milk receipts.

According to the record, manufacturing handlers and cooperatives have opted to not pool their milk receipts when the manufacturing class prices of milk are higher than the order's blend price—commonly referred to as being “inverted.” During such months, manufacturing handlers and cooperatives have elected to not pool all of their eligible milk receipts because doing so would require them to pay into the PSF of the order, the mechanism through which handler and producer prices are equalized. When prices are not inverted, handlers would pool all of their eligible receipts and receive a payment or draw from the PSF. In receiving a draw from the PSF, such handlers will have sufficient money to pay at least the order's blend price to their supplying dairy farmers.

When manufacturing handlers and cooperatives opt to not pool all of their eligible milk receipts in a month, they are essentially avoiding a payment to the PSF. This, in turn, enables them to avoid the marketwide sharing of the additional value of milk that accrues in the higher-valued uses of milk other than Class I. When the Class I price again becomes the highest valued use of milk, or when other class-price relationships become favorable, the record reveals that these same handlers opt to again pool their eligible milk receipts and draw money from the PSF. It is the ability of manufacturing handlers and cooperatives opting to not pool milk and thereby avoid the marketwide sharing of the revenue accruing from non-Class I milk sales that is viewed by proponents as giving rise to disorderly marketing conditions. According to proponents, producers and handlers who cannot escape being pooled and priced under the order are not assured of equitable prices.

The record reveals that since the implementation of Federal milk marketing order reform in January 2000, and especially in more recent years, large and rapid increases in manufactured product prices during certain months have provided the economic incentives for manufacturing handlers to opt not to pool eligible milk on the Central order. For example, during the three month period of February to April 2004, the Class III price increased over 65 percent from $11.89 per cwt to $19.66 per cwt. During the same time period, total producer milk pooled on the Central order decreased by nearly 50 percent from 1.16 billion pounds to 612 million pounds. When milk volumes of this magnitude are not pooled the impacts on producer blend prices are significant. Producers who incur the additional costs of consistently servicing the Class I needs of the market receive a lower return than would otherwise have been received if they did not continue to service the Class I market. Prices received by dairy farmers who supplied the other milk needs of the market are not known. However, it is reasonable to conclude that prices received by dairy farmers were not equitable or uniform.

The record reveals that “inverted” prices of milk are generally the result of the timing of Class price announcements. Despite changes made as part of Federal milk order reform to shorten the time period of setting and announcing Class I milk prices and basing the Class I price on the higher of the Class III or Class IV price to avoid price inversions, large month-to-month price increases in Class III and Class IV product prices sometimes trumped the intent of better assuring that the Class I price for the month would be the highest-valued use of milk. In all orders, the Class I price (and the Class II skim price) is announced prior to or in advance of the month for which it will apply. The Class I price is calculated by using the National Agricultural Statistics Service (NASS) surveyed cheese, butter, nonfat dry milk and dry whey prices for the two most current weeks prior to the 24th day of the preceding month and then adding a differential value to the higher of either the advanced Class III or Class IV price.

Historically, the advance pricing of Class I milk has been used in all Federal orders because Class I handlers cannot avoid regulation and are required to pool all of their Class I milk receipts, they should know their product costs in advance of notifying their customers of price. However, milk receipts for Class III and IV uses are not required to be pooled; thus, Class III and IV product prices (and the Class II butterfat value) are not announced in advance. These prices are announced on or before the 5th of the following month. Of importance here is that manufacturing plant operators and cooperatives have the benefit of knowing all the classified prices of milk before making a decision to pool or not pool eligible receipts.

The record reveals that the decision of manufacturing handlers or cooperatives to pool or not pool milk is made on a month-to-month basis and is generally independent of past pooling decisions. Manufacturing handlers and cooperatives that elected to not pool their milk receipts did so to avoid making payments to the PSF and they anticipated that all other manufacturing handlers and cooperatives would do the same. However, the record indicates that normally pooled manufacturing handlers and cooperatives met the pooling standards of the order to ensure that the Class I market was adequately supplied and that they established eligibility to pool their physical receipts, including diversions to nonpool plants. Opponents to proposals to deter de-pooling are of the view that meeting the pooling standards of the order and deciding how much milk to pool are unrelated events. Proponents took the view that participation in the marketwide pool should be based on a long-term commitment to supply the market because in the long-term it is the sales of higher priced Class I milk that adds additional revenue to the pool.

The producer price differential, or PPD, is the difference between the Class III price and the weighted average value of all Class I, II and IV milk pooled. In essence, the PPD is the residual revenue remaining after all butterfat, protein and other solids values are paid to producers. If the pooled value of Class I, II and IV milk is greater than the Class III value, dairy farmers receive a positive PPD. While the PPD is usually positive, a negative PPD can occur when class prices rise rapidly during the six-week period between the time the Class I price is announced and the time the Class II butterfat and III and IV milk prices are announced. When manufacturing prices fall, this same lag in the announcement of class prices yields a positive PPD.

As revealed by the record, when manufacturing plants and cooperatives opted to not pool milk because of inverted price relationships, PPD's were much more negative. When this milk is not pooled, a larger percentage of the milk remaining pooled will be “lower” priced Class I milk. When manufacturing milk is not pooled, the weighted average value of milk decreases relative to the Class II, III or IV value making the PPD more negative. For example, record evidence demonstrated that in April 2004, a month when a sizeable volume of milk was not pooled, the PPD was a negative $3.97 per cwt. If all eligible milk had been pooled, the PPD would have been $.87 per cwt higher or a negative $3.10 per cwt.

The record reveals that when manufacturing handlers and cooperatives opt to not pool milk, unequal pay prices may result to similarly located dairy farmers. For example, Dean noted that when a cooperative delivers a high percentage of their milk receipts to a distributing plant, it lessens their ability to not pool milk, making them less competitive in a marketplace relative to other producers and handlers. Other evidence in the record supports conclusions identical to Dean that when a dairy farmer or cooperative is able to receive increased returns from shipping milk to a manufacturing handler during times of price inversions, other dairy farmers or cooperatives who may have shipped more milk to a pool distributing plant are competitively disadvantaged.

The record of this proceeding reveals that the ability of manufacturing handlers and cooperatives to not pool all of their eligible milk receipts gives rise to disorderly marketing conditions and warrants the establishment of additional pooling standards to safeguard marketwide pooling. Current pooling provisions do not require or prohibit handlers and cooperatives from pooling all eligible milk receipts. However, the record reveals that when handlers and cooperatives opt to not pool milk inequities arise among producers and handlers that are contrary to the intent of the Federal milk marketing order program—maintaining orderly marketing conditions.

The record contains extensive testimony regarding the effects on the milk order program resulting from advance pricing and the priority the milk order program has placed on the Class I price being the highest valued use of milk. It remains true that the Class I use of milk is still the highest valued use of milk notwithstanding those occasional months when milk used in usually lower-valued classes may be higher. This has been demonstrated by an analysis of the effective Class I differential values—the difference in the Class I price at the base zone of Jackson County, Missouri, and the higher of the Class III or Class IV price—for the 65 month period of January 2000 through May 2005 performed by USDA. 2 These computations reveal that the effective monthly Class I differential averaged $1.97 per cwt. Accordingly, it can only be concluded that in the longer-term Class I sales continue to be the source of additional revenue accruing to the pool even when, in some months, the effective differential is negative.

Price inversions occur when the wholesale price for manufactured products rises rapidly indicating a tightening of milk supplies to produce those products. It is for this reason that the Department chose the higher of the Class III and Class IV prices as the mover of the Class I price. Distributing plants must have a price high enough to attract milk away from manufacturing uses to meet Class I demands. As revealed by the record, this method has not been sufficient to provide the appropriate price signals to assure an adequate supply of milk for the Class I market. Accordingly, additional measures are needed as a means of assuring that milk remains pooled and thus available to the Class I market. Adoption of Proposal 2 is a reasonable measure to meet the objectives of orderly marketing.

This decision does find that disorderly marketing conditions are present when producers do not receive uniform prices. Handlers and cooperatives opting to not pool milk do not account to the pool at the classified use-values of those milk receipts. They do not share the higher classified use-value of their milk receipts with all other producers who are pooled on the order are incurring the additional costs of servicing the Class I needs of the market. This is not a desired or reasonable outcome especially when the same handlers and cooperatives will again pool all of their eligible receipts when class-price relationships change in a subsequent month. These inequities borne by the market's producers are contrary to the intent of the Federal order program's reliance on marketwide pooling—ensuring that all producers supplying the market are paid uniform prices for their milk regardless of how the milk of any single producer is used.

It is reasonable that the order contain pooling provisions intended to deter the disorderly conditions that arise when de-pooling occurs. Such provisions maintain and enhance orderly marketing. Accordingly, this decision finds it reasonable to recommend adoption of provisions that would limit the volume of milk a handler or cooperative may pool in a month to 125 percent of the total volume pooled by the handler or cooperative in the prior month. Adoption of this standard will not prevent manufacturing handlers or cooperatives from electing to not pool milk. However, it should serve to maintain and enhance orderly marketing by encouraging participation in the marketwide pooling of all classified uses of milk.

Consideration was given on whether de-pooling should be considered at a national hearing with other, broader national issues of milk marketing. However each marketing area has unique marketing conditions and characteristics which have area-specific pooling provisions to address those specific conditions. Because of this, pooling issues are considered unique to each order. This decision finds that it would be unreasonable to address pooling issues, including de-pooling, on a national basis.

Some manufacturing handlers and cooperatives argue that their milk did perform in meeting the Class I needs during the month and this occurred before making their pooling decisions. They argue that the Class I market is therefore not harmed and that the intents and goals of the order program are satisfied. With respect to his preceding and in response to these arguments, this decision finds that the practice of de-pooling undermines the intent of the Federal order program to assure producers uniform prices across all uses of milk normally associated with the market as a critical indicator of orderly marketing conditions. Similarly, handlers and cooperatives who de-pool purposefully do so to gain a momentary financial benefit (by avoiding making payments to the PSF) which would otherwise be equitably shared among all market participants. While the order's performance standards tend to assure that distributing plants are adequately supplied with fresh, fluid milk, the goals of marketwide pooling are undermined by the practice of de-pooling. Producers and handlers who regularly and consistently serve the Class I needs of the market will not equitably share in the additional value arising momentarily from non-fluid uses of milk. These same producers and handlers will, in turn, be required to share the additional revenue arising from higher-valued Class I sales in a subsequent month when class-price relationships change.

The four proposals considered in this proceeding to deter the practice of de-pooling in the Central order have differences. They all seek to address market disorder arising from the practice of de-pooling. However, this decision does not find adoption of the two “dairy farmer for other markets” proposals—Proposals 6 and 7—reasonable because they would make it needlessly difficult for milk to be re-pooled and because their adoption may disrupt prevailing marketing channels or cause the inefficient movement of milk. Likewise, Proposal 8, to restrict pooling in a month to 115 percent of the prior month's volume pooled by the handler, is not recommended for adoption. Adoption of this proposal would disrupt current marketing conditions beyond what the record justifies. Therefore, this decision recommends adoption of Proposal 2 to limit the pooling of milk in any month by a handler to 125 percent of the handler's pooled receipts in the prior month because it provides the most reasonable measure to deter the practice of de-pooling.

Consideration was given to omitting a recommended decision on the issue of de-pooling. The record does not support a conclusion that adoption of measures to deter de-pooling warrant emergency action. The recommended adoption of provisions to limit the volume of milk that can be pooled during the month on the basis of what was pooled in the preceding month warrants public comments before a final decision is issued.

A proposal, published in the hearing notice as Proposal 3 and modified at the hearing, seeking establishment of transportation and assembly credits in the Central Order is not recommended for adoption. The published proposal seeks to provide a credit for the shipment of milk from supply plants to distributing plants. The proposal was modified at the hearing to expand the transportation credit to include milk shipped directly from dairy farms to distributing plants. In addition, the modified proposal would provide an assembly credit for milk shipped directly from dairy farms to distributing plants.

The proposal would provide a credit for the shipment of milk from supply plants and dairy farms to distributing plants at a rate of $0.003 per cwt per mile, excluding the first 25 miles of shipment and all shipments farther than 500 miles. In addition, the proposal would provide for a credit of $0.10 per cwt for the assembly of milk from dairy farms to distributing plants. The Central order does not currently have transportation or assembly credit provisions.

As published in the hearing notice, Proposal 3 was advanced by AMPI, et al. The modification to Proposal 3, presented at the hearing to include transportation credits for shipments from dairy farms directly to distributing plants was advanced by DFA/PF.

On behalf of all proponents of Proposal 3, the Foremost, et al., witness requested that the proposal be modified to remove all references to “milk reload stations” as originally offered in the proposal. Accordingly, no additional references will be made concerning re-load stations in this decision.

A witness appearing on behalf of AMPI, et al., testified that transportation and assembly credits are needed in the Central marketing area to allow transporting handlers to recover costs of assembling and transporting milk to serve the Class I needs of the market.

The AMPI, et al., witness was of the opinion that the rates and distance limitations proposed for the transportation and assembly credits would compensate handlers for approximately 75 percent of the cost of moving milk from supply plants to distributing plants within the marketing area. The witness asserted that this was reasonable because it would keep transportation and assembly cost recovery at less than full cost. According to the witness, the proposed rates and distance limitations would tend to discourage inefficient movements of milk by handlers from seeking transportation and assembly credits.

The AMPI, et al., witness expressed the opinion that all producers receiving the benefits of marketwide pooling should contribute to the recovery of costs associated with moving milk within the marketing area to serve the Class I needs of the market. The witness provided examples of milk movements where supply plant handlers moving milk to distributing plants were unable to recover the full costs of assembling and transporting milk at Federal order minimum prices. The witness testified that because handlers transporting milk directly from dairy farms to distributing plants incur costs similar to the overhead costs incurred by handlers transporting milk from supply plants, the proponents seek an assembly credit for all milk that serves the Class I market. The AMPI, et al., witness testified that even though dairy farmers currently are charged for the cost of assembling their milk into loads and transporting the milk to distributing plants, the charges are insufficient to completely recoup the costs incurred by handlers.

A witness representing DFA/PF testified in support of Proposal 3 and modified the proposal to include the transportation and assembly credits for milk shipped directly from farms to distributing plants. The witness asserted that the costs of assembly and transportation of milk in the Central marketing area are not fully recouped in the market by handlers. The witness noted that the $0.003 per mile transportation credit rate would apply to milk shipped to a distributing plant.

The DFA/PF witness testified that additional compensation for the transportation and assembly of milk for fluid use is needed in particular areas of the Central marketing area because the order's blend price is insufficient to keep milk produced in the marketing area within the marketing area. The witness noted this was specifically apparent in the southeastern portion of the marketing area that borders portions of the Southeast and Appalachian orders. In addition, the witness testified that the location values of milk for markets within the Central marketing area, for example in St. Louis, Missouri, and areas of southern Illinois, are similarly insufficient to attract milk. According to the witness, this causes milk procurement problems for some distributing plants in this localized portion of the Central marketing area.

The DFA/PF witness testified that marketwide service payments are authorized in the legislation that provides for Federal milk orders. The witness explained that payments for services not elsewhere compensated can be taken from producer revenue to compensate providers of services that are of marketwide benefit. The witness asserted that transportation and assembly operations performed in the Central marketing area meet the general objectives of providing marketwide service for marketwide benefit. According to the witness, Proposal 3, as modified, describes a set of services that benefit the entire market. The witness was of the opinion that the marketwide services include: marketing of milk, farm pick-up of milk, off-load and re-load of milk, procurement of milk, selling milking equipment, disseminating information and prices to producers, milk testing, delivery to distributing plants, and other field services.

According to the DFA/PF witness, inclusion of milk shipped directly from dairy farms to distributing plants for transportation and assembly credits would be more representative of how the majority of milk is transported to distributing plants regulated by the order. The witness noted that in the Central marketing area distributing plants receive only about 4.5 percent of their milk from supply plants. The witness testified that the modification of Proposal 3 to include milk shipped from farms to distributing plants would more accurately represent the transportation compensation requirements needed to ensure delivery of milk for fluid use.

According to the DFA/PF witness, the inclusion of farm to distributing plant shipments would require the Market Administrator of the Central order to verify handler claims for receiving credits. The witness indicated that least-distance routes for delivery from each point of origin to the destination distributing plants would need to be determined. According to the witness, the additional cost that would be borne by the Market Administrator in administering transportation and assembly provisions would be negligible and should not require a higher administrative assessment. However, the witness acknowledged that proponents had not consulted the Market Administrator's office for an estimate of additional administrative costs that may be borne in operating a transportation and assembly credit provision.

The DFA/PF witness testified that the St. Louis area market is unable to consistently and successfully attract milk from the Central order's milkshed because the order's Class I price and the blend price are lower than those in the nearby Appalachian and Southeast marketing areas. According to the witness, marketwide service payments for transportation and assembly of milk to serve markets such as St. Louis would provide sufficient financial incentive to offset the higher blend prices of these bordering Federal milk marketing areas. Additionally, it would ensure a consistent and reliable supply of milk to meet the needs of that portion of the Central marketing area's Class I market, the witness said.

A witness for Prairie Farms (PF) testified in support of the adoption of Proposal 3 as modified at the hearing. The witness was of the opinion that without expansion of transportation and assembly credits that included direct shipped milk, the ability to serve the Class I needs of all locations in the Central marketing area would not be achieved because milk would seek the higher blend prices available in the nearby markets of the Appalachian and Southeast orders. The witness from Prairie Farms provided example scenarios of actual and hypothetical net returns possible for handlers shipping milk to distributing plants in the Central, Appalachian, and Southeast marketing areas. The witness compared these returns to net returns available from shipping to distributing plants in Illinois and St. Louis within the Central marketing area. According to the witness, these example scenarios reinforced the assertion that milk is attracted by higher Class I prices in localized areas of the Appalachian and Southeast marketing areas.

The PF witness was of the opinion that inappropriate Class I differential levels, as in the St. Louis area example, were the root cause of the market's inability to attract sufficient fluid milk; however, modifications to the Class I price surface are not currently feasible. In light of this, the witness stated that obtaining the needed financial incentives to ensure delivery of milk to this deficit portion of the marketing area by the use of transportation and assembly credits is a reasonable alternative to changing the Class I differentials.

The DFA/PF witness estimated that providing credits for milk transported from farms to distributing plants would reduce the Central order's blend price to dairy farmers by $0.045 per cwt per month. The Foremost, et al., witness testified that the impact of providing credits for assembly would reduce the Central order's blend price by $0.036-$0.040 per cwt per month. The DFA/PF witness testified that the combined impact of transportation credits for the supply plant to distributing plant movements, direct delivery from farms to distributing plants, and assembly credits would reduce the Central marketing area's blend price by a total of $0.081-$0.085 per cwt per month.

A witness for Dean testified in support of Proposal 3 as modified by DFA/PF. The Dean witness expressed a preference for the DFA/PF modification to include direct farm milk shipments to distributing plants but did not support adoption of assembly credits. The witness noted that Dean would consider the entire Proposal 3, including the DFA/PF modification, if the assembly credit feature were retained. The witness was of the opinion that adopting the proposal would increase equity among handlers and producers who supply the Class I market. However, the witness was unable to identify distributing plants in the St. Louis and southern Illinois portions of the marketing area that did not or could not receive sufficient milk supplies. In addition, the witness was unable to recall if handlers had asked or relied on the Central marketing area's Market Administrator to increase the Central order's performance standards to bring forth milk to meet the market's Class I needs.

In a post hearing brief, Select/Continental indicated general opposition to adopting transportation and assembly credits for milk movements from supply plants to distributing plants. The brief expressed support for a transportation and assembly credit provision that would be limited to milk shipped directly from dairy farms to distributing plants. According to the brief, milk should be attracted to markets for specific use through classified pricing. Fluid milk, according to the brief, should be attracted to distributing plants by appropriate location values. According to the brief, implementing transportation and assembly credits in the Central marketing area would be an admission that the Class I price surface was no longer successful in meeting the Class I needs of the marketing area.

In a post hearing brief, DFA/PF reiterated their support for transportation and assembly credits as modified. The brief reiterated support and reinforcement of the testimony offered to expand the scope for transportation and assembly credits to include direct farm-to-plant milk movements. Likewise, Dean Foods reiterated its support in a post-hearing brief for expanding transportation and assembly credits to include direct farm-to-plant milk movements as a means to improve the available milk supply for its distributing plant operations in the southeastern portion of the Central order.

Geographically, the Central marketing area is the largest Federal milk marketing area, spanning the distance from eastern Illinois to western Colorado. It is bordered by the Upper Midwest, Mideast, Appalachian, Southeast, and Southwest marketing areas. The marketing area also is bordered by unregulated areas on the west including Utah, portions of western South Dakota, western portions of Nebraska, and all of Wyoming. In addition the Central marketing area completely surrounds a large unregulated area in central Missouri.

Proposal 3 as advanced by AMPI, et al., seeks to establish a marketwide service payment in the form of a transportation credit for the movement of milk from supply plants to distributing plants at a rate of $0.003 per cwt per mile. The proposal provides for a distance limit for receipt of the credit for milk movements between 25 to 500 miles from the supply plants to distributing plants. The proposal also seeks the establishment of an assembly credit feature for which handlers would collect $0.10 per cwt for the assembly of loads of milk within the marketing area.

The modification to Proposal 3, advanced by DFA/PF, seeks expansion of the transportation credit to include milk shipped directly from dairy farms to distributing plants. The modification would establish a transportation credit rate of $0.003 per cwt per mile for milk shipped directly from dairy farms to distributing plants. The combination of the two proposals effectively seeks transportation and assembly credits for all Class I milk pooled on the Central order. The rationale for the modification to Proposal 3 is that milk shipped directly from farms to distributing plants represents more than 95 percent of all milk shipped to distributing plants. Milk shipped from supply plants represents about 5 percent of all milk shipped to distributing plants.

Proponents estimate that the Central order blend price would be lowered in the range of $0.036-$0.040 per cwt per month by the assembly credit feature for all Class I milk, if adopted. The proponents estimate that the impact of the transportation credit for all Class I milk pooled on the Central order would be a blend price reduction of approximately $0.045 per cwt, if adopted. The combined reduction to the Central order blend price per month would be $0.081-$0.085 per cwt.

The transportation and assembly credits advanced by the proponents are similar to the transportation and assembly credits implemented in the Chicago Regional order, a predecessor order of the current Upper Midwest order. The transportation and assembly credit provisions of the Chicago Regional order were carried forward into the provisions of the current Upper Midwest order as a part of Federal milk order reform. These provisions were first implemented in 1987 to ensure that the costs of serving the Class I market of the Chicago Regional marketing area were shared by all market participants that benefited from the revenue generated from Class I sales. The impact on producer revenue was expected to be minimal according to the Final Decision published October 15, 1987, (7 CFR 10130).

The transportation credit and assembly credit provisions of the Upper Midwest order provide an assembly credit of $0.08 per cwt and a transportation credit for the transportation of milk transferred from pool plants to distributing plants of $0.028 cents per cwt per mile. Transportation or assembly credits are not applied to milk shipments to distributing plants directly from producer farms. The credits are computed by the Market Administrator and are deducted from the marketwide value of milk before calculation of the order's blend price. The impact of these credits on the Upper Midwest blend price ($0.02-$0.03 per cwt) are one fourth to one third the magnitude of impact that proponents expect the proposed transportation and assembly credits would have on the Central order blend price, if adopted.

The transportation and assembly credit features of the current Upper Midwest order and the pre-reform Chicago Regional order are similar in the magnitudes of their costs per mile and per hundredweight of milk handled. The transportation and assembly credit provisions of the Chicago Regional order applied to a geographically compact milkshed with the emphasis on encouraging milk movements to the single urban market of Chicago. The Chicago Regional marketing area (and the Chicago metropolitan area of the current Upper Midwest marketing area) was supplied with milk primarily from southern and central Wisconsin. The transportation and assembly credit feature of the current Upper Midwest marketing order provides pool plants that serve the Class I market with some recovery of assembly and transportation costs incurred in transferring milk to distributing plants.

In contrast, the Central marketing area is geographically much larger and handlers with Class I route disposition serve multiple urban centers in a variety of States located from Illinois to Colorado. The record reveals that the area of concern to the proponents is a relatively limited area of St. Louis and portions of southern Illinois. The record does not reveal that there are other portions of the marketing area where problems have been identified in procuring milk supplies for Class I use. Accordingly, it is reasonable to conclude that marketwide service payments in the form of transportation and assembly credits on all Class I milk may only solve a localized problem while all dairy farmers would receive a lower blend price for their milk.

The impact of transportation and assembly credits on dairy farmer income is far lower in the Upper Midwest marketing area than that proposed for the Central order. For example, according to Market Administrator data, the reduction to the Upper Midwest blend price in October 2004 was $ 0.015 per cwt and $0.0125 per cwt for the assembly and transportation credits, respectively. This represents an overall reduction of $0.0275 per cwt to the Upper Midwest blend price in that month. Market Administrator data shows that during May 2005 the reduction to the Upper Midwest blend price attributable to the combined impact of the transportation and assembly credit features was $0.020 per cwt.

The record reveals that the impact anticipated by proponents of transportation and assembly credits on the Central order blend price would be a reduction of as much as $0.081-$0.085 per cwt. The reduction in blend prices and dairy farmer income that would result from the adoption of a transportation and assembly credit of this magnitude would be 3-4 times the magnitude of the blend price reduction that dairy farmers experience in the Upper Midwest. According to Market Administrator information, the average sized producer in the Central marketing area produces and markets about 200,000 pounds of milk per month. The average reduction in income for such an average producer per month would be $160-$170 per month, or about $2000 per year. A similar sized producer in the Upper Midwest marketing area would experience a reduction in income of $40-$57 per month or about $500-$680 per year. The differences in magnitudes are interesting but germane only to the extent that transportation and assembly credits are justified.

The proposed transportation and assembly credits are justified by proponents on the basis that the movement of milk to serve the Class I market is a marketwide service of marketwide benefit and credits for providing marketwide services are authorized in the Agricultural Marketing Agreement Act of 1937, (AMAA) as amended. However, the focus of the record evidence is on the marketing conditions in the southern Illinois and St. Louis regions of the Central marketing area. However, the record, does not indicate that price differences as noted in proponent testimony concerning the eastern portion of the marketing area occur elsewhere in the Central marketing area. The record does not support concluding that handlers serving major urban areas in other regions of the marketing area (such as, Denver, Oklahoma City, or Tulsa) experience difficulty in attracting milk supplies. This supports concluding that the issues raised by the proponents are at best localized in nature rather than marketwide.

In addition, the record reveals in the testimony of the AMPI, et al., witness that some transportation and assembly costs incurred by handlers for milk delivered to distributing plants are recovered by the marketplace. While proponents have asserted that the recovery of costs for assembly by handlers is incomplete, the record contains insufficient information upon which to judge if lowering producer blend prices by as much as $.08 per cwt is reasonable. The size of the likely blend price reduction is important but not the critical factor in determining whether transportation and assembly credits are reasonable for the Central marketing area. The most important factor in that regard is whether the marketwide costs would provide marketwide rather than local benefits.

Record evidence supplied by a Class I handler located in St. Louis indicates that the firm is able to continue receiving, bottling, and selling milk in the St Louis area. This evidence suggests that milk movements to handlers in the St. Louis area are occurring and meet the order's Class I needs. This evidence provides a basis to conclude that the order provisions attract sufficient milk for fluid use. In this regard, the need for additional government intervention beyond what the order currently provides in meeting the market's fluid demands is not warranted.

The record evidence concerning challenges faced by handlers in moving milk within the Central marketing area to distributing plants in St. Louis and Illinois indicates that there may be, at best, localized problems in supplying the Class I needs of these plants. The proponents for transportation and assembly credits attribute these difficulties to the higher location values and blend prices of nearby or bordering portions of the Southeast and Appalachian orders. However, the record reveals that handlers have not sought alternative actions to bring forth additional milk supplies to meet Class I demands. For example, there is no record evidence illustrating that the Market Administrator has been called upon to change performance standards or diversion limits which would better ensure that the Class I needs of any of the Central marketing area's distributing plants would be met.

This recommended decision finds that adoption of the proposed transportation and assembly credit provision is not supported by record evidence. Accordingly, this recommended decision does not find agreement with the rationale advanced by proponents that marketwide service payments in the form of transportation and assembly credits for milk are needed to overcome deficiencies of the Central order. At best, record evidence demonstrates that if there are difficulties in procuring milk for Class I use, they are isolated to a fraction of the marketing area. Adopting transportation and assembly credits would unreasonably lower the returns to all dairy farmers pooled on the order to address a localized issue.

A proposal published as Proposal 14, seeking to require payments from the producer settlement fund to be made no later than the next business day after the due date for payments into the producer settlement fund, was advanced by the Market Administrator. The proposal was withdrawn and was not considered in this decision.

Briefs, proposed findings and conclusions were filed on behalf of certain interested parties. These briefs, proposed findings and conclusions 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 Central 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.

The following findings are hereby made with respect to the aforesaid marketing agreement and order:

(a) The tentative marketing agreement and the 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 tentative marketing agreement and the order, as hereby proposed to be amended, are such prices as will reflect the aforesaid factors, ensure a sufficient quantity of pure and wholesome milk, and be in the public interest; and

(c) The tentative marketing agreement and the 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, the marketing agreement upon which a hearing has been held.

The recommended marketing agreement is not included in this decision because the regulatory provisions thereof would be the same as those contained in the order, as hereby proposed to be amended. The following order amending the order, as amended, regulating the handling of milk in the Central marketing area is recommended as the detailed and appropriate means by which the foregoing conclusions may be carried out.

For the reasons set forth in the preamble, 7 CFR Part 1032 is proposed to be amended as follows:

This decision recommends adoption of amendments that would: (1) Establish a limit on the volume of milk a handler may pool during the months of April through February to 115 percent of the volume of milk pooled in the prior month; and (2) Establish a limit on the volume of milk a handler may pool during the month of March to 120 percent of the volume of milk pooled in the prior month.

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.

The amendments to the rules proposed herein have been reviewed under Executive Order 12988, Civil Justice Reform. They are not intended to have a retroactive effect. If adopted, the proposed amendments would 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 Secretary 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 Secretary 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 Deparment'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.

During March 2005, the month during which the hearing occurred, there were 9,767 dairy producers pooled on, and 36 handlers regulated by, the Mideast order. Approximately 9,212 producers, or 94.3 percent, were considered small businesses based on the above criteria. Of the 36 handlers regulated by the Mideast during March 2005, 26 handlers, or 72.2 percent, were considered small businesses.

The adoption of the proposed pooling standards serve to revise established criteria that determine those producers, producer milk, and plants that have a reasonable association with and consistently serve the fluid 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, by doing so, to determine those producers who 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. Therefore, the 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 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 recommended 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 approved forms are routinely used in most business transactions. The 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.

Interested parties are invited to submit comments on the probable regulatory and informational impact of this proposed rule on small entities. Also, parties may suggest modifications of this proposal for the purpose of tailoring their applicability to small businesses.

Notice of Hearing: Issued February 14, 2005; published February 17, 2005 (70 FR 8043).

Amended Notice of Hearing: Issued March 1, 2005; published March 3, 2005 (70 FR 10337).

Tentative Partial Decision: Issued July 21, 2005; published July 27, 2005 (70 FR 43335).

Interim Final Rule: Issued September 20, 2005; published September 26, 2005 (70 FR 56111).

Notice is hereby given of the filing with the Hearing Clerk of this recommended 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 (AMAA) 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, U.S. Department of Agriculture, STOP 9200—Room 1031, 1400 Independence Avenue, SW., Washington DC 20250-9200, by the 60th day after publication of this decision in the Federal Register . Six (6) 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. Some evidence was received that specifically addressed these issues, and some of the evidence encompassed entities of various sizes.

A public hearing was held upon proposed amendments to the marketing agreement and 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 (AMAA), as amended (7 U.S.C. 601-674), and the applicable rules of practice and procedure governing the formulation of marketing agreements and marketing orders (7 CFR Part 900).

The proposed amendments set forth below are based on the record of a public hearing held at Wooster, Ohio, on March 7-10, 2005, pursuant to a notice of hearing issued February 14, 2005, published February 17, 2005, (70 FR 8043) and a amended notice of hearing issued March 1, 2005, and published March 3, 2005 (70 FR 10337).

The material issues on the record of hearing relate to:

This recommended decision specifically addresses proposals published in the hearing notice as Proposals 4, 5, 6, 7, and 8 which seek to establish a limit on the volume of milk that can be pooled on the order; Proposal 9 which seeks to establish transportations credits; and features of Proposal 3 intended to clarify the Producer definition by providing a definition of “temporary loss of Grade A approval.” Proposals which sought to change the performance standards of the order, Proposals 1 and 2, were addressed in a tentative partial decision published on July 27, 2005 (70 FR 43335). The portion of Proposal 3 that sought to amend the number of days a producer needs to deliver milk to a distributing plant before the milk of the producer is eligible for diversion was abandoned by the proponents at the hearing. No further reference to that portion of Proposal 3 will be made.

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

Federal milk marketing orders rely on the tools of classified pricing and marketwide pooling to assure an adequate supply of milk for fluid (Class I) use and to provide for the equitable sharing of the revenues arising from the classified pricing of milk. Classified pricing assigns a value to milk according to how the milk is used. Regulated handlers who buy milk from dairy farmers are charged class prices according to how they use the farmer's milk. Dairy farmers are then paid a weighted average or “blend” price. The blend price that dairy farmers are paid for their milk is derived through the marketwide pooling of all class uses of milk in a marketing area. Thus each producer receives an equal share of each use class of milk and is indifferent as to the actual Class for which the milk was used. The Class I price is usually the highest class price for milk. Historically, the Class I use of milk provides the additional revenue to a marketing area's total classified use value of milk.

The series of Class prices that are applicable for any given month are not announced simultaneously. The Class I price and the Class II skim milk price are announced prior to the beginning of the month for which they will be effective. Class prices for milk in all other uses are not determined until on or before the 5th day of the following month. The Class I price is determined by adding a differential value to the higher of either an advanced Class III or Class IV value. These values are calculated based on formula using the National Agricultural Statistics Service (NASS) survey prices of cheese, butter, and nonfat dried milk powder for the first two weeks of the prior month. For example, the Class I price for August is announced in late July and is based on the higher of the Class III or IV value computed using NASS commodity price surveys for the first two weeks of July.

The Class III and IV prices for the month are determined and announced after the end of the month based on the NASS survey prices for the selected dairy commodities during the month. For example, the Class III and IV prices for August are based on NASS survey commodity prices during August. A large increase in the NASS survey price for the selected dairy commodities from one month to the next can result in the Class III or IV price exceeding the Class I price. This occurrence is commonly referred to by the dairy industry as a “Class price inversion.” A producer price inversion generally refers to when the Class III or IV price exceeds the average classified use value, or blend price, of milk for the month. Price inversions have occurred with increasing frequency in Federal milk orders since the current pricing plan was implemented on January 1, 2000, despite efforts made during Federal Order Reform to reduce such occurrences. Price inversions can create an incentive for dairy farmers and manufacturing handlers who voluntarily participate in the marketwide pooling of milk to elect not to pool their milk on the order. Class I handlers do not have this option; their participation in the marketwide pool is mandatory.

The producer price differential, or PPD, is the difference between the Class III price and the weighted average value of all Classes. In essence, the PPD is the dairy farmer's share of the additional/reduced revenues associated with the Class I, II, and IV milk pooled in the market. If the value of Class I, II, and IV milk in the pool is greater than the Class III value, dairy farmers receive a positive PPD. However, a negative PPD can occur if the value of the Class III milk in the pool exceeds the value of the remaining classes of milk in the pool. This can occur as a result of the price inversions discussed above.

The Mideast Federal order operates a marketwide pool. The Order contains pooling provisions which specify criteria that, if met, allow dairy farmers to share in the benefits that arise from classified pricing through pooling. The equalization of all class prices among handlers regulated by an order is accomplished through a mechanism known as the producer settlement fund (PSF). Typically, Class I handlers pay the difference between the blend price and their use-value of milk into the PSF. Manufacturing handlers typically receive a draw from the PSF, usually the difference between the Class II, III or IV price and the blend price. In this way, all handlers pay the Class value for milk and all dairy farmer suppliers receive at least the order's blend price.

When manufacturing class prices of milk are high enough to result in a use-value of milk for a handler that is higher than the blend price, handlers of manufacturing milk may choose to not pool their milk receipts. Opting to not pool their milk receipts allows these handlers to avoid the obligation of paying into the PSF. The choice by a manufacturing handler to not pool their milk receipts is commonly referred to in the dairy industry as “de-pooling.” When the blend price rises above the manufacturing class use-values of milk these same handlers again opt to pool their milk receipts. This is often referred to as “re-pooling.” The ability of manufacturing handlers to de-pool and re-pool manufacturing milk is viewed by some market participants as being inequitable to both producers and handlers.

Proponents are in agreement that milk marketing orders should contain provisions that will tend to limit the practice of de-pooling. Five proposals intending to limit the de-pooling of milk were considered in this proceeding. The proposals offered different degrees of deterrence against de-pooling by establishing limits on the amount of milk that can be re-pooled. The proponents of these five proposals are generally of the opinion that de-pooling erodes equity among producers and handlers, undermines the orderly marketing of milk and is detrimental to the Federal order system.

Two different approaches on how to best limit de-pooling are represented by these five proposals. The first approach, published in the hearing notice as Proposals 6 and 7, addresses de-pooling by limiting the volume of milk a handler can pool in a month to a specified percentage of what the handler pooled in the prior month. The second approach, published in the hearing notice as Proposals 4, 5 and 8, addresses de-pooling by establishing what is commonly referred to as a “dairy farmer for other markets” provision. These proposals would require milk of a producer that was de-pooled to not be able to be re-pooled by that producer for a defined time period. All proponents agreed that none of the proposals would completely eliminate de-pooling, but would likely deter the practice.

Of the five proposals received that would limit de-pooling, this decision recommends adoption of Proposal 7 as modified in post-hearing briefs, offered by Dairy Farmers of America and Michigan Milk Producers Association (DFA/MMPA). DFA/MMPA are Capper-Volstead cooperatives who pool milk on the Mideast market. Specifically, adoption of Proposal 7 will limit the volume of milk a handler could pool during the months of April through February to no more than 115 percent of the volume of milk pooled in the prior month, and limit the volume of milk a handler could pool in the month of March to 120 percent of the volume of milk pooled in the month prior. Milk diverted to nonpool plants in excess of these limits will not be pooled. Milk shipped to pool distributing plants will not be subject to the 115 or 120 percent limitation. Milk pooled on another Federal Order during the previous three consecutive months would not be subject to the 115 or 120 percent limitation. The 115 or 120 percent limitation may be waived at the discretion of the Market Administrator for a new handler on the order or for an existing handler whose milk supply changes due to unusual circumstances.

As published in the hearing notice, Proposal 6, offered by Ohio Dairy Producers (ODP) and Ohio Farmers Union (OFU), was virtually identical to Proposal 7. ODP is an organization of independent Ohio dairy farmers and agriculture businesses that work to increase the productivity and profitability of dairy farmers. OFU is an organization whose members include dairy farmers pooled on the Mideast order. Proposal 6 would limit the volume of milk a handler could pool in a month to 115 percent of the volume of milk pooled in the prior month. The proposal does not contain a separate pooling standard for the month of March. Milk shipped to pool distributing plants, or milk pooled on another Federal order during the preceding six months, would not be subject to the 115 percent standard. The proposal would grant authority to the Market Administrator to increase or decrease the 115 percent standard.

As published in the hearing notice, Proposals 4, 5 and 8 address de-pooling by establishing defined time periods during which de-pooled milk could not be pooled. Proposal 4, also offered by ODP and OFU, would require an annual pooling commitment by a handler to the market. The proposal specified that if the milk of a producer was not pooled during a month, or any of the preceding eleven months, the equivalent of at least 10 day's milk production of the dairy farmer would need to be delivered to a pool distributing plant during the month in order for all the milk of the dairy farmer for that month to be pooled. Proposal 4 is not recommended for adoption.

Proposal 5, offered by Continental Dairy Products (Continental), would limit the ability to pool the milk of a producer if such milk had not been pooled during the previous 12 months. Continental is a Capper-Volstead cooperative whose member's milk is pooled on the Mideast order. Proposal 5 is not recommended for adoption.

Proposal 8, offered by Dean Foods Company (Dean), would not permit re-pooling for a 2 to 7 month period for milk that had been de-pooled. Dean is a handler that distributes fluid milk products within the Mideast marketing area. Under Proposal 8, if a producer's milk were de-pooled in any of the months of February through June, or during any of the preceding three months, or during any of the preceding months of July through January, the equivalent of at least 10 day's milk production would need to be physically received at a pool distributing plant in the order to pool all of the dairy farmer's production for the month. Additionally, if the milk of a dairy farmer is de-pooled in any of the months of July through January, or in a preceding month, at least 10 day's milk production of the dairy farmer would need to be delivered to a pool distributing plant to have all the milk of the dairy farmer pooled for the month. Proposal 8 is not recommended for adoption.

While Proposals 4, 5 or 8 are not recommended for adoption, to the extent that these proposals offered alternative methods to deter the practice of de-pooling, adoption of Proposals 6 and 7 essentially accomplishes this objective.

The proponents of Proposals 4, 5, 6, 7 and 8 are all of the opinion that current inadequate pooling standards enable manufacturing handlers to de-pool milk and immediately re-pool milk the following month and are in need of revision. According to the proponents, the Mideast blend price is lowered when large volumes of higher valued milk used for manufacturing is de-pooled as well as when the large volumes of de-pooled milk returns to the pool. Furthermore, the witnesses argued that de-pooling handlers do not have to account to the Mideast pool at classified prices and therefore face different costs than their similarly situated pooling competitors. While all proponents insisted that the pooling standards of the order need to be amended to ensure producer and handler equity, their opinions differed only on how to best meet this end.

The current Producer milk provision of the Mideast order considers the milk of a dairy farmer to be producer milk when it has been received at a pool plant of the order. A producer must deliver 2 day's milk production to a pool plant during each of the months of August through November so that all the milk of a producer will be eligible to be pooled throughout the year. Once the standard has been met, the milk of a producer is eligible to be diverted to nonpool plants and continue to be priced under the terms of the order. A pool plant cannot divert more than 50 percent of its total producer milk receipts to nonpool plants during each of the months of August through February and 60 percent during each of the months of March through July. Milk that is subject to inclusion in another marketwide equalization program operated by another government entity is not considered producer milk. The order currently does not limit a handler's ability to de-pool manufacturing uses of milk.

A witness appearing on behalf of Continental testified in support of Proposal 5. The witness was of the opinion that pooling provisions should limit a handler's ability to de-pool their milk receipts at will and with little consequence. The witness testified that Proposal 5 would prohibit a handler from pooling the milk of a producer that had been de-pooled during the previous 11 months. The witness characterized Proposal 5 as an adequate deterrent to handlers de-pooling large volumes of milk for short term financial gain. The witness added that adoption of Proposal 5 would provide adequate safeguards for new producers on the order or producers who may temporarily lose Grade A status to pool their milk without penalty.

A post-hearing brief submitted on behalf of Continental reiterated their support for the adoption of Proposal 5. The brief stressed that de-pooling leads to the inequitable sharing of revenues amongst producers and therefore should be dealt with in the most stringent manner. Continental argued that adoption of any proposal that would allow handlers to continue to de-pool any percentage of their milk receipts supports the concept that de-pooling is an acceptable practice. Continental vigorously opposed any level of de-pooling and insisted that adoption of Proposal 5 was the only appropriate proposal to re-establish equity in the marketplace.

A witness appearing on behalf of ODP testified in support of Proposals 4 and 6. According to the witness, over 1.3 billion pounds of milk was de-pooled during April and May 2004 reducing the value of the marketwide pool by $21.3 million. The ODP witness insisted that pooling standards should ensure that producer milk which regularly supplies the needs of the fluid market does not receive a lower blend price when manufacturing handlers opt to not pool their milk receipts. The witness noted that Federal order hearings have been held in the Central and Upper Midwest markets to address de-pooling. The witness stressed that if the ability of manufacturing handlers to not pool their milk receipts is eliminated in the Central and Upper Midwest markets, it may add to the volume of de-pooled milk in the Mideast market. The witness was of the opinion that adoption of either Proposal 4 or Proposal 6 would best solve the inequities created from de-pooling.

A witness appearing on behalf of Dean testified in support of Proposal 4. The witness asserted that the intent of the Federal order system is to ensure a sufficient supply of milk for fluid use and provide for uniform payments to producers who stand ready, willing, and able to serve the fluid market regardless of how the milk of any individual is utilized. The Dean witness testified that provisions allowing manufacturing handlers the option to participate or not participate in the pool causes inequities between handlers.

The Dean witness was of the opinion that de-pooling causes inequities between handlers and undermines the order's ability to provide for a stable milk supply to meet Class I demand. The inequity, the witness said, is that all handlers do not have the same ability to pool and de-pool; fluid handlers are required to pool their milk receipts while manufacturing handlers have the option of pooling their milk receipts. The witness was of the opinion that this difference in pooling options creates cost inequities between handlers since a fluid handler must always account to the pool at classified use values while manufacturing handlers may not.

The Dean witness also explained how de-pooling leads to inequities between producers. The witness used a hypothetical example of two cooperatives—Cooperative A that delivers 50 percent of its milk receipts to distributing plants and Cooperative B who delivers 30 percent of its milk receipts to distributing plants. Cooperative A, the witness said, is always at a disadvantage when a price inversion occurs because they can only de-pool 50 percent of their milk receipts because the milk delivered to distributing plants must be pooled. However, the witness said, Cooperative B can de-pool 70 percent of their milk receipts because only 30 percent is delivered to distributing plants. Therefore, the witness concluded, Cooperative B is able to pay a higher price to its dairy farmer suppliers since it is able to de-pool an additional 20 percent of its total milk receipts that Cooperative A cannot.

The Dean witness stressed that hearings have been held in other Federal orders to consider proposals seeking to deter de-pooling and urged the Department to adopt provisions to prevent milk from opportunistically pooling on the Mideast order. In the opinion of the Dean witness, Proposal 4 is the most appropriate solution to deter the de-pooling of milk because it creates large and long-term consequences to handlers who opt to de-pool. The Dean witness believed that should the Department determine that Proposal 4 is not appropriate, Proposal 8 would be the best alternative.

A post-hearing brief submitted on behalf of Dean reiterated support for the adoption of Proposal 4 with a modification. Dean proposed granting the Market Administrator the ability to waive a producer's de-pooled status if the producer was de-pooled after informing its pooling handler that it intended to deliver its milk to another handler. The brief stressed that the intention of Proposal 4 is not to prevent a producer from being pooled because of circumstances out of their control and believed their modification would remedy this potential situation. Dean's brief reiterated that de-pooling results in inequities between both handlers and producers. The brief noted that a provision similar to Proposal 4 is in place in the Northeast order and asserted that it has been very effective in limiting de-pooling.

A witness appearing on behalf of Superior Dairy (Superior) testified in support of Proposal 4. Superior is a pool distributing plant regulated by the Mideast order. The witness said that Proposal 4 should be adopted because the de-pooling actions of some handlers are reducing the blend price paid to producers who regularly and consistently service the needs of the Class I market.

A witness appearing on behalf of OFU testified in support of Proposal 6. The witness said that current regulations allow handlers to take advantage of the Federal order program and not share income generated in the market with pooled producers. The witness supported adoption of Proposal 6 and stressed that adoption of the proposal would discourage manufacturing handlers from not pooling their milk receipts when it is to their financial advantage.

A second witness appearing on behalf of Dean testified in support of Proposals 4, 6, 7, and 8. The witness testified that Proposal 4 would encourage handlers to pool their milk receipts in times of a price inversion since the decision to de-pool would result in a 12-month penalty. The witness said that adoption of Proposal 4 would also ensure that the de-pooled producer provided service to the Class I market by making substantial and consistent service to fluid distributing plants.

The second Dean witness characterized Proposal 8 as a less desirable alternative to Proposal 4. The difference in the two proposals, the witness said, is the number of months a producer must meet the 10-day touch base standard to be re-pooled—it is fewer under Proposal 8 and varies depending on the month in which the milk was de-pooled. In general, emphasized the witness, the effects of both proposals would be the same except that if Proposal 8 were adopted, the cost to a de-pooling handler and the benefit to continuously pooled producers would be less.

The second Dean witness testified that Proposal 7 and Proposal 6 are less desirable options to Proposals 4 and 8. According to the witness, if a 115 percent re-pooling standard were adopted it would take a handler who opted to de-pool 90 percent of its milk 17 months to re-pool all the handler's milk receipts. If a handler opted to de-pool 30 percent of its milk receipts, the witness added, it would only take 3 months to again pool all of its milk receipts. The witness emphasized that the larger the volume of milk a handler opted to de-pool, the longer the length of time a handler would need to requalify all its milk receipts and the more money it would cost the de-pooling handler. The witness concluded that Proposals 6 and 7 offered a different method for limiting de-pooling that would not be as effective as the method contained in Proposals 4 and 8.

A dairy farmer whose milk is pooled on the Mideast order testified in support of Proposals 4, 5, and 6. The witness testified that in April 2004 their farm lost $9,000 because of the reduced PPD that resulted from de-pooling. The witness urged the Department to adopt either Proposal 4, 5, or 6 to remedy de-pooling and to do so on an emergency basis.

A witness appearing on behalf of DFA/MMPA testified in support of Proposal 7. The witness said that Proposal 7 was designed to limit de-pooling by creating financial consequences for manufacturing handlers who de-pool their milk receipts. The witness testified that members of DFA/MMPA currently de-pool milk when it is to their advantage but emphasized that de-pooling causes market disorder and should be prohibited.

The DFA/MMPA witness said that de-pooling is not a new occurrence; however, the volatility of milk prices in recent years has caused more frequent price inversions and subsequent opportunities to de-pool. The witness referenced data presented at a similar proceeding held in the Central order that during the 84 month period from 1993 to 1999, there were 16 months with negative PPD's, 6 of which were in excess of a negative 50 cents per cwt. However, the witness noted that during the 60 month period from January 2000 through December 2004 the opportunity to de-pool had occurred 51 times.

The DFA/MMPA witness contended that de-pooling causes inequities because similarly situated handlers face different costs in procuring a milk supply. Class I milk is required to be pooled, the witness said, and distributing plants always have to share the additional value of their Class I milk sales with all pooled producers. However, the witness said, a manufacturing handler is not required to account to the pool at classified prices and can therefore retain the revenue generated from not pooling milk when price inversions occur. The witness asserted that manufacturing handlers use the additional revenue generated from de-pooling to pay a higher price to their producers while fluid handlers must use money from their profit margins to pay a competitive price. In this regard, the witness said, Class I handlers are at a disadvantage in competing with manufacturing handlers for a producer milk supply.

Relying on Market Administrator statistics, the DFA/MMPA witness illustrated that in April 2004 manufacturing handlers that may have chosen to not pool their milk receipts were able to keep $3.78 more per hundredweight than a fluid handler on all their de-pooled milk and could use the proceeds to pay dairy farmers. The witness showed how a supplying handler that delivered one load of milk a day for a month to a Class I plant, would have received $56,700 less than a manufacturing handler who could opt to de-pool their milk receipts. Relying on Market Administrator statistics, the witness testified that 649.3 million pounds of milk was de-pooled in April 2004. According to the witness, if that milk had been pooled the PPD paid to all producers would have been $1.66 per cwt higher.

The DFA/MMPA witness testified that Proposal 7 would limit the amount of milk a handler could pool to 115 percent of the handlers prior month pooled milk volume. The witness insisted that the 115 percent standard would create the economic incentive necessary to keep an adequate reserve supply of milk pooled on the order while accommodating reasonable levels of growth in a handler's month-to-month production and other seasonal production fluctuations. The witness noted that the Market Administrator should be given the discretion to disqualify de-pooled milk from pooling if the Market Administrator believes that the handler was trying to circumvent the pooling standards.

The DFA/MMPA witness testified that emergency marketing conditions exist without a deterrent to de-pooling that warrant the omission of a recommended decision. The witness was of the opinion that the volatile dairy product markets that gave rise to rapid price increases and price inversions will continue and therefore, should be addressed in an expedited manner.

A post-hearing brief submitted on behalf of DFA/MMPA reiterated their support of Proposal 7. The brief stressed that adoption of Proposal 7, while not completely eliminating a handler's ability to de-pool, would reduce the total volume of de-pooled milk. DFA/MMPA suggested a modification to Proposal 7 in their post-hearing brief to establish a limit on the volume of milk a handler could pool in March to 120 percent of the their total volume of milk pooled during the prior month. DFA/MMPA believed that this modification would better accommodate and account for the fewer number of days in the month of February.

The DFA/MMPA brief argued that Proposals 4 and 5 are not appropriate for the Mideast order because they call for stringent and unnecessary changes in the order's pooling provisions. The brief stressed that the intention of Proposal 7 was to improve the pooling standards of the order but not in a manner that would necessitate a change to a handler's business operations.

A witness appearing on behalf of Ohio Farm Bureau Federation testified in support of Proposal 7. The witness was of the opinion that if the current pooling provisions are not amended to deter the practice of de-pooling, prices received by farmers who reliably service the Class I market would decrease. The witness claimed that handlers who de-pool milk do not share the revenues generated from de-pooling with all pooled producers which lowers returns to producers who are consistently serving the Class I market. The witness added that Federal order hearings concerning de-pooling have been held in other Federal orders. The witness claimed that if de-pooling is not addressed in the Mideast order, milk from other Federal orders may seek to be pooled on the Mideast order. In this regard, the witness said that adoption of Proposal 7 is necessary to ensure that blend prices received by producers who are consistently pooled are not further eroded.

A witness appearing on behalf Prairie Farms Dairy (Prairie Farms) testified in support of Proposal 7. Prairie Farms is a member owned Capper-Volstead cooperative that pools milk on the Mideast order. The witness testified that since Prairie Farms is required to pool all milk utilized at their distributing plants, all revenues generated from their Class I sales are shared with all pooled producers. The witness noted that Prairie Farms does de-pool its manufacturing milk when it is advantageous but emphasized that this practice is detrimental to producers who are consistently serving the Class I market. The witness urged adoption of Proposal 7 but also offered support for Proposal 6.

Seven dairy farmers whose milk is pooled on the Mideast order testified in support of Proposal 7. The dairy farmers testified that the purpose of the Federal order system is to ensure that pooled producers receive an equitable share of the revenue generated from all classes of milk. The witnesses were of the opinion that the practice of de-pooling caused them to lose a substantial amount of potential income. These witnesses stressed that if a manufacturing handler chooses to pool their milk receipts in months when the PPD is positive, it is only equitable for them to pool their milk receipts when the PPD is negative. The witnesses believed that de-pooling results in producers who consistently service the Class I needs of the market receiving a lower blend price than they otherwise would have if all milk had been pooled. The witnesses maintained that because de-pooling erodes revenues received by pooled producers, the Department should addressed de-pooling on an emergency basis.

Another dairy farmer witness whose milk is pooled on the Mideast order testified in support of limiting de-pooling but did not offer support for any specific proposal. The witness said that as a result of de-pooling in the months of April and May 2004, their farm lost over $6,000. The witness was of the opinion that the Department should act on an emergency basis since the ability for manufacturing handlers to de-pool milk will continue to lower the proceeds received by producers that service the needs of the Class I market.

A witness appearing on behalf of Smith Dairy Products Company testified in support of proposals limiting de-pooling. Smith operates two distributing plants located in the Mideast marketing area. The witness said that the practice of de-pooling manipulates the intent of the Federal milk order system and results in the lowering of the blend prices paid to producers that service the needs of the Class I market. The witness did not offer support for a specific proposal but urged the Department to eliminate the ability to de-pool milk on the Mideast order on an emergency basis.

A witness appearing on behalf of Continental testified in opposition to Proposals 4, 6, 7, and 8. The witness opposed adoption of these proposals because they would allow milk delivered to a distributing plant to be immediately re-pooled and maintained that Proposal 5 would be a better option for the marketing area.

A witness appearing on behalf of White Eagle Cooperative Federation (White Eagle) testified neither in support of or opposition to Proposal 7. White Eagle is a federation of cooperatives and independent producers that markets approximately 150 million pounds of milk per month on the Mideast order. The witness asserted that adoption of the 115 percent pooling standard could limit smaller cooperatives from increasing their dairy farmer membership. The witness testified that adoption of Proposal 7 would allow for an increase in the volume of milk pooled above 115 percent if a producer who was pooled on another Federal order sought to become pooled on the Mideast order but would not make the same exception for a producer continually pooled on the Mideast order who increases production. The witness said that if de-pooling were limited on the Mideast order, de-pooled milk would seek to be pooled on other Federal orders where there are no de-pooling restrictions. The witness was of the opinion that the de-pooling issue should be handled on a national basis and with a recommended decision where the public could submit comments. These positions were reiterated in their post-hearing brief filed on behalf of White Eagle, Superior Dairy, United Dairy, Guggisberg Cheese, Brewster Dairy, and Dairy Support, Inc.

A post-hearing reply brief submitted on behalf of Dean expressed opposition to Proposal 5. Dean argued that Proposal 5 was too restrictive because it contained no provision to enable de-pooled milk to become immediately re-pooled if it was truly needed to service the fluid market later in the month.

All Federal milk marketing orders require the pooling of milk received at pooled distributing plants—which is predominately Class I milk—and all pooled producers and handlers on an order share in the additional revenue arising from higher valued Class I sales. Manufacturing handlers and cooperatives of Class II, III and IV uses of milk who meet the pooling and performance standards make all of their milk receipts eligible to be pooled and usually find it advantageous. Manufacturing handlers and cooperatives who supply a portion of their total milk receipts to Class I distributing plants receive the difference between their use-value of milk and the order's blend price. Federal milk orders, including the Mideast order, establish limits on the volume of milk eligible to be pooled that is not used for fluid uses primarily through diversion limit standards. However, manufacturing handlers and cooperatives are not required, as are Class I handlers, to pool all their eligible milk receipts.

According to the record, manufacturing handlers and cooperatives have opted to not pool their milk receipts when the manufacturing class prices of milk are higher than the order's blend price—commonly referred to as being “inverted.” During such months, manufacturing handlers and cooperatives have elected to not pool all of their eligible milk receipts because doing so would require them to pay into the PSF of the order, the mechanism through which handler and producer prices are equalized. When prices are not inverted, these handlers would pool all of their eligible receipts and receive a payment or draw from the PSF. In receiving a draw from the PSF, such handlers have sufficient money to pay at least the order's blend price to their supplying dairy farmers.

When manufacturing handlers and cooperatives opt to not pool all of their eligible milk receipts in a month, they are essentially avoiding a payment to the PSF. This, in turn, enables them to avoid the marketwide sharing of the additional value of milk that accrues in the higher-valued uses of milk other than Class I. When the Class I price again becomes the highest valued use of milk, or when other class-price relationships become favorable, the record reveals that these same handlers opt to again pool their eligible milk receipts and draw money from the PSF. It is the ability of manufacturing handlers and cooperatives opting to not pool milk and thereby avoid the marketwide sharing of the revenue accruing from non-Class I milk sales that is viewed by proponents as giving rise to disorderly marketing conditions. According to proponents, producers and handlers who cannot escape being pooled and priced under the order are not assured of equitable prices.

The record reveals that since the implementation of Federal milk marketing order reform in January 2000, and especially in more recent years, large and rapid increases in manufactured product prices during certain months have provided the economic incentives for manufacturing handlers to opt not to pool eligible milk on the Mideast order. For example, during the 3-month period of February to April 2004, the Class III price increased over 65 percent from $11.89 cwt to $19.66 cwt. During the same time period, total producer milk pooled on the Mideast order decreased by nearly 40 percent from 1.4 billion pounds to 873 million pounds. When milk volumes of this magnitude are not pooled the impacts on producer blend prices are significant. Producers who incur the additional costs of consistently servicing the Class I needs of the market receive a lower return than would otherwise have been received if they did not continue to service the Class I market. Prices received by dairy farmers who supplied the other milk needs of the market are not known. However, it is reasonable to conclude that prices received by dairy farmers were not equitable or uniform.

The record reveals that “inverted” prices of milk are generally the result of the timing of Class price announcements. Despite changes made as part of Federal milk order reform to shorten the time period of setting and announcing Class I milk prices and basing the Class I price on the higher of the Class III or Class IV price to avoid price inversions, large month-to-month price increases in Class III and Class IV product prices sometimes trumped the intent of better assuring that the Class I price for the month would be the highest-valued use of milk. In all orders, the Class I price (and the Class II skim price) is announced prior to or in advance of the month for which it will apply. The Class I price is calculated by using the National Agricultural Statistics Service (NASS) surveyed cheese, butter, nonfat dry milk and dry whey prices for the two most current weeks prior to the 24th day of the preceding month and then adding a differential value to the higher of either the advanced Class III or Class IV price.

Historically, the advance pricing of Class I milk has been used in all Federal orders because Class I handlers cannot avoid regulation and are required to pool all of their Class I milk receipts they should know their product costs in advance of notifying their customers of price changes. However, milk receipts for Class III and IV uses are not required to be pooled; thus, Class III and IV product prices (and the Class II butterfat value) are not announced in advance. These prices are announced on or before the 5th of the following month. Of importance here is that manufacturing plant operators and cooperatives have the benefit of knowing all the classified prices of milk before making a decision to pool or not pool eligible receipts.

The record reveals that the decision of manufacturing handlers or cooperatives to pool or not pool milk is made on a month-to-month basis and is generally independent of past pooling decisions. Manufacturing handlers and cooperatives that elected to not pool their milk receipts did so to avoid making payments to the PSF and they anticipated that all other manufacturing handlers and cooperatives would do the same. However, the record indicates that normally pooled manufacturing handlers and cooperatives met the pooling standards of the order to ensure that the Class I market was adequately supplied and that they established eligibility to pool their physical receipts including diversions to nonpool plants. Opponents to proposals to deter de-pooling are of the view that meeting the pooling standards of the order and deciding how much milk to pool are unrelated events. Proponents took the view that participation in the marketwide pool should be based on a long-term commitment to supply the market because in the long-term it is the sales of higher priced Class I milk that adds additional revenue to the pool.

The producer price differential, or PPD, is the difference between the Class III price and the weighted average value of all Class I, II and IV milk pooled. In essence, the PPD is the residual revenue remaining after all butterfat, protein and other solids values are paid to producers. If the pooled value of Class I, II and IV milk is greater than the Class III value, dairy farmers receive a positive PPD. While the PPD is usually positive, a negative PPD can occur when class prices rise rapidly during the six-week period between the time the Class I price is announced and the time the Class II butterfat and III and IV milk prices are announced. When manufacturing prices fall, this same lag in the announcement of class prices yields a positive PPD.

As revealed by the record, when manufacturing plants and cooperatives opted to not pool milk because of inverted price relationships, PPD's were much more negative. When this milk is not pooled, a larger percentage of the milk remaining pooled will be the “lower” priced Class I milk. When manufacturing milk is not pooled the weighted average value of milk decreases relative to the Class II, III or IV value making the PPD more negative. For example, record evidence demonstrated that in April 2004, a month when a sizeable volume of milk was not pooled, the PPD was a negative $3.78 per cwt. If all eligible milk had been, the PPD would have been $1.66 per cwt higher or a negative $2.12 per cwt.

The record reveals that when manufacturing handlers and cooperatives opt to not pool milk, unequal pay prices may result to similarly located dairy farmers. For example, Dean noted that when a cooperative delivers a high percentage of their milk receipts to a distributing plant, it lessens their ability to not pool milk and makes them less competitive in the marketplace relative to other producers and handlers. Other evidence in the record supports conclusions identical to Dean that when a dairy farmer or cooperative is able to receive increased returns from shipping milk to a manufacturing handler during times of price inversions, other dairy farmers or cooperatives who may have shipped more milk to a pool distributing plant are competitively disadvantaged.

The record of this proceeding reveals that the ability of manufacturing handlers and cooperatives to not pool all of their eligible milk receipts gives rise to disorderly marketing conditions and warrants the establishment of additional pooling standards to safeguard marketwide pooling. Current pooling provisions do not require or prohibit handlers and cooperatives from pooling all eligible milk receipts. However, the record reveals that when handlers and cooperatives opt to not pool milk, inequities arise among producers and handlers that are contrary to the intent of the Federal milk marketing order program—maintaining orderly marketing conditions.

The record contains extensive testimony regarding the effects on the milk order program resulting from advance pricing and the priority the milk order program has placed on the Class I price being the highest valued use of milk. It remains true that the Class I use of milk is still the highest valued use of milk notwithstanding those occasional months when milk used in usually lower-valued classes may be higher. This has been demonstrated by an analysis of the effective Class I differential values—the difference in the Class I price at the base zone of Cuyahoga County, Ohio, and the higher of the Class III or Class IV price—for the 65-month period of January 2000 through May 2005 performed by USDA. 1 These computations reveal that the effective monthly Class I differential averaged $1.97 per cwt. Accordingly, it can only be concluded that in the longer-term Class I sales continue to be the source of additional revenue accruing to the pool even when, in some months, the effective differential is negative.

Price inversions occur when the wholesale price for manufactured products rises rapidly indicating a tightening of milk supplies to produce those products. It is for this reason that the Department chose the higher of the Class III or Class IV prices as the mover of the Class I price. Distributing plants must have a price high enough to attract milk away from manufacturing uses to meet Class I demands. As revealed by the record, this method has not been sufficient to provide the appropriate price signals to assure an adequate supply of milk for the Class I market. Accordingly, additional measures are needed as a means of assuring that milk remains pooled and thus available to the Class I market. Adoption of Proposal 7 is a reasonable measure to meet the objectives of orderly marketing.

This decision does find that disorderly marketing conditions are present when producers do not receive uniform prices. Handlers and cooperatives opting to not pool milk do not account to the pool at the classified use value of those milk receipts. They do not share the higher classified use—value of their milk receipts with all other producers who are pooled on the order are incurring the additional costs of servicing the Class I needs of the market. This is not a desired or reasonable outcome especially when the same handlers and cooperatives will again pool all of their eligible receipts when class-price relationships change in a subsequent month. These inequities borne by the market's producers are contrary to the intent of the Federal order program's reliance on marketwide pooling—ensuring that all producers supplying the market are paid uniform prices for their milk regardless of how the milk of any single producer is used.

It is reasonable that the order contain pooling provisions intended to deter the disorderly conditions that arise when de-pooling occurs. Such provisions maintain and enhance orderly marketing. Accordingly, this decision finds it reasonable to recommend adoption of provisions that would limit the volume of milk a handler or cooperative may pool during the months of April through February to 115 percent of the total volume pooled by the handler or cooperative in the prior month and to 120 percent of the prior month's pooled volume during March. Adoption of this standard will not prevent manufacturing handlers or cooperatives from electing to not pool milk. However, it should serve to maintain and enhance orderly marketing by encouraging participation in the marketwide pooling of all classified uses of milk.

Consideration was given on whether de-pooling should be considered at a national hearing with other, broader national issued of milk marketing. However, each marketing area has unique marketing conditions and characteristics which have area-specific pooling provisions to address those specific conditions. Because of this, pooling issues are considered unique to each order. This decision finds that it would be unreasonable to address pooling issues, including de-pooling, on a national basis.

Some manufacturing handlers and cooperatives argue that their milk did perform in meeting the Class I needs during the month and this occurred before making their pooling decisions. They argue that the Class I market is therefore not harmed and that the intents and goals of the order program are satisfied. In response to these arguments, this decision finds that the practice of de-pooling undermines the intent of the Federal order program to assure producers uniform prices across all uses of milk normally associated with the market as a critical indicator of orderly marketing conditions. Similarly, handlers and cooperatives who de-pool purposefully do so to gain a momentary financial benefit (by avoiding making payments to the PSF) which would otherwise be equitably shared among all market participants. While the order's performance standards tend to assure that distributing plants are adequately supplied with fresh, fluid milk, the goals of marketwide pooling are undermined by the practice of de-pooling. Producers and handlers who regularly and consistently serve the Class I needs of the market will not equitably share in the additional value arising momentarily from non-fluid uses of milk. These same producers and handlers will, in turn, be required to share the additional revenue arising from higher-valued Class I sales in a subsequent month when class-price relationships change.

The five proposals considered in this proceeding to deter the practice of de-pooling in the Mideast order have differences. They all seek to address market disorder arising from the practice of de-pooling. However, this decision does not find adoption of the three “dairy farmer for other market” proposals—Proposals 4, 5 and 8—reasonable because they would make it needlessly difficult for milk to be re-pooled and because their adoption may disrupt prevailing marketing channels or cause the inefficient movement of milk. Likewise, Proposal 6, which suggests restricting pooling in a month to 115 percent of the prior month's volume pooled by the handler, is not recommended for adoption. Adoption of this proposal would disrupt current marketing conditions beyond what the record justifies. Therefore, this decision recommends adoption of Proposal 7 to limit the pooling of milk by a handler during the months of April through February to 115 percent of the total milk receipts the handler pooled in the prior month and to 120 percent of the prior month's pooled volume during March because it provides the most reasonable measure to deter the practice of de-pooling.

Consideration was given to omitting a recommended decision on the issue of de-pooling. The record does not support a conclusion that adoption of measures to deter de-pooling warrant emergency action. The recommended adoption of provisions to limit the volume of milk that can be pooled during the month on the basis of what was pooled in the preceding month warrants public comments before a final decision is issued.

A proposal published in the hearing notice as Proposal 3, seeking to specify the length of time a dairy farmer may lose Grade A status before losing producer status on the order, is not recommended for adoption. Proposal 3, offered by Dean, seeks to amend the Producer milk definition by explicitly stating that a dairy farmer may lose Grade A status for up to 21 calendar days per year before needing to requalify as a producer on the order. The Mideast order does not specify the length of time a dairy farmer may lose Grade A status before needing to requalify as a producer on the order.

Two witnesses appearing on behalf of Dean testified in support of Proposal 3. The Dean witnesses supported adoption of Proposal 3 to provide for 21 days in a year that a producer could lose Grade A approval before needing to reassociate with the Mideast order by making a delivering to a Mideast pool plant. By providing for an exact number of days, the witnesses emphasized, a loss of Grade A status could not be used as a method to de-pool or to circumvent the pooling standards. The witnesses believed that the Market Administrator should be granted the authority to extend the length of time a producer could lose Grade A status before they would have to requalify if the loss of status was due to circumstances beyond the producers control. A post-hearing brief submitted on behalf of Dean reiterated their belief that this change was necessary to ensure that the re-pooling standards would not be circumvented.

The Producer definition of the Mideast order currently does not define the length of time a producer may lose Grade A status before needing to requalify for producer status on the order. The issue of qualifying for producer status is important since it determines which producers and which producer milk is entitled to share in the revenues arising from the marketwide pooling of milk on the Mideast order.

The definition of “temporary” used by the Market Administrator has accommodated the Mideast market by giving producers a reasonable amount of time to regain Grade A status without burdening the market with excessive touch-base shipments or recordkeeping requirements. Limiting the time period a producer can lose Grade A status would require handlers and the Market Administrator to track the producer's loss of Grade A status throughout the year to determine when the 21 day limit is reached.

This decision finds that the additional touch-base shipments that would be required for a dairy farmer to requalify for producer status on the order would cause uneconomic shipments of milk. Additionally, the increased recordkeeping requirements would burden not only the handlers but also the Market Administrator's office without contributing to the goals and application of the proposed amendments to the pooling standards contained in this decision. Accordingly, Proposal 3 is not recommended for adoption.

A proposal offered by DFA and published in the hearing notice as Proposal 9 and as modified at the hearing, seeking to establish a transportation credit provision is not recommended for adoption. Proposal 9 seeks to establish a year-round transportation credit on shipments of milk from farms to distributing plants at a rate of $0.0031 per cwt per mile. A separate rate of $0.0024 per cwt per mile for eligible milk movements in the State of Michigan was offered as a modification by MMPA. The credit would not be applicable on the first 75 miles of movement and would be limited to 350 miles. The Mideast order does not currently provide for transportation credits.

A witness appearing on behalf of DFA/MMPA testified that the establishment of a transportation credit in the Mideast order is warranted because the cost of supplying the Class I market is not being equitably borne by all pooled producers. The witness testified that all producers benefit from Class I sales because the revenue generated is distributed through the marketwide pool. In particular, the witness said that all pooled producers were not equitably sharing in the costs of transporting supplemental supplies to meet Class I demand. The witness was of the opinion that Federal order prices should reimburse producers for the cost of transporting milk supplies to Class I plants when needed. The witness emphasized that Proposal 9 is designed to equitably distribute some the cost of transporting those Class I milk supplies with all pooled producers.

The DFA/MMPA witness explained that the proposed exemption of the first 75 miles of eligible milk movement recognizes the producer's responsibility to deliver their milk to the market. The 75 mile exclusion was appropriate, the witness contended, because in the two northern reserve supply regions of Michigan and northern Ohio, the average distance milk travels to a distributing plant is 71 and 74 miles, respectively. The witness also said that a maximum applicable milk movement of 350 miles is a reasonable safeguard to prevent milk from traveling from great distances solely to receive the transportation credit. The DFA/MMPA witness also noted that the Market Administrator should be given the discretion to adjust the transportation credit rate if market conditions warrant. The witness asserted that the market's blend price would be reduced by approximately $0.0297 per cwt per month if Proposal 9 was adopted. The witness maintained that a small reduction in the blend price received by farmers to cover a transportation credit was justified because of the benefit they would receive from having Class I plants fully supplied.

The DFA/MMPA witness contended that the northern region of the Mideast marketing area is a milk surplus region while the southern portion of the marketing area is usually a milk deficit region. The witness said that often surplus milk from the northern region of the marketing area must be transported long distances to supply the southern region for Class I use. Before Federal order reform, the witness asserted, the pricing structure of the Federal order program provided location adjustments that encouraged milk to move to Class I plants because the difference in the Class I differentials between the surplus and deficit areas provided producers sufficient reimbursement for the transportation costs incurred. However, the witness stressed, the Mideast order's current Class I differential values between surplus and deficit areas do not provide sufficient incentive to encourage this north to south movement of milk.

According to the DFA/MMPA witness, the cost to move a load of milk within the Mideast marketing area from a $1.80 Class I differential zone to a $2.20 Class I differential zone is $0.66 per cwt. However, the order's Class I differential's only provided a $0.40 per cwt incentive to transport that milk. The result, said the witness, is that Class I handlers have to pay additional money to fulfill their Class I needs although all pooled producers benefit from the higher returns generated from those Class I sales. The witness maintained that Federal order prices should cover all transportation costs for supplemental milk supplies and stressed that the proposed transportation credit only seeks to recoup 66 percent of that cost.

The DFA/MMPA witness provided over-order premium and cost information experienced by DFA when delivering supplemental milk supplies. The witness said that the average over-order premium charged for supplemental milk in 2004 was $1.72 per cwt. The witness explained that after subtracting out various customer credits, transportation costs, zone adjustments and give up charges, the net return, on average, was $0.71 per cwt to pay producers and cover the operating costs of the cooperative. The witness discussed the marketing decisions of DFA for October 2004, a month when supplemental supplies are historically needed. The witness said that in October 2004 DFA purchased over 21 million pounds of supplemental milk for delivery to distributing plants in the Mideast marketing area. After subtracting costs from the over-order premium, there was an average of $0.45 per cwt to pay producers and cover operating costs. The witness estimated that if Proposal 9 had been in place during October 2004, DFA would have received an $0.08 per cwt transportation credit on its supplemental supplies of Class I milk.

A post-hearing brief submitted on behalf of DFA/MMPA reiterated their position that transportation credits for the Mideast order are appropriate to ensure that all pooled producers will more equitably bear some costs in servicing the Class I market. The brief also argued that Proposal 9, as modified at the hearing, contained appropriate mileage limits to safeguard against handlers seeking to pool milk on the order solely for the purpose of receiving the credit.

The DFA/MMPA brief contended that the Mideast marketing area lacks sufficient supplemental supplies within the marketing area to service the Class I needs of the market. The brief reiterated that DFA/MMPA members are currently bearing a disproportionate share of the cost of supplying the Class I market because they have to transport milk long distances but are not reimbursed for the additional transportation costs incurred. The brief reiterated that while there are reserve supplies of milk in northern regions of the marketing area that could be delivered to the deficit southern regions, the Class I differential does not sufficiently reimburse the additional transportation cost.

A witness appearing on behalf of Foremost Farms USA Cooperative (Foremost) and Alto Dairy Cooperative (Alto) testified in support of establishing a transportation credit provision. Hereinafter, this decision will refer to these entities as “Foremost, et al. ” Foremost, et al. , are dairy farmer owned cooperatives that market milk and supply distributing plants in the Mideast marketing area. The witness was of the opinion that a transportation credit on producer milk delivered to distributing plants was warranted because of the high cost of servicing Class I plants in the Mideast marketing area. The witness explained that on average, the distance from farms to distributing plants in the Mideast marketing area is longer than the distance between farms and manufacturing plants. Therefore, the witness was of the opinion that since producers pay the transportation cost for their milk, a producer delivering to a distributing plant will always receive a lower price for their milk because their transportation costs will be greater.

The Foremost, et al. , witness also offered a modification to Proposal 9 that the proposed transportation credit should apply to milk transfers from pool supply plants to pool distributing plants. The witness testified that from 2002 through 2004, Foremost delivered approximately 20 million pounds of milk from their pool supply plants to pool distributing plants during the months of August through November. However, the witness said, under the provision as proposed by DFA/MMPA, these milk transfers would not have received the transportation credit. The witness noted that the Upper Midwest order provides for transportation and assembly credits for milk transferred from supply plants to distributing plants and that a transportation credit provision for the Mideast order should also be applicable for plant-to-plant milk movements.

The Foremost, et al. , witness explained that the Mideast Milk Marketing Agency (MEMMA), of which Foremost is a member, markets the milk of is members and charges Class I handlers an over-order premium for milk delivered to their plants. The premium charges are negotiated between MEMMA and the individual distributing plants, the witness explained. The witness was of the opinion that to remain competitive with other suppliers and for their customers to remain competitive in the market, MEMMA cannot increase their over-order premiums to a rate that would compensate the costs of moving milk as would a transportation credit.

A post-hearing brief submitted on behalf of Foremost, et al., maintained their support of Proposal 9 with their modification to include plant-to-plant milk movements as eligible for a transportation credit. The brief contended including credits for plant-to-plant transfers is appropriate because, in their opinion, all Class I milk shipments to distributing plants should be eligible for a transportation credit.

A witness appearing on behalf of Michigan Milk Producers Association (MMPA) testified in support of establishing a transportation credit for Class I milk with a modification. The witness proposed that a lower rate be applicable for milk movements within the State of Michigan.

According to the MMPA witness, trucks used to haul milk within the State of Michigan are often larger because of higher gross weight limits allowed by the State. Typically, a trailer that can hold up to 90,000 pounds of milk, results in transportation costs of approximately $0.0036 per loaded mile, the witness noted. However, in keeping with testimony offered by DFA/MMPA for partial reimbursement of transportation cost, the witness said, Michigan distributing plants receiving milk from Michigan farms should receive a lower credit rate of $0.0024 per loaded mile. Otherwise, the witness said, Michigan handlers would recoup more than 67 percent of their actual transportation cost. The witness was of the opinion that the gain to producers from having all Class I needs satisfied outweighed the small reduction that a transportation credit would have on the blend price.

The MMPA witness testified that the Producer Equalization Committee (PEC), which was identified as the over-order pricing agency in Michigan, charges an over-order premium for Class I and II milk. According to the witness, these premiums over the previous 2 years have ranged from $1.40 to $1.65 per cwt. The witness explained that PEC pools its over-order revenue and equitably distributes it among participating producers. According to the witness, individual producers who incurred higher transportation costs for shipping milk a long distance will sometimes receive a larger share of the over-order revenue.

The MMPA witness testified in opposition to the Foremost, et al., modification to provide transportation credits on plant-to-plant milk movements. The witness argued that transportation credits should be used to promote efficient movements of milk and that shipping milk directly from farms to distributing plants in the Mideast marketing area is the most efficient movement. The witness was of the opinion that data provided by the Market Administrator demonstrated that there are adequate reserve supplies located within reasonable distances for farm-to-distributing plant deliveries. The witness asserted that providing a transportation credit on milk transfers between plants would encourage milk to be pooled from plant locations far from the marketing area and would inappropriately qualify producers—who would not be reliable suppliers of milk for the Class I needs of the Mideast market—to be pooled on the order. A post-hearing brief submitted on behalf of MMPA reiterated their support for establishing a transportation credit for Class I milk as they modified it during the hearing and opposition to including milk delivered from pool supply plants to pool distributing plants.

A brief submitted on behalf of Dean expressed support for adopting a transportation credit provision with a modification. The brief said that providing a transportation credit to reimburse the cost of supplying the Class I market is appropriate, but expressed concern with exempting the proposed first 75 miles of milk movement from receiving the credit. Dean believed that such an exemption discriminates against local farmers that supply Class I plants.

The Dean brief also asserted that if producer milk receives a transportation credit for supplying the Class I market, milk from that same farm should not be permitted to divert to a plant that is located outside the Mideast marketing area. The brief explained that milk diverted to plants outside the marketing area should be viewed as “dairy farmer for other markets” milk. While Dean acknowledged that such treatment of out-of-area diverted milk is a major change to Proposal 9, their brief nevertheless proposed that for milk diverted to out-of-area plants from the same farm that milk receives a transportation credit, such milk should not count as shipments for the purpose of meeting the order's touch-base standard.

Seven dairy farmers whose milk is pooled on the Mideast order testified in support of establishing a transportation credit for Class I milk. Five of the dairy farmers were members of cooperatives and two were independent dairy farmers. The dairy farmers were of the opinion that the entire market should bear the costs associated with serving the Mideast Class I market, not solely the cooperatives that provide supplemental supplies to the order's distributing plants.

A witness appearing on behalf of OFU testified in opposition to adopting transportation credits. The witness said that a transportation credit would discourage the use of local milk to supply Mideast order pool plants.

A witness appearing on behalf of Prairie Farms testified in opposition to adopting transportation credits for Class I milk. The witness said that the modified transportation credit proposals would provide no benefit to Prairie Farms members who supply distributing plants because most of their producers are located less than 75 miles from the plant. The witness contended that transportation credits in the Mideast order would lead to inefficient milk movements for the sole purpose of receiving a credit.

A witness appearing on behalf of Smith Dairies testified in opposition to adopting transportation credits for Class I milk. The witness was of the opinion that providing a transportation credit would reduce the blend price paid to pooled producers who consistently supply distributing plants. The witness stressed that handlers who have supply agreements with distributing plants should account for their transportation costs of supplemental supplies and not ask the government for regulatory relief. The witness also asserted that the handler's business model should account for all transportation costs of milk from the farm to the retail customer. The witness was of the opinion that transportation credits could give a competitive advantage to those handlers that receive the credit. The witness said that when Smith Dairies purchases supplemental supplies, the price negotiated for the supplemental supplies does cover transportation costs and a transportation credit would be additional reimbursement.

A brief submitted on behalf of Continental expressed opposition to the transportation credit provision. Continental believed that adopting Proposal 9 would only benefit the proponents of the proposal and would reduce the blend price paid to close-in producers who supply a distributing plant. The brief stated that Continental's major concern was that the credit would be paid by the handlers with no guarantee that the credit would be transferred to a non-cooperative producer who incurred hauling costs. Continental was of the opinion that adoption of the proposal could pressure non-members into joining a cooperative and thereby limit producer choices as to where they can market their milk.

The Agricultural Marketing Agreement Act of 1937 (AMAA), as amended, provides authority for milk marketing orders to contain provisions for making payments to handlers for performing services that are of marketwide benefit. In this context, a marketwide service payment is a charge to all producers whose milk is pooled on the order, regardless of the use classification of such milk. The payment, in the form of a credit, is deducted from the total value of all milk pooled before computing the order's blend price. The AMAA identifies services that may be of marketwide benefit to include, but are not limited to: (1) Providing facilities to furnish additional supplies of milk needed by handlers and to handle and dispose of milk supplies in excess of quantities needed by handlers; (2) handling on specific days quantities of milk that exceed quantities needed by handlers; and (3) transporting milk from one location to another for the purpose of fulfilling requirements for milk of a higher use classification or for providing a market outlet for milk of any use classification.

Proposal 9, as proposed and modified by DFA/MMPA seeks to establish a transportation credit as a marketwide service payment for milk shipped directly from dairy farms to distributing plants. The credit would only be applicable to milk classified as Class I and would be paid at a rate of $0.0031 per cwt per mile. The credit would not apply to the first 75 miles of applicable milk movements because this is the typical distance milk moves from farm to distributing plants in the marketing area. Receipt of the credit would be limited to not more than 350 miles because the Class I needs of the marketing area are satisfied without the need to reach further for a supply. In light of testimony that higher gross vehicle weight limits are provided in the State of Michigan, MMPA proposed a modification to establish a separate and lower transportation credit rate of $0.0024 per cwt per mile for intra-state milk movements from farms to distributing plants in the State of Michigan. Foremost, et al., sought to expand the adoption of transportation credits for milk transfers between supply plants and distributing plants because milk transferred from supply plants, like direct-shipped milk, also serves the Class I market and should therefore be eligible for a transportation credit. This modification was not supported by DFA or MMPA, the proponents of Proposal 9.

An example of a Federal milk marketing order that currently provides for a marketwide service payment is the transportation and assembly credits employed in the Upper Midwest milk marketing order. The transportation and assembly credit provisions of the Chicago Regional order were carried into the provisions of the current Upper Midwest order as part of Federal order reform. The transportation credit feature of the provision provides transporting handlers with a credit of $0.028 per cwt per mile for milk transfers from pool supply plants to pool distributing plants. The credit is deducted from the total value of all milk pooled on the order. Because the transportation credit reduces the total dollar value of the milk pooled, it results in a lower blend price paid to all producers.

These provisions were first implemented in 1987 to ensure that the costs of serving the Class I market of the Chicago Regional marketing area were more equitably shared among all market participants that benefited from the additional revenue generated from Class I sales. Because of the very liberal pooling standards of the Upper Midwest order, much of the milk is pooled through the diversion process by having delivered one day's production to a pool plant. Since such milk is then pooled on a continuing basis, it is considered equitable that such milk bears some of the cost of supplying the Class I market on a continual basis. The credit was maintained in the larger consolidated Upper Midwest order for the same reasons. The transportation credit, as proposed and modified by proponents in this proceeding, differs from the transportation credit provision of the Upper Midwest order. The principal difference is that as proposed, the credit would be paid to the receiving handler for milk delivered direct from farms to distributing plants.

The dairy-farmer cooperative proponents argue that in their capacity as producers they are bearing an inequitable share of the cost of supplying the supplemental needs of the marketing area's Class I market. In this regard, they assert that while all pooled producers are benefiting from Class I sales in the market, cooperative member producers supply a greater percentage of supplemental milk to Class I plants, and thus conclude that they are inequitably bearing the cost of providing supplemental supplies during certain times of the year.

The cooperative witnesses contend that when independently supplied distributing plants need supplemental supplies, such supplemental supplies are acquired from cooperatives. However, the cooperatives over-order premiums have been determined well before the start of the months when supplemental milk supplies are needed without adjusting for the generally farther distance any given particular load of milk must be transported. Even though proponents seek transportation credits year-round, the evidence reveals that it is the additional cost burden they bear providing supplemental milk supplies in the fall months, using October 2004 as a representative month, which Proposal 9 seeks to address. The basis of the argument advanced by the proponents was that without a transportation credit, meaningful cost recovery is not otherwise obtainable from receiving handlers. The record evidence does not support concluding that this burden is experienced in every month of the year.

The proponent cooperatives also asserted that the Class I differentials of the Mideast marketing area do not offer sufficient incentive to attract Class I milk to distributing plants in certain portions of the Mideast area. This failure, the proponent cooperatives say, places them as Class I suppliers at a competitive disadvantage relative to other Class I suppliers who are not supplying supplemental needs. The cooperatives proposed the establishment of a transportation credit provision as a means of offsetting a portion of the total additional cost of supplying Class I plants that the Class I differentials do not adequately compensate.

The proponents noted that the structure of the Mideast market, namely plant consolidation, diminished milk supplies in certain areas and transportation costs have increased since the Class I differentials were implemented in 2000. Amending the Class I differentials to more equitably reimburse Class I suppliers for transportation costs was another option considered but rejected by the proponents. They were of the opinion that changing the Class I price surface would have been very difficult and concluded that providing for transportation credits would be a satisfactory alternative to pricing problems. Proponents estimated that the impact of the proposed transportation credit on the Mideast order blend price per month, if adopted, would be a reduction of approximately $0.0297 per cwt.

This decision finds that the record of this proceeding does not support the adoption of a transportation credit provision in the Mideast marketing area. The proponents requested a year-round transportation credit for Class I milk deliveries but did not offer sufficient evidence to justify establishment of the credit. Evidence presented at the hearing for the volume and cost of milk deliveries was limited to the fall month of October 2004. Testimony offered in support of the establishment of a transportation credit spoke primarily of the need for partial cost recovery for the transportation of supplemental supplies in the fall months. Because the record contains no data for other months it is difficult to determine to what extent distant milk is moving to the Mideast market as supplemental supplies. Additionally, it is not possible to determine what portion of the distant supplies revealed in the October data are displacing local milk at distributing plants for producer qualification purposes only.

The proponents did provide average cost and revenue data regarding supplemental milk supplies for 2004. The DFA witness testimony compared average milk procurement costs for October 2004 with average annual procurement costs. The two largest changes in procurement costs during the month of October, when compared to the annual average, were for “give-up charges” and for “supplemental hauling costs.” If the annual average procurement costs are adjusted to remove the impact of supplemental procurement costs calculated for August through November, it is estimated that supplemental hauling costs increased $0.27 and give-up charges increased $0.22 on average in the fall when compared to the average cost as extrapolated for the remainder of the year. This analysis concludes that the give-up charges are a major portion of the costs associated with the supplemental supply. This may indicate that the performance standards for the order are too low. It should be noted that the diversion limits were reduced and the supply plant shipping standards were increased on an interim emergency basis as a result of this proceeding.

Due to the lack of data detailing the total cost of procuring supplemental supplies of milk and an estimate of the annual revenue generated by the transportation credit, no finding can be made that Proposal 9 should be adopted. Of particular concern is the possibility that the credit could be applicable to current and customary supply arrangements. This would result in a producer financed hauling subsidy on a year-round basis that is not related to any supplemental supplies or marketwide services.

Additionally, it is unclear why government intervention is needed to essentially require producers to supplement the milk procurement costs of handlers located in milk deficit sections of the marketing area. Such a transportation credit would disadvantage handlers located in non-deficit regions of the marketing area that wish to distribute packaged milk products in the deficit regions. The full cost of transporting packaged Class I milk into the deficit regions would be borne by the distributing handler but the cost of transporting bulk milk into the deficit region for subsequent processing would be partially funded by all producers through the transportation credit. The proponent's testimony throughout the proceeding stressed that they are unable to recoup their transportation costs from the marketplace. However, the evidence does not support these assertions. Both DFA and MMPA witnesses revealed that they are able to charge Class I handlers adequate over-order premiums to cover their transportation costs. The proponents asserted that these transportation costs should instead be recouped through marketwide pooling so that they can return a greater portion of the over-order premium to their members. The additional transportation cost of supplemental milk supplies is recovered from handlers who benefit by having such milk made available to satisfy demands.

Cooperatives who deliver supplemental supplies to distributing plants are providing those handlers with the benefit of a supply to meet their demands. However, in return the cooperative receives the benefit of an over-order premium to cover any additional costs it may incur and, if possible, return a higher price to its members. The cooperative also benefits in that these supplemental deliveries are used to satisfy the cooperative's long-term performance standards. It is not reasonable to lower the blend prices received by all dairy farmers when transportation costs are adequately recovered from the Class I handler who needs the milk to meet demands.

This recommended decision finds that government intervention through the adoption of the proposed year-round transportation credit provision is not warranted. The record of this proceeding does not reveal that there are additional costs that cannot be recouped in the marketplace without such intervention.

Briefs and proposed findings and conclusions were filed on behalf of certain interested parties. These briefs, proposed findings and conclusions, 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 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) The tentative marketing agreement and the 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 tentative 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 tentative marketing agreement and the 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, the marketing agreement upon which a hearing has been held.

The recommended marketing agreement is not included in this decision because the regulatory provisions thereof would be the same as those contained in the order, as hereby proposed to be amended. The following order amending the order, as amended, regulating the handling of milk in the Mideast marketing area is recommended as the detailed and appropriate means by which the foregoing conclusions may be carried out.

For the reasons set forth in the preamble, 7 CFR part 1033, is proposed to be amended as follows:

We invite you to submit any relevant written data, views, or arguments regarding this proposed AD. Send your comments to an address listed in the ADDRESSES section. Include the docket number “FAA-2006-23948; Directorate Identifier 2005-NM-246-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of the proposed AD. We will consider all comments received by the closing date and may amend the proposed AD in light of those comments.

We will post all comments we receive, without change, to http://dms.dot.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact with FAA personnel concerning this proposed AD. Using the search function of that web site, anyone can find and read the comments in any of our dockets, including the name of the individual who sent the comment (or signed the comment on behalf of an association, business, labor union, etc.). You may review the DOT's complete Privacy Act Statement in the Federal Register published on April 11, 2000 (65 FR 19477-78), or you may visit http://dms.dot.gov.

You may examine the AD docket on the Internet at http://dms.dot.gov, or in person at the Docket Management Facility office between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The Docket Management Facility office (telephone (800) 647-5227) is located on the plaza level of the Nassif Building at the DOT street address stated in the ADDRESSES section. Comments will be available in the AD docket shortly after the Docket Management System receives them.

The FAA has examined the underlying safety issues involved in fuel tank explosions on several large transport airplanes, including the adequacy of existing regulations, the service history of airplanes subject to those regulations, and existing maintenance practices for fuel tank systems. As a result of those findings, we issued a regulation titled “Transport Airplane Fuel Tank System Design Review, Flammability Reduction and Maintenance and Inspection Requirements” (67 FR 23086, May 7, 2001). In addition to new airworthiness standards for transport airplanes and new maintenance requirements, this rule included Special Federal Aviation Regulation No. 88 (“SFAR 88,” Amendment 21-78, and subsequent Amendments 21-82 and 21-83).

Among other actions, SFAR 88 requires certain type design ( i.e., type certificate (TC) and supplemental type certificate (STC)) holders to substantiate that their fuel tank systems can prevent ignition sources in the fuel tanks. This requirement applies to type design holders for large turbine-powered transport airplanes and for subsequent modifications to those airplanes. It requires them to perform design reviews and to develop design changes and maintenance procedures if their designs do not meet the new fuel tank safety standards. As explained in the preamble to the rule, we intended to adopt airworthiness directives to mandate any changes found necessary to address unsafe conditions identified as a result of these reviews.

In evaluating these design reviews, we have established four criteria intended to define the unsafe conditions associated with fuel tank systems that require corrective actions. The percentage of operating time during which fuel tanks are exposed to flammable conditions is one of these criteria. The other three criteria address the failure types under evaluation: single failures, single failures in combination with another latent condition(s), and in-service failure experience. For all four criteria, the evaluations included consideration of previous actions taken that may mitigate the need for further action.

The Joint Aviation Authorities (JAA) has issued a regulation that is similar to SFAR 88. (The JAA is an associated body of the European Civil Aviation Conference (ECAC) representing the civil aviation regulatory authorities of a number of European States who have agreed to co-operate in developing and implementing common safety regulatory standards and procedures.) Under this regulation, the JAA stated that all members of the ECAC that hold type certificates for transport category airplanes are required to conduct a design review against explosion risks.

We have determined that the actions identified in this AD are necessary to reduce the potential of ignition sources inside fuel tanks, which, in combination with flammable fuel vapors, could result in fuel tank explosions and consequent loss of the airplane.

The Direction Ge ne rale de l'Aviation Civile (DGAC), which is the airworthiness authority for France, notified us that an unsafe condition may exist on certain Airbus Model A319-100 and A320-200 series airplanes; and A320-111 airplanes. The DGAC advises that operators have reported that the low-pressure warning for the fuel pumps of the center fuel tank has come on in flight. The probable cause is re-wetting of the low-level sensors for the center tank pumps when the airplane is maneuvered, and when the altitude changes. The warning also may come on when the airplane experiences turbulence. This condition, if not corrected, could cause the fuel pumps to run while dry, which could result in a potential ignition source inside the center fuel tank which, in combination with flammable fuel vapors, could result in a fuel tank explosion and consequent loss of the airplane.

Airbus has issued Service Bulletin A320-28-1059, Revision 06, dated June 29, 2000. The service bulletin describes procedures for modifying the wiring to the fuel pump control of the center fuel tank to “latch” the pumps off when the low-level sensor has been dry for 5 minutes. The modification also includes installing two-pole relays to release the “latch” when the refuel door is opened or when switching from “Auto” to “Manual” mode for center pump operation. Accomplishing the actions specified in the service information is intended to adequately address the unsafe condition. The DGAC mandated the service information and issued French airworthiness directive F-2005-173, dated October 26, 2005, 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. We have examined the DGAC's findings, evaluated all pertinent information, and determined that we need to issue an AD for products of this type design that are certificated for operation in the United States.

Therefore, we are proposing this AD, which would require accomplishing the actions specified in the service information described previously.

The applicability of French airworthiness directive F-2005-173 excludes airplanes on which Airbus Service Bulletin A320-28-1059 was accomplished in service. However, we have not excluded those airplanes from the applicability of this proposed AD; rather, this proposed AD includes a requirement to accomplish the actions specified in that service bulletin. This requirement would ensure that the actions specified in the service bulletin and required by this proposed AD are accomplished on all affected airplanes. Operators must continue to operate the airplane in the configuration required by this proposed AD unless an alternative method of compliance is approved.

This proposed AD would affect about 119 airplanes of U.S. registry. The proposed actions would take about 17 work hours per airplane, at an average labor rate of $65 per work hour. There is no cost for parts. Based on these figures, the estimated cost of the proposed AD for U.S. operators is $131,495, or $1,105 per airplane.

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the Agency's authority.

We are issuing this rulemaking under the authority described in subtitle VII, part A, subpart III, section 44701, “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

We have determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD 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.

For the reasons discussed above, I certify that the 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. 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.

We prepared a regulatory evaluation of the estimated costs to comply with this proposed AD and placed it in the AD docket. See the ADDRESSES section for a location to examine the regulatory evaluation.

Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

We invite you to submit any written relevant data, views, or arguments regarding this proposal. Send your comments to an address listed under ADDRESSES. Include “AD Docket No. 2001-NE-01-AD” in the subject line of your comments. If you want us to acknowledge receipt of your mailed comments, send us a self-addressed, stamped postcard with the docket number written on it; we will date-stamp your postcard and mail it back to you. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of the proposed AD. If a person contacts us verbally, and that contact relates to a substantive part of this proposed AD, we will summarize the contact and place the summary in the docket. We will consider all comments received by the closing date and may amend the proposed AD in light of those comments.

You may examine the AD Docket (including any comments and service information), by appointment, between 8 a.m. and 4:30 p.m., Monday through Friday, except Federal holidays. See ADDRESSES for the location.

On March 25, 2003, we issued AD 2003-07-02, Amendment 39-13098 (68 FR 15937, April 2, 2003). That AD requires removing from service certain turbine rotor components at reduced life limits. That AD resulted from RRC updating material properties and recalculating component life limits. That condition, if not corrected, could result in uncontained turbine rotor failure resulting in an in-flight engine shutdown and possible damage to the airplane.

Since we issued AD 2003-07-02, RRC reevaluated turbine wheel assembly and turbine wheel spacer assembly life limits for 501-D series turboprop engines. RRC changed certain life limits for the 501-D22 series turboprop engines because of recent improvements in how low-cycle-fatigue life is determined. RRC similarly reduced the life limit of 2nd-3rd-stage spacer assemblies, part numbers (P/Ns) 23033464 and 6842683, installed on 501-D22 series turboprop engines.

We have evaluated all pertinent information and identified an unsafe condition that is likely to exist or develop on other products of this same type design. We are proposing this AD, which would require the same actions specified in AD 2003-07-02, but for 501-D22 series turboprop engines, it would add a life limit of 5,200 cycles-in-service for 2nd-3rd-stage spacer assemblies, P/Ns 23033464 and 6842683.

We estimate that this proposed AD would affect 684 engines installed on aircraft of U.S. registry. The proposed action does not impose any additional labor costs if performed at the time of scheduled engine overhaul. Required parts would cost about $45,000 per engine. Based on these figures, we estimate the total cost of the proposed AD to U.S. operators to be $30,780,000.

Paragraph (f) of the current AD, AD 2003-07-02, contains a paragraph pertaining to special flight permits. Even though this proposed AD does not contain a similar paragraph, we have made no changes with regard to the use of special flight permits to operate the airplane to a repair facility to do the work required by this proposed AD. In July 2002, we published a new Part 39 that contains a general authority regarding special flight permits and airworthiness directives; see Docket No. FAA-2004-8460, Amendment 39-9474 (69 FR 47998, July 22, 2002). Thus, when we now supersede ADs we will not include a specific paragraph on special flight permits unless we want to limit the use of that general authority granted in section 39.23.

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the Agency's authority.

We are issuing this rulemaking under the authority described in subtitle VII, part A, subpart III, section 44701, “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

We have determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD 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.

For the reasons discussed above, I certify that the 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. Would not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

We prepared a summary of the costs to comply with this proposal and placed it in the AD Docket. You may get a copy of this summary by sending a request to us at the address listed under ADDRESSES. Include “AD Docket No. 2001-NE-01-AD” in your request.

Accordingly, under the authority delegated to me by the Administrator, the Federal Aviation Administration proposes to amend 14 CFR part 39 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 [CGD13-06-006], 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 the Aids to Navigation and Waterways Management Branch 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 .

The proposed temporary rule would enable the Washington State Department of Transportation (WSDOT), the owner of the bridge, to rehabilitate the structure and manage interruptions to this refurbishment caused by draw openings. The 2-hour notice requirement proposed as a temporary requirement from May 1, 2006, to June 1, 2007, would enable the work to proceed while still providing operational capability. Between January 2, 2007, and March 31, 2007, there is also proposed an 8-week period in which 24 hours notice would be required. The start and end dates are not yet known for this 8-week portion of the project. The 8-week period of 24-hour notice will be considered for approval and rulemaking via a separate temporary deviation. The work includes mechanical and electrical control system improvements, refurbishment of the center lock system, and the replacement of drive motors, the control building and maintenance access platforms. The eight weeks of testing the new control system will necessitate the 24-hour notice for openings.

The Simpson Avenue Bridge in the closed position provides 36 feet of vertical clearance above high water elevation 11.2 feet (datum mean lower low water 0.0). Drawbridge openings are not frequent at this location. The openings are mostly for recreational and commercial fishing vessels, rarely for sailboats and tugs.

The draw opened for vessels 144 times in 2004 for an average of almost 3 openings per week and 131 times in 2005 for a lesser weekly average.

The operating regulations currently in effect for the Simpson Avenue Bridge are found at 33 CFR 117.1047. The regulations require at least one hour notice at all times for draw openings.

One-hour notice is insufficient time for WSDOT and its contractors to restore the bridge to operational condition and to clear equipment from moving parts as needed to open the span. As few vessels require openings, the increased notice of two hours proposed would not seem an unreasonable burden to vessel operators.

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 Homeland Security.

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

With regards to the proposed temporary changes, we reached this conclusion based on the fact that most vessels will be able to plan transits in advance and being locally based will soon adjust to the temporary change.

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.

For the same reasons enumerated above, 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.

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 that they can better evaluate its effects on them and participate in the rulemaking. If the rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact Austin Pratt, Chief, Bridge Section, at (206) 220-7282. The Coast Guard will not retaliate against small entities that question or complain about this rule or any policy or action of the Coast Guard.

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 will not result in such an 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 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. The Administrator of Information and Regulatory Affairs has not designated this as a significant energy action. Therefore, it does not require a Statement of Energy Effects under Executive Order 13211.

The National Technology Transfer and Advancement Act (NTTAA) (15 U.S.C. 272 note) directs agencies to use voluntary consensus standards in their regulatory activities unless the agency provides Congress, through the Office of Management and Budget, with an explanation of why using these standards would be inconsistent with applicable law or otherwise impractical. Voluntary consensus standards are technical standards ( e.g. , specifications of materials, performance, design, or operation; test methods; sampling procedures; and related management systems practices) that are developed or adopted by voluntary consensus standards bodies.

This rule does not use technical standards. Therefore, we did not consider the use of voluntary consensus standards.

We have analyzed this proposed rule under Commandant Instruction M16475.lD, which guides the Coast Guard in complying with the National Environmental Policy Act of 1969 (NEPA)(42 U.S.C. 4321-4370f), and have concluded that there are no factors in this case that would limit the use of a categorical exclusion under section 2.B.2 of the Instruction. Therefore, this proposed rule is categorically excluded, under figure 2-1, paragraph (32)(e) of the Instruction, from further environmental documentation. There are no expected environmental consequences of the proposed action that would require further analysis and documentation.

For the reasons discussed in the preamble, the Coast Guard proposes to temporarily amend 33 CFR part 117 as follows:

On June 30, 2003, in 68 FR 38657, VA published a proposed rule that would have amended subpart D of 38 CFR part 21, regarding approval criteria for branches and extensions of educational institutions. Under the proposed rule, VA would have permitted educational institutions with multi-state campuses to submit required certifications from a centralized location. This document withdraws the proposed rule of June 30, 2003, 68 FR 38657. In its place, we are promulgating a new proposed rule concerning the same subject matter. Interested persons were given 60 days to submit comments on the initial proposed rule and VA considered those comments when drafting this new proposed rule. The differences between the now withdrawn proposed rule and the new proposed rule are explained below. In addition, this document addresses the public comments that VA received in response to the withdrawn proposed rule.

Educational institutions are required, under sections 3675 and 3676, title 38, United States Code (U.S.C.), to maintain certain records in order for their courses to be approved for the training of veterans and other eligible persons under the educational assistance programs VA administers. Generally, these records contain information about students' grades and progress, prior training, charges for tuition and fees, and other administrative and policy records that show the institution satisfactorily meets all the applicable approval criteria in 38 U.S.C. 3675 and 3676. In addition, under 38 U.S.C. 3690(c) (38 U.S.C. 3034 and 10 U.S.C. 16136(b) provide the authority to apply § 3690(c) to educational assistance provided under 38 U.S.C. chapter 30 and 10 U.S.C. chapter 1606), each institution must make its records and accounts pertaining to eligible veterans and eligible persons who receive educational assistance under chapters 30, 31, 32, 35, and 36 of title 38, U.S.C. and chapter 1606 of title 10, U.S.C. available for examination by authorized representatives of the Government. Furthermore, by application of 38 U.S.C. 3684 each educational institution offering a course in which a veteran or eligible person is enrolled under chapter 30, 31, 32, 35, or 36 of title 38, U.S.C., or chapter 1606 of title 10, U.S.C., must report to VA the following information:

• The enrollment of each such veteran or eligible person; and

• The interruption or termination of the education of each such person. The school official that prepares and submits the above required certifications to VA is known as the “Certifying Official.”

Under VA's existing regulations, each educational institution (and generally each of its branches or extensions) must maintain its own administrative records for its students. In addition, a Certifying Official must be present at each location to prepare and submit the required certifications to VA. Over the years, we have referred to the branch's or extension's ability to maintain its own records and to submit its own certifications as the branch or extension having its own “administrative capability.” There are limited exceptions to the rule that each campus or extension must have its own administrative capability. One exception is permitted when the parent facility is within the same State as the branch or extension and the parent facility maintains a centralized recordkeeping system, specifies the branch location when certifying enrollments to VA, and can identify the records of students at each location. Another exception allows the State approving agency to combine the approval of the courses offered at the branch or extension with the courses offered at the parent school if the branch or extension is located within the same State and:

• The course offering at the branch or extension consists of a small number of unit subjects that do not comprise a program of education or a set curriculum large enough to allow pursuit on a continuing basis;

• The course offering at the branch or extension is given on a temporary basis (no more than a few cycles of training); or

• The facilities at the branch or extension contain insufficient space for an administrative capability to be developed.

When an educational institution's branches or extensions meet the requirements of the exceptions in the above paragraph, the Certifying Official is (or Certifying Officials are) located at the parent facility and there is no Certifying Official present at the branch or extension.

VA received comments both in favor of and against the withdrawn proposed rule. Favorable comments were submitted by:

• Three representatives from private for-profit educational institutions that offer courses at multiple locations;

• The Legislative Director for the National Association of Veterans Program Administrators (NAVPA) on behalf of NAVPA (NAVPA is an organization for Certifying Officials); and

• A representative from a state educational institution.

All five of the above individuals have experience with Certifying Official duties.

VA received 24 letters against the proposed rule. One of the 24 letters was from the President of the National Association of State Approving Agencies (NASAA) on behalf of the NASAA membership. Each state has a department or agency known as the State approving agency (SAA). Each SAA is responsible, under 38 U.S.C. 3671, for approving courses for veterans training offered in their state. In addition to the letter from the national association, 19 SAAs representing their individual states sent in letters similar to the letter from NASAA. The remaining four comments against the proposed rule were submitted by:

• A former college vice president;

• The President of the New Jersey Association of Veteran Program Administrators (NJAVPA) on behalf of NJAVPA (NJAVPA is an organization for Certifying Officials in New Jersey);

• A veteran who is a former Certifying Official commenting from a veteran's and a Certifying Official's perspective; and

• A Certifying Official from a community college that has five campuses.

The comments in favor of the withdrawn proposed rule say that the change would improve service to veterans and other eligible individuals. In addition, the educational institution representatives in favor of the withdrawn proposed rule feel that centralizing their Certifying Officials would allow them to better manage their resources. The comments against the withdrawn proposed rule fell into these main categories:

• Decline in service to veterans and other eligible individuals;

• Adversely impacts state recordkeeping laws;

• State approving agencies (SAAs) may not be able to fulfill their contracted responsibilities; and

• Lessens the approval criteria for out-of-state institutions;

We address the comments, both for and against, in the following paragraphs.

A. Some providing comments perceived that the proposed change would adversely impact state recordkeeping laws; that State approving agencies might not be able to fulfill their contracted responsibilities; and that the proposed rule would lessen the approval criteria for out-of-state institutions. Based on comments from the SAAs and NASAA, it was apparent that VA needed to redefine the meaning of “administrative capability.” Our proposed definition of “administrative capability” in the withdrawn proposed rule was that “administrative capability” meant the ability to:

• Maintain all records and accounts that 38 CFR 21.4209 requires;

• Designate and have a certifying official on site; and

• Provide VA with the reports and certifications that 38 CFR 21.4203, 21.4204, 21.7252, and 21.7652 require based on source data on site, without referral to another location of an educational institution for documentation.

It now is apparent that including both the recordkeeping requirement and the VA certification element in the definition of “administrative capability,” clouded our intent that (subject to the existing exceptions in § 21.4266(b) and (c)) only the certification duties could be centralized. To alleviate confusion, we are revising our previously proposed definition of “administrative capability” and also proposing a definition for the term “Certifying Official.” In this document we propose to define “administrative capability” to mean “the ability to maintain all records and accounts that § 21.4209 requires.” We propose to define the term “Certifying Official” to mean “a representative of an educational institution designated to provide VA with the reports and certifications that §§ 21.4203, 21.4204, 21.5810, 21.5812, 21.7152, and 21.7652 require.”

The revision of the withdrawn proposed rule makes it clear that VA is not proposing to change the existing rules for approval of branches and extensions, other than to permit an educational institution with multi-state campuses the option of centralizing its Certifying Official function. Under this proposed rule, each branch or extension still must maintain all records that 38 CFR 21.4209 requires, unless one of the exceptions in § 21.4266(d) applies. Generally, these records contain information about students' grades and progress, prior training, charges for tuition and fees, and other administrative and policy records that show the institution satisfactorily meets all the applicable approval criteria in 38 U.S.C. 3675 and 3676.

In this proposed rule, we clarify, in revised § 21.4266(e), that the State approving agency may combine the approval of courses offered by an extension of an educational institution with the approval of courses offered at the main campus (or the branch campus it is dependent on) only if the extension and the campus it is dependent on are within the same State. (The proposed rule would not change jurisdiction for approval of courses by the State approving agencies (SAAs). For example, an educational institution in New York with a branch in California must have its courses offered in New York approved by the New York SAA and the courses offered at its California branch approved by the California SAA.) The language in the withdrawn proposed rule did not clearly express that combined approvals only apply to locations within the same State. In addition, we clarify in § 21.4266(e) that (in accordance with § 21.4251) an extension of a proprietary educational institution that offers courses that do not lead to a standard college degree is still subject to the minimum period of operation requirements. The information was included because we recently learned that some individuals erroneously concluded the minimum period of operation rule did not apply when approvals were combined.

In this document, we propose adding § 21.4266(f) to clearly express the existing exceptions and the proposed additional exception to the requirement that each location where a course is offered must have a Certifying Official present. In proposed § 21.4266(f)(1) and (f)(2), we show the two exceptions that are permitted under existing regulations. In proposed § 21.4266(f)(3) we show the proposed additional exception that would apply to educational institutions with multi-state campuses who choose to centralize their Certifying Official functions. An educational institution with multi-state campuses may centralize Certifying Official functions if the institution:

• Submits all required reports and certifications via electronic submission through VA's internet-based education certification application;

• Shows the VA facility code for the location that has administrative capability for the location where the student is training when submitting required reports and certifications to VA;

• Provides the Certifying Official full access to the administrative records and accounts that § 21.4209 requires for each student attending the location (or locations) for which the Certifying Official serves as the designated Certifying Official. The records may be originals, certified copies, or in an electronically formatted record keeping system; and

• Designates an employee, at each location of the educational institution that does not have a Certifying Official present, who will serve as a point of contact for the Certifying Official, veterans and other eligible persons, VA, and the SAA. This employee must have access (other than to transmit certifications) to VA's Internet-based education certification application to provide information to VA beneficiaries, the SAA and VA.

Based on the comments we received, we are proposing rules that an educational institution with multi-state campuses must follow if it chooses to centralize its Certifying Official function. These proposed rules are based on concerns of the State approving agency representatives and to ensure program integrity. The new proposed rules the affected educational institutions must follow are explained in the following paragraphs.

1. Submit all required reports and certifications via VA's Internet-based education certification application. The electronic certification application has safeguards to help prevent fraud that are not available in a paperless environment. In addition the application provides VA with a means to extract electronic reports showing all certifications for VA students submitted by an educational institution. VA can extract this information separately for each location. These reports will be helpful for compliance surveys performed by VA or the SAA.

The SAAs expressed concern that their compliance review and supervisory visits would be hampered if the certification documents are maintained at a location outside of their individual states. This proposed rule requires that there must be an employee (at the location that does not have a Certifying Official present) designated to act as a point of contact for VA, the SAA, veterans, reservists, servicemembers and other eligible persons. The point of contact must have access (other than to transmit certifications) to VA's Internet-based education certification application and must allow the SAA or VA representative conducting a site visit to view any VA enrollment certification data on any VA student attending that location. (The data displayed in VA's Internet-based education certification application is not a new collection of information under the Paperwork Reduction Act. The Office of Management and Budget (OMB) approved the collection of enrollment data on VA Form 22-1999 which includes collecting the information via the Internet-based application. The OMB approval number is 2900-0073 and is valid until October 31, 2006.)

2. Show the VA facility code for the location that has administrative capability for the location where the student is training when submitting required reports and certifications to VA. This proposed rule is necessary so that VA can ensure that veterans and other eligible persons are certified properly. The facility code identifies the location that has administrative capability for the location where the student is enrolled. Administrative capability may be at the location the student is attending, or it may exist at another location of the educational institution within the same state. This code tells VA the location of the educational institution in the state where the student is enrolled, and which location of that institution has administrative capability. This will assist in extracting reports for compliance review and program integrity. In addition to program integrity, the Internet-based application uses the facility code to automatically route the electronic certifications to the VA regional processing office (RPO) that has jurisdiction over the location where the student is training. VA also uses the facility code to extract statistical data for administrative purposes. (This is not a new collection of information. Certifying Officials show the VA facility code on all enrollment certifications and reports submitted to VA. We included this proposed rule for clarity so that educational institutions that centralize their Certifying Official functions understand they must continue to reflect the VA facility code for the location that has administrative capability for the location where the student is pursuing the course, rather than the facility code of the centralized location from where the certifications are prepared.)

3. Provide the Certifying Official full access to administrative records and accounts that 38 CFR 21.4209 requires for each location the official serves as the designated Certifying Official. This proposed rule is necessary so that the Certifying Official has proper access to report enrollment information. We clarified this requirement in this proposed rule because many readers of the withdrawn proposed rule thought the withdrawn proposed rule would give educational institutions with multi-state campuses the authority to move all administrative records from branches and extensions to one central location. While the Certifying Officials must have access to the records, it was not our intent to say all administrative records would be maintained at the national level and that the administrative records would not be available at the state level. Many states require the branches to maintain administrative records and accounts locally for state licensure requirements. If an educational institution wants to submit VA certifications from a central location, the institution must ensure the individual submitting those certifications has access to all administrative records and accounts to properly certify enrollment information for veterans and other eligible persons.

B. Service to veterans and other eligible individuals. Those commenting against centralizing the Certifying Official function strongly feel that service will decline because there will not be a designated person on campus to:

• Assist with the certification process;

• Provide guidance on VA benefits;

• Provide information on individual State veterans benefits; or

• Serve as a continuing advocate for veterans' education at the facility.

They are also concerned that submitting certifications to VA from a centralized national location rather than directly from the campus where the student is attending will delay reporting and ultimately delay receipt of benefits. In addition, they feel that veterans might have to incur long distance phone charges and may have trouble accessing staff in the centralized office if the veteran resides in a different time zone than the centralized office. Several individuals expressed concerns that educational institutions may choose to centralize certification duties in an effort to reduce their administrative overhead costs and subsequently not properly staff the office at the central location.

Those in favor of the option of centralizing the Certifying Official function feel service to veterans will improve. In several of the branches and extensions, a Certifying Official performs other duties and does not solely concentrate on veteran's certifications. It is an ancillary duty. Those educational institutions that prefer to centralize their certifying officials state that by allowing them this option they could dedicate staff members who specialize in VA certification. Thus, their quality of service would improve. By centralizing their Certifying Official functions, those institutions feel they could better train and manage their Certifying Officials.

VA currently permits educational institutions offering distance learning courses to submit certifications from a central location for all students enrolled in their distance learning programs, regardless of where the student resides. VA has not experienced major problems with educational institutions that perform certifications for their campuses in their distance learning programs.

Many Certifying Officials serve as knowledgeable source persons for VA education program information and assistance. Several individuals commenting strongly feel that these services will decline if educational institutions are permitted to centralize their Certifying Official functions. It is important to note that although many Certifying Officials serve as knowledgeable source persons and veterans advocates, providing a valuable service to veterans and VA, there is no statutory provision that requires them to do so. In addition, there is no evidence to support the allegation that an educational institution that chooses to centralize its Certifying Official function would stop providing quality service to its veteran customers. The majority of educational institutions that have multi-state campuses are not public institutions. The majority of veterans, servicemembers, reservists, and other eligible persons entitled to VA educational assistance attend public educational institutions. (For example, during fiscal year 2003, 81% of individuals in receipt of Montgomery GI Bill educational assistance attended public educational institutions.) A private educational institution that is not concerned with assisting veterans and other eligible persons, and providing good customer service, risks losing those students as customers.

Some providing comments perceive that only a local Certifying Official would have access to information about State benefits for veterans, servicemembers or other eligible individuals. While it may require some effort to obtain this information, a centralized office can obtain all the information about State benefits from the Internet. Most financial aid offices provide information about the types of funding available for those seeking financial aid. The educational institutions that have expressed an interest in centralizing their Certifying Official function already have a central financial aid office.

Although several individuals commented that nothing replaces “face-to-face” contact, and veterans will lose that benefit if a Certifying Official is not present on each campus, there are also individuals who prefer to conduct their business via email or telephone rather than in person. One SAA official commented that she has seen service decline within her State at some campuses when certification was centralized into one location. (Centralized certification within a State is permitted under existing regulations in certain instances.) She felt the decline was due to the physical separation and that the physical separation resulted in a disconnect between the veteran and the certification process. VA concedes that in some instances the service may decline, but it also may improve. Even under existing regulations, a veteran might receive better service from one campus Certifying Official than he/she would receive from the Certifying Official at another branch of the educational institution. However, VA cannot assume that all service would improve or all service would decline if centralized certification were permitted for educational institutions that have campuses in more than one state.

The school representatives interested in centralizing their Certifying Official functions stated, in their official comments on the withdrawn proposed rule, that they would still provide face-to-face representation at all their locations. It is only the individuals who certify and submit reports that they wish to centrally locate. One school representative stated it would be similar to the way they centrally administer Federal financial aid. The central location processes the paperwork and the local campus counsels the students and provides general information about aid that is available. In this proposed rule, we added a proposed requirement that there must be a designated point-of-contact at each location that does not have a Certifying Official present who will be available for VA, the Certifying Official, the SAA, and the student.

C. Several SAAs and NASAA suggested having a requirement that each educational institution that centralizes its Certifying Official function, must:

• Have a knowledgeable point-of-contact for student, VA, and SAA contact purposes at each approved location without a Certifying Official present;

• Grant access to all student records, including VA certification documents, to the point-of-contact;

• Maintain a list of everyone who has applied for, received, or expresses a formal interest in using GI Bill benefits;

• Submit certifications to the VA Regional Processing Office that has jurisdiction of the State or territory in which the student is enrolled;

• Maintain adequate toll free numbers or lines for use by students with the capability to measure missed calls;

• Maintain adequate full-time campus personnel at the location the Certifying Official is present to ensure:

○ That certifications and changes are timely submitted

○ Student progress is monitored

○ Course-to-program applicability is monitored; and

○ Calls from veterans and SAAs are answered timely

In addition, the SAA's suggested that VA:

• Permit centralized certification on a test basis;

• Establish a minimum ratio of veteran students to campus personnel;

• Establish a maximum timeframe to submit enrollment certifications (recommended a two-week timeframe); and

• Conduct an annual survey the first five years after the final rule permitting centralized certification to measure customer satisfaction with respect to centralized certification.

Several of the suggestions would require VA to impose more rules on educational institutions that choose to centralize their Certifying Official functions than on those educational institutions that choose not to centralize. We do not believe, however, that it would be equitable for VA to require that only educational institutions that choose to centralize their Certifying Official functions would be subject to employee/veteran ratios, timeframe measurements, mandatory telephone line requirements; and maintenance of lists of persons interested in GI Bill benefits. VA does not see a need to regulate these matters. When problems arise with the certification process, VA's Education Liaison Representatives (ELR), the SAA official, the Certifying Official, and the educational institution work together to resolve the issues. In those instances where liaison assistance and/or training assistance do not resolve the issues, the approval is withdrawn.

Educational institutions, whether opting to centralize their Certifying Official functions or not, will continue to submit enrollment information to the VA regional processing office (RPO) that has jurisdiction over the campus that has administrative capability for the location where the student is enrolled. This will be controlled automatically in VA's internet-based education certification application by routing certifications to the RPO by the VA facility code identifier.

VA is exploring expanding our annual customer satisfaction survey of education assistance recipients to include questions that cover the certification process for new and continuing students.

In this document we propose a rule, for those educational institutions opting to centralize their Certifying Official functions, that they must designate a point-of-contact at each branch or extension location that does not have a Certifying Official present. This was suggested by the SAAs. This will ensure veterans and other eligible persons know who will assist them as well as provide VA and the SAAs a point-of-contact for compliance reviews.

VA also received a comment expressing concern that veterans would not be able to receive an advance payment if educational institutions centralize the Certifying Official function. We do not find that this would occur. An advance payment is a payment that equals the monthly amount of educational assistance due for the month in which the course begins and the following month. The check is made out to the student and is mailed to the school in advance of the start of the term. Students will still be able to receive an advance payment at the location that has administrative capability for the location where they are training. VA determines where to send the payment by using the VA facility code as an identifier. Less than 10% of students receive advance payments. Most students prefer VA to send payments electronically to their individual bank accounts.

The SAAs expressed concerns that permitting educational institutions to centralize their Certifying Official functions may lead to incidents of fraud, waste, and abuse. VA carefully considered these concerns. By adding the proposed rule that those who centralize must use VA's Internet-based education certification application, VA can monitor certification submissions for each location by reports extracted from the application. VA can provide SAAs with listings of students enrolled and certified for the location that the SAA is visiting to assist in the review. In addition, the SAA may view individual enrollment records in VA's Internet-based education certification application during a supervisory visit at a location that does not have a Certifying Official present. The designated point of contact will have access to the Internet-based education certification application and allow the SAA to view enrollment data stored in the application. The ability to review the enrollments will also help VA employees who conduct compliance reviews to ensure veterans and other eligible persons are properly certified.

In addition to the reports, the existing provisions in 38 CFR 21.4210 permit VA to suspend or discontinue payments of educational assistance to all veterans, servicemembers, reservists, and other eligible persons and to disapprove further enrollments or reenrollments if evidence supports a substantial pattern of veterans, servicemembers, reservists, or other eligible persons who are receiving educational assistance to which they are not entitled because the educational institution offering the course has violated recordkeeping or reporting requirements. If VA obtained evidence of substantial violations of recordkeeping or reporting, VA could suspend and discontinue payments to students at all locations served by the centralized Certifying Official (or Officials). The rules in § 21.4210 provide VA enough latitude, if there were substantial problems, that offering centralized certification on a test basis is not necessary.

Some SAAs are concerned that, without a Certifying Official present at each location, reductions and terminations will not be reported timely and thus more overpayments will occur. Whether the Certifying Officials are centralized or not, they each must follow the same reporting and certification regulations. VA will not lessen those requirements just because an educational institution decided to centralize. Again, VA can suspend or discontinue payment of educational assistance to all VA students enrolled at all locations for violations of reporting and certification regulations. Additionally, the student is still responsible to report his or her enrollment changes directly to VA. Students in receipt of benefits under the Montgomery GI Bill—Active Duty and the Montgomery GI Bill—Selected Reserve programs must verify their enrollment monthly. The student is required to report changes in enrollment as part of the verification. VA does not make payment under these two programs until the student's verification is received.

It is important to note that the proposed rule only would permit, not require, educational institutions with multi-state campuses to centralize their Certifying Official functions. Under existing rules, educational institutions with campuses within the same State (and who have a centralized recordkeeping system) may centralize their Certifying Official functions. Many educational institutions will have no interest in changing the way they currently do business, especially those locations that have many veterans, servicemembers, or reservists enrolled. This proposed rule provides more flexibility to an educational institution that has many campuses, and that may not have significant veteran enrollment.

This document contains a provision in proposed 38 CFR 21.4266(f)(3)(i) that would require an educational institution to submit required certifications electronically using VA's Internet-based education certification application if the institution chooses to centralize its Certifying Official function. The proposed requirement is a collection of information under the Paperwork Reduction Act (44 U.S.C. 3501-3521) that would need approval by the Office of Management and Budget (OMB). Accordingly, under section 3507(d) of the Act, VA has submitted a copy of this rulemaking action to OMB for review.

OMB assigns a control number for each collection of information it approves. VA may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number.

VA has approval to collect the information either by paper or electronically under OMB Control No. 2900-0073 (Enrollment Certification). Under the existing approval, educational institutions choose whether to submit their certifications by paper or electronically. The proposed requirement in 38 CFR 21.4266(f)(3) would require electronic submission by those educational institutions centralizing their Certifying Official functions and would require revision to the existing approval. The existing OMB approval expires October 31, 2006. In a separate document VA is requesting an extension of approval. That document will be published in the Federal Register in the near future and will provide the public an opportunity to comment on the collection.

The Unfunded Mandates Reform Act of 1995 requires, at 2 U.S.C. 1532, that agencies prepare an assessment of anticipated costs and benefits before issuing any rule that may result in an expenditure by State, local, or tribal governments, in the aggregate or by the private sector, of $100 million or more (adjusted annually for inflation) in any given year. This proposed rule would have no such effect on State, local, or tribal governments, or the private sector.

Executive Order 12866 directs agencies to assess all costs and benefits of available regulatory alternatives and, when regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity). The Order classifies a rule as a significant regulatory action requiring review by the Office of Management and Budget if it meets any one of a number of specified conditions, including: Having an annual effect on the economy of $100 million or more, creating a serious inconsistency or interfering with an action of another agency, materially altering the budgetary impact of entitlements or the rights of entitlement recipients, or raising novel legal or policy issues. VA has examined the economic, legal, and policy implications of this proposed rule and has concluded that it is a significant regulatory action because it raises novel policy issues.

The Secretary of Veterans Affairs (VA) hereby certifies that this proposed rule will not have a significant economic impact on a substantial number of small entities as they are defined in the Regulatory Flexibility Act, 5 U.S.C. 601-612. The proposed rule will affect only those educational institutions that choose to centralize their Certifying Official functions. Centralizing certifying functions would be at the option of the educational institution should they desire to consolidate their certifying functions. Some educational institutions with multi-state campuses requested VA expand current regulations to permit them to centralize their Certifying Official functions. Those education institutions believe centralizing their functions will allow them to better manage and allocate their resources. Existing VA regulations do not permit educational institutions with multi-state campuses to centralize their Certifying Official functions. The economic effect on small entitles would essentially entail a cost savings associated with the consolidation of certifying functions. By centralizing the functions, the institutions desiring this option say they could dedicate less full-time employees to the centralizing duties and at the same time have those employees specialize. According to the staff members of educational institutions interested in centralizing, their training costs would be reduced by having a centralized staff dedicated to VA certification and serving veterans. The option in this proposed rule that would liberalize current regulations to permit centralizing the certification functions would not impact a substantial number of small entities. Of the 6,900 post secondary educational institutions approved by Department of Education for Title IV funds, only 3 of those institutions commented on the previous proposed rule that would have permitted centralized certification. Less than 10 educational institutions have expressed interest in centralized certification, but those that have are very interested in the proposed change that would allow them the option. Pursuant to 5 U.S.C. 605(b), this proposed rule, therefore, is exempt from the initial and final regulatory flexibility analyses requirements of sections 603 and 604.

The Catalog of Federal Domestic Assistance numbers and titles for the programs affected by this proposed rule are 64.117, Survivors and Dependents Educational Assistance; 64.120, Post-Vietnam Era Veterans' Educational Assistance; and 64.124, All-Volunteer Force Educational Assistance. This proposed rule also affects the Montgomery GI Bill Selected Reserve program. There is no Catalog of Federal Domestic Assistance number for the Montgomery GI Bill Selected Reserve program.

For the reasons set out above, 38 CFR part 21 (subpart D) is proposed to be amended as follows.

In the final rules section of this Federal Register , EPA is approving the State's SIP submittal as a direct final rule without prior proposal because the Agency views this as a noncontroversial submittal and anticipates no adverse comments. A detailed rationale for the approval is set forth in the direct final rule. If no adverse comments are received in response to this action, no further activity is contemplated. If EPA receives relevant adverse comments, the direct final rule will be withdrawn and all public comments received will be addressed in a subsequent final rule based on this proposed rule. EPA will not institute a second comment period. Any parties interested in commenting on this action should do so at this time. Please note that if EPA receives adverse comment on an amendment, paragraph, or section of this rule and if that provision may be severed from the remainder of the rule, EPA may adopt as final those provisions of the rule that are not the subject of an adverse comment.

For additional information, see the direct final rule which is located in the Rules section of this Federal Register.

Table of Contents I. Background and Purpose A. What Is the NESHAPs Program? B. What Are the Requirements for This Partial Approval and Delegation? C. What Is the History of This Partial Approval and Delegation? D. How Has WDOH Satisfied the Requirements for Partial Approval and Delegation of the Radionuclide NESHAPs? II. EPA Action A. What Authorities Are Included in This Partial Approval and Delegation to WDOH? B. What Authorities Are Excluded From This Partial Approval and Delegation to WDOH? III. Implications A. How Will This Partial Approval and Delegation Affect the Regulated Community? B. Where Will the Regulated Community Send Notifications and Reports? C. What Are WDOH's Reporting Obligations? D. What Is the Effect of Other State Laws Regulating Radionuclide Air Emissions? E. How Will WDOH Receive Partial Approval and Delegation of Newly Promulgated and Revised Radionuclide NESHAPs? F. How Frequently Should WDOH Update Its Partial Approval and Delegation? G. How Will This Delegation Affect Indian Country? IV. Summary of Proposed Action V. Statutory and Executive Order Reviews I. Background and Purpose A. What Is the NESHAPs Program?

Hazardous air pollutants are defined in the Act as pollutants that threaten human health through inhalation or other type of exposure. These pollutants are commonly referred to as “air toxics” or “hazardous air pollutants” and are listed in section 112(b)(1) of the Act. National Emission Standards for Hazardous Air Pollutants or NESHAPs control emissions of hazardous air pollutants from specific source categories and implement the requirements of section 112 of the Act. These standards are found in 40 CFR parts 61 and 63.

Section 112(l) of the Act authorizes EPA to approve State and local air toxics programs or rules such that these agencies can accept full or partial delegation of authority for implementing and enforcing the NESHAPs. Typically, a State or local agency requests delegation based on Federal rules adopted unchanged into State or local rules.

Requirements for partial approval and delegation of NESHAPs adopted unchanged into State or local law are set forth in 40 CFR 63.91(d). This type of delegation is referred to as “straight delegation.” There are two basic requirements for straight delegation. First, the requesting agency must show it has adequate authority and resources to implement and enforce the NESHAPs. This criterion must be met for straight delegation as well as for all other types of delegation under section 112(l). Second, in the case of straight delegation, the requesting agency must show that it has adopted the Federal NESHAPs for which it is requesting delegation unchanged into State or local law.

There are two ways a State or local agency can show it has adequate authority and resources to implement and enforce the requested NESHAPs. First, the requesting agency can show that it has received from EPA final or interim approval of its operating permit program under title V of the Clean Air Act. This is because the authority and enforcement requirements for approval of a title V program are equivalent to the requirements for NESHAPs delegation found in 40 CFR 63.91(d). Moreover, EPA approval of a title V program already confers the responsibility to implement and enforce all requirements applicable to major sources and certain other sourcof section 112.

A requesting agency that does not have an EPA-approved title V program can request delegation by showing it has the authority necessary to implement and enforce the NESHAPs, it has the resources and ability to carry out this responsibility, and it is capable of assuring expeditious compliance by sources, all as provided in 40 CFR 63.91(d)(3)(i) through (v). Once a requesting agency demonstrates that it meets the approval criteria, it need only reference that demonstration and reaffirm it still meets the criteria in future requests for updated delegation of section 112 standards.

With respect to radionuclide emissions from licensees of the Nuclear Regulatory Commission or licensees of Nuclear Regulatory Commission Agreement States which are subject to 40 CFR part 61, subparts I, T, or W, a State may request that EPA approve delegation of implementation and enforcement of the Federal standard pursuant to 40 CFR 63.91, but no changes or modifications in the form or content of the standard will be approved pursuant to 40 CFR 63.92, 63.93, 63.94, or 63.97. See 40 CFR 63.90(f). In other words, the only approval option for these NESHAPs is straight delegation.

EPA is authorized to grant, with the State's consent, partial approval to a State request for delegation where the State's legal authorities substantially meet the requirements of 40 CFR 63.91(d)(3)(i) but are not fully approvable. Section 63.91(d)(3)(i) requires the State to show it has enforcement authorities meeting the requirements of 40 CFR 70.11 (the enforcement authorities of the title V program), the authority to request information from regulated sources regarding their compliance status, and the authority to inspect sources and any records required to determine a source's compliance status. In addition, if a State delegates authorities to a local agency and the local agency does not have authorities that meet the requirements of 40 CFR 70.11, the State must retain enforcement authority. In the case of a partial approval, EPA will continue to implement and enforce those authorities under 40 CFR 63.91(d)(3)(i) that are not approved.

EPA granted interim delegation of 40 CFR part 61, subparts H and I, to WDOH on August 2, 1995. See 60 FR 39263. That interim delegation expired by its terms on November 9, 1996. Subsequent to that delegation, EPA revised 40 CFR part 61, subparts H and I on September 9, 2002. See 67 FR 57166 and 57167, respectively. In addition, EPA raised a concern regarding whether Washington's Regulatory Reform Act of 1995, RCW Ch. 43.05, conflicted with requirements for delegation or approval of Clean Air Act programs to WDOH. WDOH revised its regulations to incorporate by reference the updated NESHAP standards and obtained a determination that RCW Ch. 43.05 does not apply to the Federally-delegated Radionuclide NESHAPs.

In a letter dated October 6, 2004, WDOH submitted a new request for delegation of subparts H and I, as well as for 40 CFR part 61, subparts B, K, Q, R, T, and W. EPA considered WDOH's October 2004 delegation request, but determined that WDOH had not adopted into State law the general provisions for part 61 in 40 CFR part 61, subpart A, and the construction/modification provisions of Subpart H, which are essential for full implementation and enforcement of the Radionuclide NESHAPs. EPA therefore did not proceed with the October 2004 delegation request.

Since then, WDOH has revised its regulations to fully incorporate by reference all of the Radionuclide NESHAPs, including 40 CFR part 61, subpart A. On June 6, 2005, WDOH submitted a new request for delegation of authority to implement and enforce 40 CFR part 61, subparts A, B, H, I, K, Q, R, T, and W, as in effect on July 1, 2004. WDOH supplemented this request with a letter from the Washington Attorney General's Office dated December 14, 2005 regarding WDOH's authority to implement and enforce the radionuclides NESHAP. In addition, WDOH clarified on December 20, 2005 that it would consent to partial delegation in the event EPA determined that WDOH did not have all the enforcement authorities required by 40 CFR 63.91(d)(3)(i) for full approval.

Although WDOH works with the Washington Department of Ecology (Ecology) in issuing Title V permits to radionuclide sources, Ecology, not WDOH is the EPA-approved Title V permitting program for such sources. Therefore, EPA must determine whether WDOH meets the criteria in 40 CFR 63.91(d)(3)(i) through (v).

Based on WDOH's June 6, 2005 request for delegation and supporting documentation, EPA has determined that WDOH meets the criteria for partial approval and straight delegation of the Radionuclide NESHAP. Specifically, WDOH has submitted a letter from the Washington Attorney General's Office dated December 14, 2005 stating that WDOH has the enforcement, inspection, and information gathering authority required by 40 CFR 63.91(d)(3)(i) with one exception. The exception is that, although WDOH has the authority required by 40 CFR 70.11(a)(3)(ii) and 63.91(d)(3)(i) to recover criminal penalties for knowing violations of the Radionuclide NESHAPs, WDOH does not currently have express authority to recover criminal fines for knowingly making a false material statement or knowingly rendering inadequate any required monitoring device or method, as required by 40 CFR 70.11(a)(3)(iii) and 63.91(d)(3)(i). The letter states that WDOH intends to include express prohibitions against these actions in the near future.

WDOH has also submitted copies of State statutes, regulations, and requirements that grant WDOH authority to implement and enforce the Radionuclide NESHAPs.

In addition, WDOH has submitted a demonstration that it has adequate resources to implement and enforce all aspects of the Radionuclide NESHAPs. This is especially important with respect to the Radionuclide NESHAPs. EPA and other Federal agencies have traditionally played the primary role in regulating radionuclide air emissions, both because radiation is not a “traditional” hazardous air pollutant and because very few State and local agencies have developed the technical expertise to independently implement the Radionuclide NESHAPs. WDOH, however, has a long history of regulating large sources of radionuclide air emissions in the State of Washington, in particular, the Department of Energy's Hanford site near Richland, Washington. The submittal also includes a plan for assuring expeditious implementation and enforcement of the Radionuclide NESHAPs.

Finally, WDOH has adopted without change or modification all of the provisions of the Radionuclide NESHAPs, 40 CFR part 61, subparts A, B, H, I, K, Q, R, T, and W, as in effect on July 1, 2004. WDOH does, as a matter of State law, have additional regulations and requirements that sources of radionuclide air emissions must meet. As discussed below, however, those additional authorities and requirements are not part of this partial delegation.

Except as provided in Section II.B., EPA is delegating to WDOH authority to implement and enforce 40 CFR part 61, subparts A, B, H, I, K, Q, R, T, and W, as in effect on July 1, 2004. NESHAPs that are promulgated or revised substantively after July 1, 2004 are not delegated to WDOH. These remain the responsibility of EPA.

Included as part of the delegation is the authority to approve:

1. “Minor changes to monitoring,” including the use of the specified monitoring requirements and procedures with minor changes in methodology as described in 40 CFR 61.14(g)(1)(i);

2. “Intermediate changes to monitoring”;

3. “Minor changes to recordkeeping/reporting”;

4. “Minor changes in test methods,” including the use of a reference method with minor changes in methodology as described in 40 CFR 61.13(h)(1)(i);

5. Waiver of the requirement for emission testing because the owner or operator of a source has demonstrated by other means to WDOH's satisfaction that the source is in compliance with the standard as described in 40 CFR 61.13(h)(1)(iii).

For purposes of this paragraph, the terms in quotations have the meaning assigned to them in 40 CFR 63.90.

EPA is not delegating authorities under 40 CFR part 61 that specifically indicate they cannot be delegated, that require rulemaking to implement, that affect the stringency of the standard, or where national oversight is the only way to ensure national consistency. Table 1 below identifies the specific authorities within 40 CFR part 61, subparts A, B, H, I, K, Q, R, T, and W that EPA is specifically excluding from this delegation.

In addition, because WDOH does not currently have express authority to recover criminal fines for knowingly making a false material statement, representation, or certificate in any form, notice or report or knowingly rendering inadequate any required monitoring device or method, as required by 40 CFR 70.11(a)(3)(iii) and 40 CFR 63.91(d)(3)(i), EPA will continue to retain primary authority to implement and enforce these authorities. This is the basis for partial rather than full approval.

Once a State or local agency has been delegated the authority to implement and enforce a NESHAP, they become the primary point of contact with respect to that NESHAP. Generally speaking, the transfer of authority from EPA to WDOH in this delegation changes EPA's role from primary implementer and enforcer to overseer.

As a result, if this partial approval and delegation is finalized, sources in Washington to the delegated Radionuclide NESHAPs should direct questions and compliance issues to WDOH. For authorities that are NOT delegated (those noted in Section II.B. above), affected sources should continue to work with EPA as their primary contact and submit materials directly to EPA. In such cases, affected sources should copy WDOH on all submittals, questions, and requests.

EPA will continue to have primary responsibility to implement and enforce Federal regulations that do not have current State or local agency delegations.

If this partial approval and delegation is finalized, sources subject to the delegated NESHAPs will be required to send required notifications, reports and requests to WDOH for WDOH's action and to provide copies to EPA. For authorities that are excluded from this delegation, sources should continue to send required notifications, reports, and requests to EPA and to provide copies to WDOH.

WDOH must maintain a record of all approved alternatives to all monitoring, testing, recordkeeping, and reporting requirements and provide this list of alternatives to EPA at least semi-annually, or at a more frequent basis if requested by EPA. EPA may audit the WDOH-approved alternatives and disapprove any that it determines are inappropriate, after discussion with WDOH. If changes are disapproved, WDOH must notify the source that it must revert to the original applicable monitoring, testing, recordkeeping, and/or reporting requirements (either those requirements of the original section 112 requirements, the alternative requirements approved under this subpart, or the previously approved site-specific alternative requirements). Also, in cases where the source does not maintain the conditions which prompted the approval of the alternatives to the monitoring testing, recordkeeping, and/or reporting requirements, WDOH must require the source to revert to the original monitoring, testing, recordkeeping, and reporting requirements, or more stringent requirements, if justified.

This partial approval and delegation delegates to WDOH authority to implement and enforce 40 CFR part 61, subparts A, B, H, I, K, Q, R, T, and W, as in effect on July 1, 2004. The partial approval and delegation does not extend to any additional State standards, including other State standards regulating radionuclide air emissions. However, if both a State or local regulation and a Federal regulation apply to the same source, both must be complied with, regardless of whether the one is more stringent than the other, pursuant to the requirements of section 116 of the Clean Air Act.

WDOH may receive partial approval and delegation of newly promulgated or revised Radionuclide NEHAPs by the following streamlined process: (1) WDOH will send a letter to EPA requesting delegation for such new or revised NESHAPs which WDOH has adopted by reference into Washington regulations; (2) EPA will send a letter of response back to WDOH granting partial approval of the delegation request (or explaining why EPA cannot grant the request), and publish only EPA's approval in the Federal Register ; (3) WDOH does not need to send a response back to EPA.

WDOH is not obligated to request or receive future delegations. However, EPA encourages WDOH, on an annual basis, to revise its rules to incorporate by reference newly promulgated or revised Radionuclide NESHAPs and request updated delegation. Preferably, WDOH should adopt Federal regulations effective July 1, of each year; this corresponds with the publication date of the Code of Federal Regulations (CFR).

This partial approval and delegation to WDOH to implement and enforce the Radionuclide NESHAPs does not extend to sources or activities located in Indian country, as defined in 18 U.S.C. 1151. “Indian country” is defined under 18 U.S.C. 1151 as: (1) All land within the limits of any Indian reservation under the jurisdiction of the United States Government, notwithstanding the issuance of any patent, and including rights-of-way running through the reservation; (2) all dependent Indian communities within the borders of the United States, whether within the original or subsequently acquired territory thereof, and whether within or without the limits of a State; and (3) all Indian allotments, the Indian titles to which have not been extinguished, including rights-of-way running through the same. Under this definition, EPA treats as reservations trust lands validly set aside for the use of a Tribe, even if the trust lands have not been formally designated as a reservation. Consistent with previous Federal program approvals or delegations, EPA will continue to implement the NESHAPs in Indian country, because WDOH has not adequately demonstrated its authority over sources and activities located within the exterior boundaries of Indian reservations and other areas in Indian country.

EPA proposes to grant partial approval to WDOH's request for program approval and delegation of authority to implement and enforce the Radionuclide NESHAPs. Pursuant to the authority of section 112(l) of the Act, this partial approval is based on EPA's finding that State law, regulations, and agency resources meet the requirements for partial program approval and delegation of authority specified in 40 CFR 63.91 and applicable EPA guidance.

The purpose of this partial approval and delegation is to acknowledge WDOH's ability to implement a Radionuclide NESHAPs program and to transfer primary implementation and enforcement responsibility for this program from EPA to WDOH. Although EPA will look to WDOH as the lead for implementing delegated Radionuclide NESHAPs for its sources, EPA retains authority under Section 113 of the Act to enforce any applicable emission standard or requirement, if needed. With partial program approval, WDOH may request newly promulgated or revised Radionuclide NESHAPs by way of a streamlined process.

Under Executive Order 12866 (58 FR 51735, October 4, 1993), this action is not a “significant regulatory action” and therefore is not subject to review by the Office of Management and Budget. For this reason, this action is also not subject to Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001). This action merely approves State law as meeting Federal requirements and imposes no additional requirements beyond those imposed by State law. Accordingly, the Administrator certifies that this rule will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ). Because this rule approves pre-existing requirements under State law and does not impose any additional enforceable duty beyond that required by State law, it does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4).

The rule also does not have Tribal implications because it will 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, as specified by Executive Order 13175 (65 FR 67249, November 9, 2000). Consistent with EPA policy, however, EPA nonetheless initiated consultation with representatives of tribal governments in the process of developing this proposal to permit them to have meaningful and timely input into its development. In the spirit of Executive Order 13175, and consistent with EPA policy to promote communications between EPA and tribal governments, EPA specifically solicits additional comment on this proposed rule from tribal officials.

This action also does not have Federalism implications because it does not have substantial direct effects 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, as specified in Executive Order 13132 (64 FR 43255, August 10, 1999). This action merely approves a State request to receive delegation of certain Federal standards, and does not alter the relationship or the distribution of power and responsibilities established in the Clean Air Act. This rule also is not subject to Executive Order 13045 “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997), because it is not economically significant.

In reviewing program approval and delegation submissions, EPA's role is to approve submissions provided that they meet the criteria of the Clean Air Act. In this context, in the absence of a prior existing requirement for the State to use voluntary consensus standards (VCS), EPA has no authority to disapprove a delegation submission for failure to use VCS. It would thus be inconsistent with applicable law for EPA to use VCS in place of a delegation submission that otherwise satisfies the provisions of the Clean Air Act. Thus the requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) do not apply. This rule does not impose an information collection burden under the provisions of Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ).

For further information, please see the information provided in the direct final action that is located in the “Rules and Regulations” section of this Federal Register publication.

Entities potentially affected by this action include those involved with the production and importation of conventional gasoline motor fuel. Regulated categories and entities affected by this action include:

This table is not intended to be exhaustive, but rather provides a guide for readers regarding entities likely to be regulated by this action. This table lists the types of entities that EPA is now aware could be potentially regulated by this action. Other types of entities not listed in the table could also be regulated. To determine whether your entity is regulated by this action, you should carefully examine the applicability criteria of Part 80, subparts D, E and F of title 40 of the Code of Federal Regulations. If you have any question regarding applicability of this action to a particular entity, consult the person in the preceding FOR FURTHER INFORMATION CONTACT section above.

1. Submitting CBI. Do not submit this information to EPA through http://www.regulations.gov or e-mail. Clearly mark the part or all of the information that you claim to be CBI. For CBI information in a disk or CD ROM that you mail to EPA, mark the outside of the disk or CD ROM as CBI and then identify electronically within the disk or CD ROM the specific information that is claimed as CBI). In addition to one complete version of the comment that includes information claimed as CBI, a copy of the comment that does not contain the information claimed as CBI must be submitted for inclusion in the public docket. Information so marked will not be disclosed except in accordance with procedures set forth in 40 CFR Part 2.

2. Tips for Preparing Your Comments. When submitting comments, remember to:

1. Identify the rulemaking by docket number and other identifying information (subject heading, Federal Register date and page number).

2. Follow directions—The agency may ask you to respond to specific questions or organize comments by referencing a Code of Federal Regulations (CFR) part or section number.

3. Explain why you agree or disagree; suggest alternatives and substitute language for your requested changes.

4. Describe any assumptions and provide any technical information and/or data that you used.

5. If you estimate potential costs or burdens, explain how you arrived at your estimate in sufficient detail to allow for it to be reproduced.

6. Provide specific examples to illustrate your concerns, and suggest alternatives.

7. Explain your views as clearly as possible, avoiding the use of profanity or personal threats.

8. Make sure to submit your comments by the comment period deadline identified.

3. Docket Copying Costs. You may be charged a reasonable fee for photocopying docket materials, as provided in 40 CFR part 2.

Section 211(k) of the 1990 Amendments to the CAA required reformulated gasoline (RFG) to contain oxygen in an amount that equals or exceeds 2.0 weight percent. CAA Section 211(k)(2)(B). Accordingly, EPA's current regulations require RFG refiners, importers and oxygenate blenders to meet a 2.0 or greater weight percent oxygen content standard. 40 CFR 80.41. Recently, Congress passed legislation which amended Section 211(k) of the CAA to remove the RFG oxygen requirement. 1 The Energy Act specified that this change was to be immediately effective in California, and that it would be effective 270 days after enactment for the rest of the country. To make the fuels rules consistent with the current Section 211(k), today's rule would modify the RFG regulations to remove the oxygen standard in § 80.41 for gasoline produced and sold for use in California. 2 (Modifications to the RFG regulations to remove the oxygen standard for gasoline produced and sold for use in all areas of the country are being published in a separate rulemaking.)

Today's rule also would modify other provisions of the RFG regulations which relate to the removal of the oxygen content requirement for gasoline produced and sold for use in California. The modifications to the affected sections are listed in the following table:

As discussed above, Section 211(k) required RFG to contain a minimum of 2.0 weight percent oxygen, and the current fuels regulations reflect this requirement. Refiners, importers and oxygenate blenders have used different oxygenates to meet this requirement. RFG that contains ethanol must be specially blended to account for the RVP “boost” that ethanol provides, and the consequent possibility of increased VOC emissions. EPA's existing regulations prohibit the commingling of ethanol-blended RFG with RFG containing other oxygenates because the non-ethanol RFG is typically not able to be mixed with ethanol and still comply with the VOC performance standards. Since all RFG is currently required to contain oxygen, the regulations do not now contain a prohibition against combining ethanol-blended RFG with non-oxygenated RFG. With the removal of the oxygen content requirement for RFG, EPA expects that refiners and importers will be producing some RFG without oxygen and some with ethanol or other oxygenates. Mixing ethanol-blended RFG with non-oxygenated RFG has the same potential to create an RVP “boost” for the non-oxygenated gasoline as mixing ethanol-blended RFG with RFG blended with other oxygenates. This is of particular concern regarding RFG because most refiners and importers comply with the RFG VOC emissions performance standard on an annual average basis calculated at the point of production or importation. All downstream parties are prohibited from marketing RFG which does not comply with a less stringent downstream VOC standard. However, even though the combined gasoline may meet the downstream VOC standard, combining ethanol-blended RFG with non-oxygenated RFG may cause some gasoline to have VOC emissions which are higher on average than the gasoline as produced or imported. Thus, with regard to gasoline produced and sold for use in California, today's rule would extend the commingling prohibition currently in the fuels regulations to include a prohibition against combining VOC-controlled ethanol-blended RFG with VOC-controlled non-oxygenated RFG during the period January 1 through September 15, with one exception, described below.

The Energy Act contains a provision which specifically addresses the combining of ethanol-blended RFG with non-ethanol-blended RFG. 4 Under this new provision, retail outlets are allowed to sell non-ethanol-blended RFG which has been combined with ethanol-blended RFG under certain conditions. First, each batch of gasoline to be blended must have been “individually certified as in compliance with subsections (h) and (k) prior to being blended.” Second, the retailer must notify EPA prior to combining the gasolines and identify the exact location of the retail outlet and specific tank in which the gasoline is to be combined. Third, the retailer must retain, and, upon request by EPA, make available for inspection certifications accounting for all gasoline at the retail outlet. Fourth, retailers are prohibited from combining VOC-controlled gasoline with non-VOC-controlled gasoline between June 1 and September 15. Retailers are also limited with regard to the frequency in which batches of non-ethanol-blended RFG may be combined with ethanol-blended RFG. Retailers may combine such batches of RFG a maximum of two periods between May 1 and September 15. Each period may be no more than ten consecutive calendar days. This proposed rule would implement this provision of the Energy Act for California gasoline. A separate rule will implement this provision for the rest of the country, with a later effective date coinciding with the removal of the RFG oxygen content requirement for such areas.

This new provision will typically be used by retail outlets to change from the use of RFG containing ethanol to RFG not containing ethanol or vice versa. (Such a change is usually referred to as a “tank turnover.”) Such blending can result in additional VOC emissions, perhaps resulting in gasoline that does not comply with downstream VOC standards. The Energy Act is unclear as to when the gasoline in the tank where blending occurs must be in compliance with the downstream VOC standard.

EPA has already promulgated regulations setting out a methodology for making tank turnovers. 40 CFR 80.78(a)(10). EPA believes retailers and wholesale purchaser-consumers should have additional flexibility during the time that they are converting their tanks from one type of RFG to another, while minimizing the time period during which non-compliant gasoline is present in their tanks and being sold. Today's changes would provide additional flexibility to the regulated parties by interpreting the Energy Act to provide retailers and wholesale purchaser-consumers with relief from compliance with the downstream VOC standard during the ten-day blending period, but requiring that the gasoline in the tank thereafter be in compliance or be deemed in compliance with the downstream VOC standard.

To provide assurance that gasoline is in compliance with the downstream VOC standard after the ten-day period, today's regulations would provide two options for retailers and wholesale purchaser-consumers. Under the first option, the retailer may add both ethanol-blended RFG and non-ethanol-blended RFG to the same tank an unlimited number of times during the ten-day period, but must test the gasoline in the tank at the end of the ten-day period to make sure that the RFG is in compliance with the VOC standard. Under the second option, the retailer must draw the tank down as much as practicable at the start of the ten-day period, before RFG of another type is added to the tank, and add only RFG of one type to the tank during the ten-day period. That is, the retailer may not add both ethanol-blended RFG and non-ethanol-blended RFG to the tank during the ten-day period, but may add only one of these types of RFG. EPA believes that when retailers and wholesale purchaser-consumers use this second option it is likely that their gasoline will comply with the downstream VOC standard at the end of the ten-day period, so that testing will not be necessary. We also believe that this approach is compatible with current practices of most retailers and wholesale purchaser-consumers, and expect that most will find it preferable to testing at the end of the ten-day period.

The commingling provisions would apply at a retail level such that each retailer may take advantage of a maximum of two ten-day blending periods between May 1 and September 15 of each calendar year. Thus, the options described above would be available to each retail outlet for each of two ten-day periods during the VOC control period. During each ten-day period the options would be available for all tanks at that retail outlet.

Regarding the requirement that each batch of gasoline to be blended must have been individually certified as in compliance with subsections (h) and (k), EPA notes that all gasoline in compliance with RFG requirements is deemed certified under Section 211(k) pursuant to § 80.40(a). Section 211(h) addresses RVP requirements for gasoline, but EPA does not have a program to certify gasoline as in compliance with this provision. For purposes of the commingling exception for retail outlets incorporated today in § 80.78(a)(8), EPA would deem gasoline that is in compliance with the regulatory requirements implementing Section 211(h) to be certified under that section. Regarding the requirement that retailers retain and make available to EPA upon request “certifications” accounting for all gasoline at the retail outlet, EPA would deem this requirement fulfilled where the retailer retains and makes available to EPA, upon request, the product transfer documentation required under § 80.77 for all gasoline at the retail outlet.

Under this proposed rule, the provisions which allow retailers to sell non-ethanol-blended California RFG that has been combined with ethanol-blended California RFG would also apply to wholesale purchaser-consumers. Like retailers, wholesale purchaser-consumers are parties who dispense gasoline into vehicles, and EPA interprets the Energy Act reference to retailers as applying equally to them. As a result, wholesale purchaser-consumers are treated in the same manner as retailers under this rule. This is consistent with the manner in which wholesale purchaser-consumers have been treated in the past under the fuels regulations.

Most of the provisions of this rule are necessary to implement amendments to the Clean Air Act included in the Energy Act that eliminate the RFG oxygen content requirement and allow limited commingling of ethanol-blended and non-ethanol-blended RFG. The extension of the general commingling prohibition in the fuels regulations to cover non-oxygenated RFG is necessary because of the Energy Act amendments, but is issued pursuant to authority of CAA Section 211(k). This provision extends the current program to reflect the presence of non-oxygenated RFG, and is designed to enhance environmental benefits of the RFG program at reasonable cost to regulated parties.

We anticipate that little or no environmental impact would occur as a result of today's proposed action to remove the oxygenate requirement for RFG. The RFG standards consist of content and emission performance standards. Refiners and importers would have to continue to meet all the emission performance standards for RFG whether or not the RFG contains any oxygenate. This includes both the VOC and NO X emission performance standards, as well as the air toxics emission performance standards which were tightened in the mobile source air toxics (MSAT) rule in 2001. 5 New MSAT standards currently under development are anticipated to achieve even greater air toxics emission reductions.

We have analyzed the potential impacts on emissions that could result from removal of the oxygenate requirement in the context of requests for waivers of the Federal oxygen requirement. 6 We found that changes in ethanol use could lead to small increases in some emissions and small decreases in others while still meeting the RFG performance standards. These potential impacts are associated with the degree to which ethanol would continue to be blended into RFG after removal of the oxygen requirement. Past analyses have projected significant use of ethanol in RFG in California despite removal of the oxygenate requirement. 7 Given current gasoline prices and the tightness in the gasoline market, the favorable economics of ethanol blending, a continuing concern over MTBE use by refiners, the emission performance standards still in place for RFG, and the upcoming renewable fuels mandate, 8 we believe that ethanol will continue to be used in RFG in California after the oxygen requirement is removed. As a result, we believe that the removal of the oxygenate mandate would have little or no environmental impact in the near future. We will be looking at the long term effect of oxygenate use in the context of the rulemaking to implement the renewable fuels mandate.

Under Executive Order 12866, (58 FR 51735 (October 4, 1993)) the Agency must determine whether the regulatory action is “significant” and therefore subject to OMB review and the requirements of the Executive Order. The Order defines “significant regulatory action” as one that is likely to result in a rule that may:

(1) Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities;

(2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency;

(3) Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or

(4) Raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in the Executive Order.

It has been determined that this direct final rule does not satisfy the criteria stated above. As a result, this rule is not a “significant regulatory action” under the terms of Executive Order 12866 and is therefore not subject to OMB review. Today's rule would remove certain requirements for all refiners, importers and oxygenate blenders of RFG in California. As a result, this rule is expected to greatly reduce overall compliance costs for all refiners, importers and oxygenate blenders of California RFG. This rule also would provide options for gasoline retailers in California to commingle certain compliant gasolines which otherwise would be prohibited from being commingled. Although there may be small compliance costs associated with one of these options, we believe that the additional flexibility provided by this option would reduce overall compliance costs for these parties.

This proposed action would not impose any new information collection burden. Refiners, importers and oxygenate blenders of California RFG are exempt from the reporting and recordkeeping requirements under the RFG regulations. 40 CFR 80.81. Therefore, the removal of the oxygen requirement for California RFG would not have any ICR implications for refiners, importers and oxygenate blenders of California RFG. Small testing costs may be associated with one of the options for California gasoline retailers to commingle compliant gasolines. However, these testing costs are expected to be minimal and would be greatly outweighed by the flexibility provided by the option to commingle compliant gasolines. The Office of Management and Budget (OMB) has previously approved the information collection requirements contained in the existing regulations in 40 CFR Part 80 under the provisions of the Paperwork Reduction Act, 44 U.S.C. 3501 et seq. and has assigned OMB control number 2060-0277, EPA ICR number 1591.15. A copy of the OMB approved Information Collection Request (ICR) may be obtained from Susan Auby, Collection Strategies Division; U.S. Environmental Protection Agency (2822T); 1200 Pennsylvania Ave., NW., Washington, DC 20460 or by calling (202) 566-1672.

Burden means the total time, effort, or financial resources expended by persons to generate, maintain, retain, or disclose or provide information to or for a Federal agency. This includes the time needed to review instructions; develop, acquire, install, and utilize technology and systems for the purposes of collecting, validating, and verifying information, processing and maintaining information, and disclosing and providing information; adjust the existing ways to comply with any previously applicable instructions and requirements; train personnel to be able to respond to a collection of information; search data sources; complete and review the collection of information; and transmit or otherwise disclose the information.

An agency may not conduct or sponsor, and a person is not required to respond to a collection of information unless it displays a currently valid OMB control number. The OMB control numbers for EPA's regulations in 40 CFR are listed in 40 CFR Part 9.

The Regulatory Flexibility Act (RFA) generally requires an agency to prepare a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements under the Administrative Procedures Act or any other statute unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. Small entities include small businesses, small organizations, and small governmental jurisdictions.

For purposes of assessing the impacts of today's rule on small entities, small entity is defined as: (1) A small business as defined by the Small Business Administration's regulations at 13 CFR 121.201); (2) a small governmental jurisdiction that is a government of a city, county, town, school district or special district with a population of less than 50,000; and (3) a small organization that is any not-for-profit enterprise which is independently owned and operated and is not dominant in its field.

After considering the economic impacts of today's rule on small entities, EPA certifies that this action would not have a significant economic impact on a substantial number of small entities. In determining whether a rule has a significant economic impact on a substantial number of small entities, the impact of concern is any significant adverse economic impact on small entities, since the primary purpose of the regulatory flexibility analyses is to identify and address regulatory alternatives “which minimize any significant economic impact of the proposed rule on small entities.” 5 U.S.C. 603 and 604. Thus, an agency may conclude that a rule will not have a significant economic impact on a substantial number of small entities if the rule relieves regulatory burden, or otherwise has a positive economic effect on all of the small entities subject to the rule.

This proposed rule would remove certain requirements for all refiners, importers and oxygenate blenders of California RFG, including small business refiners, importers and oxygenate blenders. Specifically, this rule would remove the burden on refiners, importers and oxygenate blenders to comply with the RFG oxygen requirement and associated compliance requirements. This rule also would provide options for gasoline retailers to commingle certain compliant gasolines which otherwise would be prohibited from being commingled. Although one option requires some compliance testing, the testing costs are expected to be minimal. As a result, we have concluded that this proposed rule, overall, would relieve regulatory burden for small entities subject to the RFG regulations. We continue to be interested in the potential impacts of the proposed rule on small entities and welcome comments on issues related to such impacts.

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public Law 104-4, establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and tribal governments and the private sector. Under section 202 of the UMRA, EPA generally must prepare a written statement, including a cost-benefit analysis, for proposed and final rules with “Federal mandates” that may result in expenditures to State, local, and tribal governments, in the aggregate, or to the private sector, of $100 million or more in any one year. Before promulgating an EPA rule for which a written statement is needed, section 205 of the UMRA generally requires EPA to identify and consider a reasonable number of regulatory alternatives and adopt the least costly, most cost-effective or least burdensome alternative that achieves the objectives of the rule. The provisions of section 205 do not apply when they are inconsistent with applicable law. Moreover, section 205 allows EPA to adopt an alternative other than the least costly, most cost-effective or least burdensome alternative if the Administrator publishes with the final rule an explanation why that alternative was not adopted. Before EPA establishes any regulatory requirements that may significantly or uniquely affect small governments, including tribal governments, it must have developed under section 203 of the UMRA a small government agency plan. The plan must provide for notifying potentially affected small governments, enabling officials of affected small governments to have meaningful and timely input in the development of EPA regulatory proposals with significant Federal intergovernmental mandates, and informing, educating, and advising small governments on compliance with the regulatory requirements.

This proposed rule contains no Federal mandates (under the regulatory provisions of Title II of the UMRA) for State, local or tribal governments or the private sector that will result in expenditures of $100 million or more. This rule would affect gasoline refiners, importers and oxygenate blenders by removing the oxygen content requirement for RFG and associated compliance requirements, and would allow gasoline retailers options for commingling compliant gasolines which otherwise would be prohibited from being commingled. This rule would have the overall effect of reducing the burden of the RFG regulations on these regulated parties. Therefore, the requirements of the Unfunded Mandates Act do not apply to this action.

Executive Order 13132, entitled “Federalism” (64 FR 43255, August 10, 1999), requires EPA to develop an accountable process to ensure “meaningful and timely input by State and local officials in the development of regulatory policies that have federalism implications.” “Policies that have federalism implications” is defined in the Executive Order to include regulations that have “substantial direct effects 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.”

This proposed rule does not have federalism implications. It would not have substantial direct effects 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, as specified in Executive Order 13132. This rule would remove the burden on regulated parties of having to comply with the oxygen standard for RFG in California, and would allow gasoline retailers to commingle certain compliant gasolines which otherwise would be prohibited from being commingled. Thus, Executive Order 13132 does not apply to this rule.

Executive Order 13175, entitled “Consultation and Coordination with Indian Tribal Governments” (65 FR 67249, November 6, 2000), requires EPA to develop an accountable process to ensure “meaningful and timely input by tribal officials in the development of regulatory policies that have tribal implications.” “Policies that have tribal implications” is defined in the Executive Order to include regulations that have “substantial direct effects on one or more Indian tribes, on the relationship between the Federal government and the Indian tribes, or on the distribution of power and responsibilities between the Federal government and Indian tribes.”

This proposed rule does not have tribal implications. It would not have substantial direct effects on tribal governments, 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, as specified in Executive Order 13175. This rule would apply to gasoline refiners, importers, oxygenate blenders and retailers who supply RFG in California. This action contains certain modifications to the Federal requirements for RFG, and would not impose any enforceable duties on communities of Indian tribal governments. Thus, Executive Order 13175 does not apply to this rule.

Executive Order 13045: “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997) applies to any rule that: (1) Is determined to be “economically significant” as defined under Executive Order 12866, and (2) concerns an environmental health or safety risk that EPA has reason to believe may have a disproportionate effect on children. If the regulatory action meets both criteria, the Agency must evaluate the environmental health or safety effects of the planned rule on children, and explain why the planned regulation is preferable to other potentially effective and reasonably feasible alternatives considered by the Agency.

EPA interprets Executive Order 13045 as applying only to those regulatory actions that are based on health or safety risks, such that the analysis required under the Order has the potential to influence the regulation. This proposed rule is not subject to Executive Order 13045 because it is not economically significant and does not establish an environmental standard intended to mitigate health or safety risks.

This proposed rule is not an economically “significant energy action” as defined in Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355 (May 22, 2001)) because it does not have a significant adverse effect on the supply, distribution, or use of energy. This rule would eliminate the oxygen content requirement for RFG in California. This change would have the effect of reducing burdens on suppliers of RFG, which, in turn, may have a positive effect on gasoline supplies. RFG refiners and blenders may continue to use oxygenates at their discretion where and when it is most economical to do so. With the implementation of the renewable fuels standard also contained in the Energy Act, the blending of ethanol, in particular, into gasoline is expected to increase considerably, not decrease. Therefore, despite this action to remove the oxygenate mandate for RFG in California, when viewed in the context of companion energy legislation, overall use of oxygenates is expected to increase in the future. This rule also would allow gasoline retailers to commingle certain compliant gasolines which otherwise would be prohibited from being commingled. This also may have a positive effect on gasoline supplies.

Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (“NTTAA”), Pub. L. 104-113, section 12(d) (15 U.S.C. 272 note) directs EPA to use voluntary consensus standards in its regulatory activities unless to do so would be inconsistent with applicable law or otherwise impractical. Voluntary consensus standards are technical standards ( e.g. , materials specifications, test methods, sampling procedures, and business practices) that are developed or adopted by voluntary consensus standards bodies. The NTTAA directs EPA to provide Congress, through OMB, explanations when the Agency decides not to use available and applicable voluntary consensus standards.

This proposed would not establish new technical standards within the meaning of the NTTAA. Therefore, EPA did not consider the use of any voluntary consensus standards.

The statutory authority for the actions in today's direct final rule comes from sections 211(c), 211(k) and 301(a) of the CAA.

For further information, please see the information provided in the direct final action that is located in the “Rules and Regulations” section of this Federal Register publication.

Entities potentially affected by this action include those involved with the production and importation of conventional gasoline motor fuel. Regulated categories and entities affected by this action include:

This table is not intended to be exhaustive, but rather provides a guide for readers regarding entities likely to be regulated by this action. This table lists the types of entities that EPA is now aware could be potentially regulated by this action. Other types of entities not listed in the table could also be regulated. To determine whether your entity is regulated by this action, you should carefully examine the applicability criteria of part 80, subparts D, E and F of title 40 of the Code of Federal Regulations. If you have any question regarding applicability of this action to a particular entity, consult the person in the preceding FOR FURTHER INFORMATION CONTACT section above.

1. Submitting CBI. Do not submit this information to EPA through www.regulations.gov or e-mail. Clearly mark the part or all of the information that you claim to be CBI. For CBI information in a disk or CD ROM that you mail to EPA, mark the outside of the disk or CD ROM as CBI and then identify electronically within the disk or CD ROM the specific information that is claimed as CBI). In addition to one complete version of the comment that includes information claimed as CBI, a copy of the comment that does not contain the information claimed as CBI must be submitted for inclusion in the public docket. Information so marked will not be disclosed except in accordance with procedures set forth in 40 CFR part 2.

2. Tips for Preparing Your Comments. When submitting comments, remember to:

1. Identify the rulemaking by docket number and other identifying information (subject heading, Federal Register date and page number).

2. Follow directions—The agency may ask you to respond to specific questions or organize comments by referencing a Code of Federal Regulations (CFR) part or section number.

3. Explain why you agree or disagree; suggest alternatives and substitute language for your requested changes.

4. Describe any assumptions and provide any technical information and/or data that you used.

5. If you estimate potential costs or burdens, explain how you arrived at your estimate in sufficient detail to allow for it to be reproduced.

6. Provide specific examples to illustrate your concerns, and suggest alternatives.

7. Explain your views as clearly as possible, avoiding the use of profanity or personal threats.

8. Make sure to submit your comments by the comment period deadline identified.

3. Docket Copying Costs. You may be charged a reasonable fee for photocopying docket materials, as provided in 40 CFR part 2.

This is a synopsis of the Commission's Report and Order, MB Docket No. 04-410, adopted February 2, 2006, and released February 6, 2006. The full text of this Commission decision is available for inspection and copying during regular business hours at the FCC's Reference Information Center, Portals II, 445 Twelfth Street, SW., Room CY-A257, and Washington, DC 20554. The complete text of this decision may also be purchased from the Commission's duplicating contractor, Best Copy and Printing, Inc., 445 12th Street, SW., Room CY-B402, Washington, DC 20054, telephone 1-800-378-3160 or http://www.BCPIWEB.com. This document is not subject to the Congressional Review Act. (The Commission, is, therefore, not required to submit a copy of this Report and Order to GAO, pursuant to the Congressional Review Act, see 5 U.S.C. 801(a)(1)(A) because the proposed rule was dismissed.

This is a synopsis of the Commission's Notice of Proposed Rule Making , MB Docket No. 06-19, adopted February 2, 2006, and released February 6, 2006. The complete text of this decision may also be purchased from the Commission's duplicating contractor, Best Copy and Printing, Inc., 445 12th Street, SW., Room CY-B402, Washington, DC 20054, telephone 1-800-378-3160 or http://www.BCPIWEB.com. This document does not contain proposed information collection requirements subject to the Paperwork Reduction Act of 1995, Public Law 104-13. In addition, therefore, it does not contain any proposed information collection burden “for small business concerns with fewer than 25 employees,” pursuant to the Small Business Paperwork Relief Act of 2002, Public Law 107-198, see 44 U.S.C. 3506(c)(4).

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 summary of the Commission's Report and Order , MB Docket No. 05-113, adopted February 2, 2006, and released February 6, 2006. The full text of this Commission decision is available for inspection and copying during normal business hours in the Commission's Reference Center 445 Twelfth Street, SW., Washington, DC 20554. The complete text of this decision may also be purchased from the Commission's duplicating contractor, Best Copy and Printing, Inc., 445 12th Street, SW., Room CY-B402, Washington, DC, 20054, telephone 800-378-3160 or http://www.BCPIWEB.com. This document is not subject to the Congressional Review Act. (The Commission, is, therefore, not required to submit a copy of this Report and Order to GAO, pursuant to the Congressional Review Act, see 5 U.S.C. 801(a)(1)(A) because the proposed rule was dismissed.

This is a synopsis of the Commission's Report and Order, MB Docket No. 04-275, adopted February 2, 2006, and released February 6, 2006. 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. This document may also be purchased from the Commission's duplicating contractors, Best Copy and Printing, Inc., 445 12th Street, SW., Room CY-B402, Washington, DC 20554, telephone 1-800-378-3160 or http://www.BCPIWEB.com.

This document is not subject to the Congressional Review Act. (The Commission, is, therefore, not required to submit a copy of this Report and Order to Government Accountability Office, pursuant to the Congressional Review Act, see 5 U.S.C. section 801(a)(1)(A) since this proposed rule is dismissed, herein.)

We published a proposed rule to implement the Captive Wildlife Safety Act (CWSA) in the Federal Register on January 31, 2006 (71 FR 5041). With this followup document, we want to draw the public's attention to the fact that the addresses we provided in 71 FR 5041 for comments on the proposed rule are different from the addresses we provided for comments on the information collection contained in the proposed rule. We are not changing any of the addresses or providing any new ones, just reminding the public which addresses are for which purposes.

The following are ways to submit your comments. Identify all your comments and materials by RIN 1018-AT69.

You may submit comments and materials on our proposed rule (71 FR 5041), but not on the information collection aspects, by any one of the following methods:

1. U.S. mail: Special Agent in Charge, Branch of Investigations, U.S. Fish and Wildlife Service, Office of Law Enforcement (OLE), 4501 North Fairfax Drive, MS 3000, Arlington, Virginia 22203.

2. Fax: Special Agent in Charge, Branch of Investigations, OLE, 703-358-2271.

3. Hand-delivery: U.S. Fish and Wildlife Service, OLE, 4501 North Fairfax Drive, Suite 3000, Arlington, VA (this option is available between the hours of 8 a.m. and 4 p.m., Monday through Friday).

4. Internet: Go to the Federal eRulemaking portal at: http://www.regulations.gov and follow the instructions for submitting comments for RIN 1018-AT69.

If you have already submitted your comments on the proposed rule by one of the above methods, they have become part of the administrative record for this rulemaking action and you do not need to resubmit them.

Send any comments on the information collection contained in our proposed rule ( not the proposed rule in general) to both of the following entities:

1. Desk Officer for the Department of the Interior, OMB-OIRA, Office of Management and Budget (OMB). Use one of the following methods:

(a) Fax: Desk Officer for the Department of the Interior, OMB-OIRA, 202-95-6566.

(b) E-mail: OIRA_DOCKET@OMB.eop.gov.

2. Hope Grey, Information Collection Clearance Officer, U.S. Fish and Wildlife Service. Use one of the following methods:

(a) U.S. Mail: Hope Grey, Information Collection Clearance Officer, U.S. Fish and Wildlife Service, MS 222-ARLSQ, 4401 North Fairfax Drive, Arlington, VA 22203.

(b) Fax: Hope Grey, Information Collection Clearance Officer, US-FWS, 703-358-2269.

(c) E-mail: hope_grey@fws.gov.