[Federal Register Volume 77, Number 139 (Thursday, July 19, 2012)]
[Proposed Rules]
[Pages 42441-42454]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-17441]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 77, No. 139 / Thursday, July 19, 2012 /
Proposed Rules
[[Page 42441]]
SMALL BUSINESS ADMINISTRATION
13 CFR Part 121
RIN 3245-AG25
Small Business Size Standards: Utilities
AGENCY: U.S. Small Business Administration.
ACTION: Proposed rule.
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SUMMARY: The U.S. Small Business Administration (SBA) proposes to
revise the small business size standards for nine industries in North
American Industry Classification System (NAICS) Sector 22, Utilities.
Six of those industries deal with electric power generation,
distribution and transmission (NAICS 221111, NAICS 221112, NAICS
221113, NAICS 221119, NAICS 221121, and NAICS 221122) and have a common
size standard based on electric output. For those six industries, SBA
proposes to replace the current size standard of 4 million megawatt
hours in electric output with an employee based size standard of 500
employees. SBA also proposes to increase the small business size
standards for three industries in NAICS Sector 22 that have receipt
based size standards, namely--NAICS 221310, Water Supply and Irrigation
Systems, from $7 million to $25.5 million; NAICS 221320, Sewage
Treatment Facilities, from $7 million to $19 million; and NAICS 221330,
Steam and Air-conditioning Supply, from $12.5 million to $14 million.
As part of its ongoing initiative to review all size standards, SBA
evaluated all industries in NAICS Sector 22 that have either electric
output based or receipts based size standards to determine whether the
existing size standards should be retained or revised. This rule is one
of a series of proposed rules that will examine industries grouped by
NAICS sector. SBA has issued a White Paper entitled ``Size Standards
Methodology'' and published in the October 21, 2009 issue of the
Federal Register a notice that ``Size Standards Methodology'' is
available on its Web site at www.sba.gov/size for public review and
comments. The ``Size Standards Methodology'' White Paper explains how
SBA establishes, reviews and modifies its small business size
standards. In this proposed rule, SBA has applied its methodology that
pertains to establishing, reviewing, and modifying a size standard
based on average annual receipts and electric output.
DATES: SBA must receive comments to this proposed rule on or before
September 17, 2012.
ADDRESSES: Identify your comments by RIN 3245-AG25 and submit them by
one of the following methods: (1) Federal eRulemaking Portal:
www.regulations.gov follow the instructions for submitting comments; or
(2) Mail/Hand Delivery/Courier: Khem R. Sharma, Ph.D., Chief, Size
Standards Division, 409 Third Street SW., Mail Code 6530, Washington,
DC 20416. SBA will not accept comments submitted by email.
SBA will post all comments to this proposed rule on
www.regulations.gov. If you wish to submit confidential business
information (CBI) as defined in the User Notice at www.regulations.gov,
you must submit such information to U.S. Small Business Administration,
Khem R. Sharma, Ph.D., Chief, Size Standards Division, 409 Third Street
SW., Mail Code 6530, Washington, DC 20416, or send an email to
sizestandards@sba.gov. Highlight the information that you consider to
be CBI and explain why you believe SBA should hold this information as
confidential. SBA will review your information and determine whether it
will make the information public.
FOR FURTHER INFORMATION CONTACT: Khem R. Sharma, Ph.D., Chief, Size
Standards Division, (202) 205-6618 or sizestandards@sba.gov.
SUPPLEMENTARY INFORMATION: To determine eligibility for Federal small
business assistance, SBA establishes small business size definitions
(referred to as size standards) for private sector industries in the
United States. SBA uses two primary measures of business size: average
annual receipts and average number of employees. SBA uses financial
assets, electric output, and refining capacity to measure the size for
a few specialized industries. In addition, SBA's Small Business
Investment Company (SBIC), Certified Development Company (504) and 7(a)
Loan Programs use either the industry based size standards or net worth
and net income based size standards to determine eligibility for those
programs. At the beginning of SBA's comprehensive size standards
review, there were 41 different size standards, covering 1,141 NAICS
industries and 18 sub-industry activities (``exceptions'' in SBA's
table of size standards). Thirty-one of these size levels were based on
average annual receipts, seven were based on average number of
employees, and three were based on other measures.
Over the years, SBA has received comments that its size standards
have not kept up with changes in the economy, in particular the changes
in the Federal contracting marketplace and industry structure. The last
time SBA conducted a comprehensive review of size standards was during
the late 1970s and early 1980s. Since then, most reviews of size
standards have been limited to a few specific industries in response to
requests from the public and Federal agencies. SBA also makes periodic
inflation adjustments to its monetary based size standards. SBA's
latest inflation adjustment to size standards was published in the
Federal Register on July 18, 2008 (73 FR 41237).
Because of changes in the Federal marketplace and industry
structure since the last overall size standards review, SBA recognizes
that current data may no longer support some of its existing size
standards. Accordingly, in 2007, SBA began a comprehensive review of
all size standards to determine if they are consistent with current
data, and to adjust them when necessary. In addition, on September 27,
2010, the President of the United States signed the Small Business Jobs
Act of 2010 (Jobs Act). The Jobs Act directs SBA to conduct a detailed
review of all size standards and to make appropriate adjustments to
reflect market conditions. Specifically, the Jobs Act requires SBA to
conduct a detailed review of at least one-third of all size standards
during every 18-month period from the date of its enactment. In
addition, the Jobs Act requires that SBA conduct a review of all size
standards not less frequently than once every 5 years thereafter.
Reviewing existing small business size standards and
[[Page 42442]]
making appropriate adjustments based on current data are also
consistent with Executive Order 13563 on improving regulation and
regulatory review.
Rather than review all size standards at one time, SBA is reviewing
a group of industries within an NAICS Sector. An NAICS Sector generally
consists of 25 to 75 industries, except for the manufacturing sector,
which has considerably more industries. Once SBA completes its review
of size standards for industries in an NAICS Sector, it will issue a
proposed rule to revise size standards for those industries for which
currently available data and other relevant factors support doing so.
Below is a discussion of SBA's size standards methodology for
establishing receipts based size standards, which SBA applied to this
proposed rule, including analyses of industry structure, Federal
procurement trends and other factors for industries reviewed in this
proposed rule, the impact of the proposed revisions to size standards
on Federal small business assistance, and the evaluation of whether a
revised size standard would exclude dominant firms from being
considered small.
Size Standards Methodology
SBA has recently developed a ``Size Standards Methodology'' for
developing, reviewing and modifying size standards when necessary. SBA
has published this document on its Web site at www.sba.gov/size for
public review and comments and included it, as a supporting document,
in the electronic docket for this proposed rule at www.regulations.gov.
SBA does not apply every feature of its ``Size Standards Methodology''
to all industries because not all features are appropriate. For
example, since this proposed rule covers all industries with receipts
based size standards in NAICS Sector 22, the methodology described here
applies to establishing receipts based standards. However, the
methodology is made available in its entirety for parties who are
interested in SBA's overall approach to establishing, evaluating and
modifying small business size standards. SBA always explains its
analysis in individual proposed and final rules relating to size
standard revisions for specific industries.
SBA welcomes comments from the public on a number of issues
concerning its ``Size Standards Methodology,'' such as suggestions on
alternative approaches to establishing and modifying size standards;
whether there are alternative or additional factors that SBA should
consider; whether SBA's approach to small business size standards makes
sense in the current economic environment; whether SBA's use of anchor
size standards is appropriate in the current economy; whether there are
gaps in SBA's methodology because of the lack of comprehensive data;
and whether there are other facts or issues that SBA should consider.
Comments on SBA's methodology should be submitted via: (1) The Federal
eRulemaking Portal: www.regulations.gov; the docket number is SBA-2009-
0008; follow the instructions for submitting comments; or (2) Mail/Hand
Delivery/Courier: Khem R. Sharma, Ph.D., Chief, Size Standards
Division, 409 Third Street SW., Mail Code 6530, Washington, DC 20416.
As with comments received to this and other proposed rules, SBA will
post all comments on its methodology on www.regulations.gov. As of July
19, 2012, SBA has received 14 comments to its ``Size Standards
Methodology.'' The comments are available to the public at
www.regulations.gov. SBA continues to welcome comments on its
methodology from interested parties.
Congress granted discretion to the SBA's Administrator to establish
detailed small business size standards. 15 U.S.C. 632(a)(2). Section
3(a)(3) of the Small Business Act (15 U.S.C. 632(a)(3)) requires that
``* * * the [SBA] Administrator shall ensure that the size standard
varies from industry to industry to the extent necessary to reflect the
differing characteristics of the various industries and consider other
factors deemed to be relevant by the Administrator.'' Accordingly, the
economic structure of an industry serves as the underlying basis for
developing and modifying small business size standards. SBA identifies
the small business segment of an industry by examining data on the
economic characteristics defining the industry structure itself (as
described below). In addition to analysis of industry structure, SBA
also considers current economic conditions, together with its own
mission, program objectives, and the Administration's current policies,
suggestions from industry groups and Federal agencies, and public
comments on the proposed rule, when it establishes small business size
standards. SBA also examines whether a size standard based on industry
and other relevant data successfully excludes businesses that are
dominant in the industry. This proposed rule affords the public an
opportunity to review and comment on SBA's proposals to revise size
standards in NAICS Sector 22, as well as on the data and methodology it
uses to evaluate and revise a size standard.
Industry Analysis
For the current comprehensive size standards review, SBA has
established three ``base'' or ``anchor'' size standards: $7 million in
average annual receipts for industries that have receipts based size
standards, 500 employees for manufacturing and other industries that
have employee based size standards (except for Wholesale Trade), and
100 employees for industries in the Wholesale Trade Sector. SBA
established 500 employees as the anchor size standard for manufacturing
industries at its inception in 1953. Shortly thereafter, SBA
established $1 million in average annual receipts as the anchor size
standard for nonmanufacturing industries. SBA has periodically
increased the receipts based anchor size standard for inflation, and it
stands today at $7 million. Since 1986, SBA has set 100 employees as
the size standard for all industries in the Wholesale Trade Sector for
SBA financial assistance programs. However, NAICS codes for Wholesale
Trade Industries (NAICS Sector 42) and their 100 employee size standard
do not apply to Federal procurement programs. Rather, for Federal
procurement purposes, the size standard is 500 employees for all
industries in Wholesale Trade and for all industries in Retail Trade
(NAICS Sector 44-45) under SBA's nonmanufacturer rule (13 CFR
121.406(b)).
These long-standing anchor size standards have stood the test of
time and gained legitimacy through practice and general public
acceptance. An anchor size standard is neither a minimum nor a maximum.
It is a common size standard for a large number of industries that have
similar economic characteristics and serves as a reference point in
evaluating size standards for individual industries. SBA uses the
anchor in lieu of trying to establish precise small business size
standards for each industry. Otherwise, theoretically, the number of
size standards might be as high as the number of industries for which
SBA establishes size standards (1,141). Furthermore, the data SBA
analyzes are static, while the U.S. economy is not. Hence, absolute
precision is impossible. Therefore, SBA presumes an anchor size
standard is appropriate for a particular industry unless that industry
displays economic characteristics that are considerably different from
others with the same anchor size standard.
When evaluating a size standard, SBA compares the economic
characteristics
[[Page 42443]]
of the specific industry under review to the average characteristics of
industries with one of the three anchor size standards (referred to as
``anchor comparison group''). This allows SBA to assess the industry
structure and to determine whether the industry is appreciably
different from the other industries in the anchor comparison group. If
the characteristics of a specific industry under review are similar to
the average characteristics of the anchor comparison group, the anchor
size standard is considered appropriate for that industry. SBA may
consider adopting a size standard below the anchor when: (1) All or
most of the industry characteristics are significantly smaller than the
average characteristics of the anchor comparison group; or (2) other
industry considerations strongly suggest that the anchor size standard
would be an unreasonably high size standard for the industry.
If the specific industry's characteristics are significantly higher
than those of the anchor comparison group, then a size standard higher
than the anchor size standard may be appropriate. The larger the
differences are between the characteristics of the industry under
review and those in the anchor comparison group, the larger will be the
difference between the appropriate industry size standard and the
anchor size standard. To determine a size standard above the anchor
size standard, SBA analyzes the characteristics of a second comparison
group. For industries with receipts based size standards, including
those in NAICS Sector 22 that are reviewed in this proposed rule, SBA
has developed a second comparison group consisting of industries with
the highest levels of receipts based size standards. To determine the
level of a size standard above the anchor size standard, SBA analyzes
the characteristics of this second comparison group. The size standards
for this group of industries range from $23 million to $35.5 million in
average annual receipts, with the weighted average size standard for
the group being $29 million. SBA refers to this comparison group as the
``higher level receipts based size standard group.''
The primary factors that SBA evaluates when analyzing the
structural characteristics of an industry include average firm size,
startup costs and entry barriers, industry competition, and
distribution of firms by size. SBA also evaluates, as an additional
primary factor, the impact that revising size standards might have on
Federal contracting assistance to small businesses. These are,
generally, the five most important factors SBA examines when
establishing or revising a size standard for an industry. In addition,
SBA considers and evaluates other information that it believes is
relevant to a particular industry (such as technological changes,
growth trends, SBA financial assistance and other program factors,
etc.). SBA also considers possible impacts of size standard revisions
on eligibility for Federal small business assistance, current economic
conditions, the Administration's policies, and suggestions from
industry groups and Federal agencies. Public comments on a proposed
rule also provide important additional information. SBA thoroughly
reviews all public comments before making a final decision on its
proposed size standards. Below are brief descriptions of each of the
five primary factors that SBA has evaluated for each industry in NAICS
Sector 22 being reviewed in this proposed rule. A more detailed
description of this analysis is provided in SBA ``Size Standards
Methodology,'' available at http://www.sba.gov/size.
1. Average firm size. SBA computes two measures of average firm
size: Simple average and weighted average. For industries with receipts
based size standards, the simple average is the total receipts of the
industry divided by the total number of firms in the industry. The
weighted average firm size is the sum of weighted simple averages in
different receipts size classes, where weights are the shares of total
industry receipts for respective size classes. The simple average
weighs all firms within an industry equally, regardless of their size.
The weighted average overcomes that limitation by giving more weight to
larger firms.
If the average firm size of an industry under review is
significantly higher than the average firm size of industries in the
anchor comparison industry group, this will generally support a size
standard higher than the anchor size standard. Conversely, if the
industry's average firm size is similar to or significantly lower than
that of the anchor comparison industry group, it will be a basis to
adopt the anchor size standard, or in rare cases, a standard lower than
the anchor.
2. Startup costs and entry barriers. Startup costs reflect a firm's
initial size in an industry. New entrants to an industry must have
sufficient capital and other assets to start and maintain a viable
business. If new firms entering a particular industry have greater
capital requirements than firms in industries in the anchor comparison
group, this can be a basis for establishing a size standard higher than
the anchor size standard. In lieu of data on actual startup costs, SBA
uses average assets as a proxy to measure the capital requirements for
new entrants to an industry.
To calculate average assets, SBA begins with the total sales to
total assets ratio for an industry from the Risk Management
Association's Annual eStatement Studies. SBA then applies these ratios
to the average receipts of firms in that industry. An industry with a
significantly higher level of average assets than that of the anchor
comparison group is likely to have higher startup costs; this in turn
will support a size standard higher than the anchor. Conversely, an
industry with average assets that are similar to or significantly lower
than those of the anchor comparison group is likely to have lower
startup costs; this in turn will support adoption of the anchor size
standard, or in rare cases, one lower than the anchor.
3. Industry competition. Industry competition is generally measured
by the share of total industry receipts generated by the largest firms
in an industry. SBA generally evaluates the share of industry receipts
generated by the four largest firms in each industry. This is referred
to as the ``four-firm concentration ratio,'' a commonly used economic
measure of market competition. SBA compares the four-firm concentration
ratio for an industry under review to the average four-firm
concentration ratio for industries in the anchor comparison group. If a
significant share of economic activity within the industry is
concentrated among a few relatively large companies, all else being
equal, SBA will establish a size standard higher than the anchor size
standard. SBA does not consider the four-firm concentration ratio as an
important factor in assessing a size standard if its value for an
industry under review is less than 40 percent. For industries in which
the four-firm concentration ratio is 40 percent or more, SBA examines
the average size of the four largest firms in determining a size
standard.
4. Distribution of firms by size. SBA examines the shares of
industry total receipts accounted for by firms of different receipts
and employment size classes in an industry. This is an additional
factor that SBA evaluates in assessing competition within an industry.
If most of an industry's economic activity is attributable to smaller
firms, this indicates that small businesses are competitive in that
industry. This supports adopting the anchor size standard. If most of
an
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industry's economic activity is attributable to larger firms, this
indicates that small businesses are not competitive in that industry.
This will support adopting a size standard above the anchor.
Concentration is a measure of inequality of distribution. To
determine the degree of inequality of distribution in an industry, SBA
computes the Gini coefficient by constructing the Lorenz curve. The
Lorenz curve presents the cumulative percentages of units (firms) along
the horizontal axis and the cumulative percentages of receipts (or
other measures of size) along the vertical axis. (For further detail,
please refer to SBA's ``Size Standards Methodology'' on SBA's Web site
at www.sba.gov/size.) Gini coefficient values vary from zero to one. If
receipts are distributed equally among all the firms in an industry,
the value of the Gini coefficient will equal zero. If an industry's
total receipts are attributed to a single firm, the Gini coefficient
will equal one.
SBA compares the Gini coefficient value for an industry under
review with that for industries in the anchor comparison group. If an
industry shows a higher Gini coefficient value than industries in the
anchor comparison industry group this may, all else being equal,
warrant a higher size standard than the anchor. Conversely, if an
industry's Gini coefficient is similar to or lower than that for the
anchor group, the anchor standard, or in some cases a standard lower
than the anchor, may be adopted.
5. Impact on Federal contracting and SBA loan programs. SBA
examines the impact a size standard change may have on Federal small
business assistance. This most often focuses on the share of Federal
contracting dollars awarded to small businesses in the industry in
question. In general, if the small business share of Federal
contracting in an industry with significant Federal contracting is
appreciably less than the small business share of the industry's total
receipts, there is justification for considering a size standard higher
than the existing size standard. The disparity between the small
business Federal market share and the industry-wide small business
share may have a variety of causes, such as extensive administrative
and compliance requirements associated with Federal contracts,
different skill sets required for Federal contracts as compared to
typical commercial contracting work, and the size of Federal contracts.
These, and other factors, are likely to influence the type of firms
that compete for Federal contracts. By comparing the Federal
contracting small business share with the industry-wide small business
share, SBA includes in its size standards analysis the latest Federal
contracting trends. This analysis may indicate a size standard larger
than the current standard.
SBA considers Federal procurement trends in the size standards
analysis only if: (1) The small business share of Federal contracting
dollars is at least 10 percent lower than the small business share of
total industry receipts, and (2) the amount of total Federal
contracting averages $100 million or more during the latest three
fiscal years. These thresholds reflect a significant level of
contracting where a revision to a size standard may have an impact on
contracting opportunities to small businesses.
Besides the impact on small business Federal contracting, SBA also
evaluates the impact of a proposed size standard on SBA's loan
programs. For this, SBA examines the volume and number of SBA
guaranteed loans within an industry and the size of firms obtaining
those loans. This allows SBA to assess whether the existing or the
proposed size standard for a particular industry may restrict the level
of financial assistance to small firms. If the analysis shows that the
current size standards have impeded financial assistance to small
businesses within an industry, this can support higher size standards.
However, if small businesses within an industry under current size
standards have been receiving significant amounts of financial
assistance through SBA's loan programs, or businesses receiving the
financial assistance are much smaller than the existing size standards,
this factor may not be considered for determining the size standards.
Sources of Industry and Program Data
SBA's primary source of industry data used in this proposed rule is
a special tabulation of the data from 2007 Economic Census (see
www.census.gov/econ/census07/) prepared by the U.S. Bureau of the
Census (Census Bureau) for SBA. The special tabulation provides SBA
with data on the number of firms, number of establishments, number of
employees, annual payroll, and annual receipts of companies by NAICS
Sector (2-digit level), Subsector (3-digit level), Industry Group (4-
digit level), Industry (6-digit level). These data are arrayed by
various classes of firms' size based on the overall number of employees
and receipts of the entire enterprise (all establishments and
affiliated firms) from all industries. The special tabulation enables
SBA to evaluate average firm size, the four-firm concentration ratio
and distribution of firms by receipts and employment size.
In some cases, where industry data were not available due to
disclosure prohibitions in the Census Bureau's tabulation, SBA either
estimated missing values using available relevant data or examined data
at a higher level of industry aggregation, such as at the NAICS 2-digit
(Sector), 3-digit (Subsector), or 4-digit (Industry Group) level. In
some instances, SBA had to base its analysis only on those factors for
which data were available or estimates of missing values were possible.
For industries that provide electric power generation, distribution
and transmission (NAICS codes 221111-221122), SBA received data from
the U.S. Energy Information Agency (EIA) (www.eia.gov/cneaf/electricity) and an industry association. The Census Bureau's Economic
Census does not provide data on electric output. The EIA data include
annual electric output in megawatt hours and total annual revenues from
electricity sales by class of ownership of individual entities involved
in the generation, transmission, or distribution of electricity in the
U.S. SBA analyzed EIA electric output data for investor-owned utilities
and power marketers for 1974-2009 to evaluate industry structure of
these industries. The industry association data also included the EIA
data and additional information on affiliation among firms in the
electric power generation, transmission, and distribution industries.
To calculate average assets, SBA used sales to total assets ratios
from the Risk Management Association's Annual eStatement Studies, 2008-
2010.
To evaluate Federal contracting trends, SBA examined data
representing Federal contract awards for fiscal years 2008-2010. The
data are available from the U.S. General Service Administration's
Federal Procurement Data System--Next Generation (FPDS-NG).
To assess the impact on financial assistance to small businesses
SBA examined data on its own guaranteed loan programs for fiscal years
2008-2010.
Dominance in Field of Operation
Section 3(a) of the Small Business Act (15 U.S.C. 632(a)) defines a
small business concern as one that is: (1) Independently owned and
operated; (2) not dominant in its field of operation; and (3) within a
specific small business size definition or size standard established by
the SBA Administrator. SBA considers as part of its evaluation
[[Page 42445]]
whether a business concern at a proposed size standard would be
dominant in its field of operation. For this, SBA generally examines
the industry's market share of firms at the proposed size standard.
Market share and other factors may indicate whether a firm can exercise
a major controlling influence on a national basis in an industry where
a significant number of business concerns are engaged. If a
contemplated size standard would include a dominant firm, SBA will
consider a lower size standard to exclude the dominant firm from being
defined as small.
Selection of Size Standards
To simplify size standards, for the ongoing comprehensive review of
receipts based size standards, SBA has proposed to select size
standards from a limited number of levels. For many years, SBA has been
concerned about the complexity of determining small business status
caused by a large number of varying receipts based size standards (see
69 FR 13130 (March 4, 2004) and 57 FR 62515 (December 31, 1992)). At
the beginning of the current comprehensive size standards review, there
were 31 different levels of receipts based size standards. They ranged
from $0.75 million to $35.5 million, and many of them applied to only
one or a few industries. SBA believes that size standards with such a
large number of small variations among them are both unnecessary and
difficult to justify analytically. To simplify managing and using size
standards, SBA proposes that there be fewer size standard levels. This
will produce more common size standards for businesses operating in
related industries. This will also result in greater consistency among
the size standards for industries that have similar economic
characteristics.
SBA proposes, therefore, to apply one of eight receipts based size
standards to each of the three industries in NAICS Sector 22 with a
receipts-based size standard. The eight ``fixed'' receipts based size
standard levels are $5 million, $7 million, $10 million, $14 million,
$19 million, $25.5 million, $30 million, and $35.5 million. To
establish these eight receipts based size standard levels, SBA
considered the current minimum, the current maximum, and the most
commonly used current receipts based size standards. At the start of
the current comprehensive size standards review, the most commonly used
receipts based size standards clustered around the following: $2.5
million to $4.5 million, $7 million, $9 million to $10 million, $12.5
million to $14 million, $25 million to $25.5 million, and $33.5 million
to $35.5 million. SBA selected $7 million as one of eight fixed levels
of receipts based size standards because it is an anchor standard for
receipts based standards. The lowest or minimum receipts based size
level will be $5 million. Other than the standards for agriculture and
those based on commissions (such as real estate brokers and travel
agents), $5 million will include those industries that at the start of
the comprehensive size standards review had the lowest receipts based
standards, which ranged from $2 million to $4.5 million. Among the
higher level size clusters, SBA has set four fixed levels, namely: $10
million, $14 million, $25.5 million, and $35.5 million. Because there
are large intervals between some of the fixed levels, SBA also
established two intermediate levels, namely $19 million between $14
million and $25.5 million, and $30 million between $25.5 million and
$35.5 million. These two intermediate levels reflect roughly the same
proportional differences as between the other two successive levels.
Evaluation of Industry Structure
Of 10 industries in NAICS Sector 22, Utilities, SBA has evaluated
the structure of six industries engaged in generation, distribution and
transmission of electricity that have size standards based on electric
output of 4 million megawatt hours and three industries that have size
standards based on average annual receipts to assess the
appropriateness of the current size standards. In this proposed rule,
SBA has not reviewed one industry that has an employee based size
standard in NAICS Sector 22 (NAICS 221210, Natural Gas Distribution).
That employee based size standard will remain in effect until SBA
reviews all employee based size standards at a later date.
As explained previously, if the characteristics of an industry
under review are similar to the average characteristics of industries
in the anchor comparison group, the anchor size standard is generally
considered appropriate for that industry. If an industry's structure is
significantly different from industries in the anchor group, a size
standard lower or higher than the anchor size standard might be
selected. The level of the new size standard is based on the difference
between the characteristics of the anchor comparison group and a second
industry comparison group. As described above, the second comparison
group for receipts based standards consists of industries with the
highest receipts based size standards, ranging from $23 million to
$35.5 million. The average size standard for this group is $29 million.
SBA refers to this group of industries as the ``higher level receipts
based size standard comparison group.'' SBA determines differences in
industry structure between an industry under review and the industries
in the two comparison groups by comparing data on each of the industry
factors, including average firm size, average assets size, the four-
firm concentration ratio, and the Gini coefficient of distribution of
firms by size. Table 1, Average Characteristics of Receipts Based
Comparison Groups, below, shows two measures of the average firm size
(simple and weighted), average assets size, the four-firm concentration
ratio, average receipts of the four largest firms, and the Gini
coefficient for both anchor level and higher level comparison groups
for receipts based size standards.
Table 1--Average Characteristics of Receipts Based Comparison Groups
----------------------------------------------------------------------------------------------------------------
Avg. firm size ($
million) Avg. assets Four-firm Avg. receipts
Receipts based comparison ---------------------- size ($ concentration of four Gini
group Simple Weighted million) ratio (%)* largest firms coefficient
average average ($ million)*
----------------------------------------------------------------------------------------------------------------
Anchor Level................. 1.32 19.63 0.84 16.6 196.4 0.693
Higher Level................. 5.07 116.84 3.20 32.1 1,376.0 0.830
----------------------------------------------------------------------------------------------------------------
* To be used for industries with a four-firm concentration ratio of 40% or greater.
[[Page 42446]]
Derivation of Receipts Based Size Standards Based on Industry Factors
For each industry factor in Table 1, Average Characteristics of
Receipts Based Comparison Groups, above, SBA derives a separate size
standard based on the differences between the values for an industry
under review and the values for the two comparison groups. If the
industry value for a particular factor is near the corresponding factor
for the anchor comparison group, SBA will consider the $7 million
anchor size standard appropriate for that factor.
An industry factor with a value significantly above or below the
anchor comparison group will generally warrant a size standard for that
industry above or below the $7 million anchor. The level of the new
size standard in these cases is based on the proportional difference
between the industry value and the values for the two comparison
groups.
For example, if an industry's simple average receipts are $3.3
million, that would support a $19 million size standard. The $3.3
million level is 52.8 percent between the average firm size of $1.32
million for the anchor comparison group and $5.07 million for the
higher level comparison group (($3.30 million - $1.32 million) / ($5.07
million - $1.32 million) = 0.528 or 52.8%). This proportional
difference is applied to the difference between the $7 million anchor
size standard and average size standard of $29 million for the higher
level size standard group and then added to $7 million to estimate a
size standard of $18.62 million ([{$29.0 million - $7.0 million{time}
* 0.528] + $7.0 million = $18.62 million). The final step is to round
the estimated $18.62 million size standard to the nearest fixed size
standard, which in this example is $19 million.
SBA applies the above calculation to derive a size standard for
each industry factor. Detailed formulas involved in these calculations
are presented in SBA's ``Size Standards Methodology,'' which is
available on its Web site at www.sba.gov/size. (However, it should be
noted that the figures in the ``Size Standards Methodology'' White
Paper are based on 2002 Economic Census data and are different from
those presented in this proposed rule. That is because when SBA
prepared its ``Size Standards Methodology,'' the 2007 Economic Census
data were not yet available). Table 2, Values of Industry Factors and
Supported Size Standards, below, shows ranges of values for each
industry factor and the levels of size standards supported by those
values.
Table 2--Values of Industry Factors and Supported Size Standards
----------------------------------------------------------------------------------------------------------------
Or if avg.
Or if weighted Or if avg. receipts of Then size
If simple avg. receipts size avg. receipts assets size is largest four Or if Gini standard is ($
is ($ million) size is ($ ($ million) firms is ($ coefficient is million)
million) million)
----------------------------------------------------------------------------------------------------------------
<1.15....................... <15.22......... <0.73.......... <142.8......... <0.686......... 5.0
1.15 to 1.57................ 15.22 to 26.26. 0.73 to 1.00... 142.8 to 276.9. 0.686 to 0.702. 7.0
1.58 to 2.17................ 26.27 to 41.73. 1.01 to 1.37... 277.0 to 464.5. 0.703 to 0.724. 10.0
2.18 to 2.94................ 41.74 to 61.61. 1.38 to 1.86... 464.6 to 705.8. 0.725 to 0.752. 14.0
2.95 to 3.92................ 61.62 to 87.02. 1.87 to 2.48... 705.9 to 0.753 to 0.788. 19.0
1,014.1.
3.93 to 4.86................ 87.03 to 111.32 2.49 to 3.07... 1,014.2 to 0.789 to 0.822. 25.5
1,309.0.
4.87 to 5.71................ 111.33 to 3.08 to 3.61... 1,309.1 to 0.823 to 0.853. 30.0
133.41. 1,577.1.
>5.71....................... >133.41........ >3.61.......... >1,577.1....... >0.853......... 35.5
----------------------------------------------------------------------------------------------------------------
Derivation of Receipts Based Size Standards Based on Federal
Contracting Factor
Besides industry structure, SBA also evaluates Federal contracting
data to assess how successful small business are in getting Federal
contracts under the existing size standards. For the current
comprehensive size standards review, SBA has decided to designate a
size standard at one level higher than the current size standard for
industries where the small business share of total Federal contracting
dollars is between 10 and 30 percentage points lower than their shares
in total industry receipts and at two levels higher than the current
size standard if the difference is more than 30 percentage points.
SBA has chosen not to designate a size standard for the Federal
contracting factor alone that is higher than two levels above the
current size standard. The FPDS-NG data have a number of limitations
and there are also complex relationships among a number of variables
affecting small business participation in the Federal marketplace. SBA
believes, therefore, that a larger adjustment to size standards based
on Federal contracting activity should be based on a more detailed
analysis of the impact of any subsequent revision to the current size
standard. In limited situations, however, SBA may conduct a more
extensive examination of Federal contracting experience. This may
enable SBA to support a different size standard than indicated by this
general rule and take into consideration significant and unique aspects
of small business competitiveness in the Federal contract market. SBA
welcomes comment on its methodology of incorporating the Federal
contracting factor in the size standard analysis and suggestions for
alternative methods and other relevant information on small business
experience in the Federal contract market.
Among the three industries that have receipts based size standards
in NAICS Sector 22, two (NAICS codes 221310 and 221320) received an
average of $100 million or more annually in Federal contracts during
fiscal years 2008-2010. Of these two industries, the Federal
contracting factor was significant (i.e., the difference between the
small business share of total industry receipts and small business
share of Federal contracting dollars was 10 percentage points or more)
for only NAICS 221310.
New Receipts Based Size Standards Based on Industry and Federal
Contracting Factors
Table 3, New Receipts Based Size Standards Supported by Each Factor
for Each Industry (millions of dollars), below, shows the results of
analyses of industry and Federal contracting factors for each of the
three industries with receipts based standards in NAICS Sector 22. Each
NAICS Industry in columns 2, 3, 4, 6, 7 and 8 shows two numbers. The
upper number is the value for the industry or federal contracting
factor shown on the top of the column; the lower number is the size
standard supported by that factor. For the four-firm concentration
ratio, a size standard is estimated based on the average receipts of
the top four firms if its value is 40 percent or more. If the four-firm
concentration ratio for an industry (column 5) is less than 40 percent,
no size standard is estimated
[[Page 42447]]
for that factor. Column 9 shows the new size standard for each
industry, calculated as the average of size standards supported by each
factor and rounded to the nearest fixed size level. Analytical details
involved in the averaging procedure are described in the SBA ``Size
Standard Methodology'' White Paper which is available on its Web site
at www.sba.gov/size. For comparison, the current size standards are
also shown in column 10 of Table 3, New Receipts Based Size Standards
Supported by Each Factor for Each Industry (millions of dollars),
below.
Table 3--New Receipts Based Size Standards Supported by Each Factor for Each Industry
[Millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
NAICS Simple Weighted Average Four-firm Four-firm Gini Federal New size Current
average average assets size ratio (%) average coefficient contract standard size
firm size firm size ($ million) size factor (%) ($ million) standard
($ million) ($ million) ($ million) ($ million)
--------------------------------------------------------------------------------------------------------------------------------------------------------
221310, Water supply and irrigation $2.2 $110.7 $7.5 46.5 $886.6 0.854 -15.0% ........... ...........
systems...........................
14.0 25.5 $35.5 ........... 19.0 $35.5 $10.0 $25.5 $7.0
221320, Sewage treatment facilities 3.5 37.0 ........... 55.8 182.7 0.834 9.8% ........... ...........
19.0 10.0 ........... ........... 7.0 $30.0 ........... 19.0 7.0
221330, Steam and air-conditioning 27.3 50.6 ........... 61.4 155.2 0.501 ........... ........... ...........
supply............................
35.5 14.0 ........... ........... 7.0 $5.0 ........... 14.0 12.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Evaluation of Electric Utilities Industries (NAICS Codes 221111 to
221122)
NAICS Industry Group 2211, Electric Power Generation, transmission,
and distribution, consists of six industries that currently have a
common size standard of 4 million megawatt hours (MWh) from the sale
and total electric output for the preceding fiscal year. These
industries are: NAICS 221111, Hydroelectric Power Generation; NAICS
221112, Fossil Fuel Electric Power Generation; NAICS 221113, Nuclear
Electric Power Generation; NAICS 221119, Other Electric Power
Generation; NAICS 221121, Electric Bulk Power Transmission and Control;
and NAICS 221122, Electric Power Distribution. To qualify as small
under this size standard, a firm, including its affiliates, must be
primarily engaged in the generation, transmission and/or distribution
of electric energy for sale and its total electric output for preceding
fiscal year does not exceed 4 million megawatt hours (see Footnote 1 in
13 CFR 121.201). SBA included this requirement with the 4 million MWh
size standard to prevent large non-electric firms and/or their electric
services subsidiaries from qualifying as small.
In this proposed rule, SBA has considered three possible changes to
the current size standard for the six industries under NAICS Industry
Group 2211: (1) Increasing the current MWh based size standard from 4
million MWh to 8 million MWh, and modifying Footnote 1; (2) adding an
employee based size standard of 500 employees along with the 8 million
MWh size standard and eliminating Footnote 1; and (3) replacing the
current 4 million MWh size standard with an employee based size
standard of 500 employees and eliminating Footnote 1.
SBA is concerned that the ``primarily engaged'' requirement to
qualify as small under the MWh based size standard may restrict Federal
contracting opportunities for small businesses that are developing
capabilities in electric energy production and are still engaged in
activities in other industries. To qualify as small under receipts
based and employee based size standards for other industries, SBA's
size regulations do not include the ``primary industry'' requirement to
compete as an eligible small business on Federal procurement. In
addition, the current footnote could be interpreted incorrectly that
the concern and each of its affiliates must be primarily engaged in
electric generation, transmission, or generation. That was never the
intent of the footnote. Rather the footnote was meant to look at
primary industry of the concern and its affiliates as a whole. The
``primarily engaged'' requirement would no longer be necessary by
combining an employee based size standard with the MWh based size
standard or by replacing it with an employee based size standard.
SBA established the 4 million MWh size standard for electric
services in 1974 (39 FR 22163, June 20, 1974 and 39 FR 30345, August
22, 1974). Prior to that, a generic receipts based size standard of $1
million was applied to electric services and other services industries
for which SBA had not established an industry specific size standard.
SBA provided only the general reasons for adopting the 4 million MWh
size standard in the 1974 proposed and final rules. SBA's analysis of
industry data available at that time from the Federal Power
Administration had found that the largest 20 percent of firms dominated
the industry in terms of total electric output, sales, assets, etc. SBA
also observed a trend of increased concentration in the industry. At
the 4 million MWh size standard, as the proposed and final rules noted,
a small business would account for not more than 0.3 percent of total
industry output.
The electric power industry has undergone significant structural
changes since the 1970s. As with other regulated industries, the
electric power industry underwent deregulation leading to unbundling of
generation, transmission, and distribution activities. Retail
competition also has been introduced in 15 states in place of local
monopolies in the electric power market. Merger and acquisition
activities in recent years, especially by holding companies, have
further contributed to the growing concentration in the electric power
industry. New firms producing electric power using alternative energy
sources (solar, wind, etc.) have entered the industry and these firms
tend to be generally smaller than firms producing electricity using
conventional energy sources such as fossil fuel. Electric power
marketers selling electricity in wholesale and retail markets have also
emerged as the result of deregulation. Thus, the electric power
industry today comprises different firms that generate, transmit, and/
or distribute electric services as compared to one company integrating
all of these activities in the past. Although the electric power
industry has undergone significant changes, many large electric power
producers still continue to generate, transmit, and/or distribute
electric
[[Page 42448]]
power either themselves or through various subsidiaries. The current
industry's structure reflecting the deregulated environment may have
implications on the appropriateness of the current size standard for
electric utilities.
The uniqueness of the electric power industry presents several
challenges in analyzing the size standard for NAICS Industry Group
2211. Due to the highly capital intensive nature of generating and
transmitting electricity, a few very large firms account for most of
the generation and transmission of electric power. However, a large
number of small firms also generate and distribute a small amount of
electric power. As a result of the concentration of most of the
activity in the few largest firms and the small number of firms
operating in most of the specific industries for electric generation,
transmission, and distribution industries, data from the Census
Bureau's special tabulation contain a significant amount of suppressed
data, limiting our ability to use them for size standards analysis
using SBA's size standards methodology. More importantly, the Census
Bureau's Economic Census does not collect data on electric output and
no comparison groups exist to assess differing characteristics of
individual industries based on electric output, thereby rendering most
of the SBA's size standards methodology not applicable to analyze MWh
based size standards for electric utilities.
Consequently, SBA has examined the changes in electric power
industry structure since 1974 using data on privately owned for-profit
electric generators to assess whether the current size standard should
be modified to more appropriately reflect today's electric power
industry composition. As mentioned earlier, these data were obtained
from the EIA's Web site and were adjusted for affiliation using the
information provided by an industry association. Data on electric power
generators are the appropriate data available that are most comparable
with the data SBA evaluated in 1974. Because of the lack of comparable
historical data on electric transmission and distribution, the new size
standard that SBA has considered proposing for electric generators will
also apply to the transmission, and distribution industries. Although
deregulation has resulted in unbundling of generation, transmission,
and distribution activities, many of the firms engaged in the electric
power generation are still engaged in transmission or/and distribution
activities. Thus, SBA believes that a common size standard is still
more appropriate for all the electric generation, transmission, and
distribution industries than having a separate size standard for each
of these activities, whether it is based on MWh, number of employees,
or combination of both.
Based on the historical analysis of industry factors, one of the
three alternatives SBA considered is to increase the current 4 million
MWh size standard for NAICS Industry Group 2211, to 8 million MWh. SBA
bases this proposed increase on several considerations. First, the data
show that the industry has become much more concentrated today than it
was in the early 1970s. Data on electric power generators from the U.S.
Department of Energy's Energy Information Agency (EIA) and an analysis
provided to SBA by an industry association showed that the share of the
largest 20 percent of firms in the industry output increased from 73
percent in 1974 to 97 percent in 2009. Similarly, the Gini coefficient
index characterizing the distribution of firms by electric output size
increased from 0.698 to 0.909 during that period. These two trends
indicate a significant increase in industry concentration and strongly
support an increase to the existing size standard. Second, despite the
increased industry concentration, average firm size decreased by almost
16 percent from 7.6 million MWh in 1974 to 6.4 million MWh in 2009. As
mentioned above, many new, very small firms have entered the electric
power generation industry. This decline in average firm size indicates
that the current size standard may not need to be increased. Third, to
attain the 1974 market share of a small electric utility company of 0.3
percent and the 1974 cumulative market share of small electric
utilities of 6.7 percent of the industry output in 2009 would support
an increase to the current size standard in the range of 6 million MWh
to 9 million MWh.
SBA examined Federal contracting trends for electric power
generation, transmission, and distribution during fiscal years 2008-
2010. Federal contracting for NAICS Industry Group 2211 averaged $1.7
billion per year during this period. Of these total Federal contract
dollars, small businesses obtained approximately 6 percent, which was
very similar to the small business share of total industry receipts.
Because the small business share in the Federal market was similar to
the small business share of total industry receipts, the Federal
contracting was not a significant factor. However, small business
shares of both total contract dollars and total industry receipts for
electric services industries were appreciably lower than those for
other industries, warranting an increase to the current size standard.
SBA considered proposing an 8 million MWh size standard, as it
would maintain the small business coverage ratio at the 4 million MWh
size standard in 1974. This would also make the small business coverage
ratio for electric services industries more comparable with the small
business ratios for most other industries that have size standards in
terms of the number of employees or average annual receipts. The small
business coverage ratios (i.e., the percentage of total firms in an
industry classified as small) for electric services industries under
the current 4 million MWh size standard are appreciably lower than
those for other industries. SBA, however, is concerned that a size
standard that is more than two times the current size standard would
include extremely large firms with billions of dollars in revenues, as
well as firms that may not need Federal assistance designed for small
businesses. Smaller firms within the electric power industry today tend
to be much more specialized in providing alternative sources of energy
on a much smaller scale than traditional electric power generators.
Wholesale and retail power marketers that sell power generated by very
large electric power generators also tend to be relatively small. A
size standard more than two times the current size standard may put
these small electric power generators and small power marketers in
competitive disadvantage, and it may result in mischaracterizing the
small business segment of the electric power industry.
If SBA were to adopt the solely MWh based measure of 8 million MWh
size standard for NAICS Industry Group 2211 considered above, it
believes that Footnote 1 needs to be revised to make it clearer how SBA
determines whether a firm is primarily engaged in electric generation,
transmission, or distribution. As discussed previously, a reader of the
current footnote might incorrectly interpret that the concern and each
of its affiliates must be primarily engaged in electric generation,
transmission or generation. To correct this, SBA would consider
revising Footnote 1 by substituting the term ``primarily engaged'' with
``primary industry'' and applying 13 CFR 121.107 when determining the
primary industry of the firm. With these changes, the revised Footnote
1 would read as follows:
1. NAICS codes 221111, 221112, 221113, 221119, 221121, and 221122--
A firm, combined with its affiliates, is
[[Page 42449]]
small if its primary industry is the generation, transmission, and/or
distribution of electric energy for sale, and its total electric output
for the preceding fiscal year did not exceed 8 million megawatt hours.
In determining small business eligibility, the megawatt hours of the
firm and each affiliate are combined and the determination of primary
industry is based on the provisions of 13 CFR 121.107.
Comments supporting the first alternative in which SBA considered
to increase the size standard to 8 million MWh should also address
whether the suggested changes to the existing footnote will
sufficiently clarify and improve upon the application of a primary
industry requirement.
As an alternative to increasing the current MWh based size
standard, SBA considered adding an employee based size standard along
with the proposed 8 million MWh size standard and removing Footnote 1
on the ``primarily engaged'' requirement. As discussed above, SBA is
concerned that the current requirement for a firm to be primarily
engaged in generation, transmission, or distribution of electric power
to qualify for Federal small business assistance may have adversely
affected small businesses interested in Federal contracting
opportunities. Since deregulation, Federal agencies have been seeking
out small businesses involved in the electric power generation using
alternative energy sources and/or in electric power distribution for
procurement of electric power. SBA has received several size protests
involving the application of the requirement that businesses be
primarily engaged in generation, transmission, or distribution of
electric power to qualify for Federal small business assistance. The
purpose of the ``primarily engaged'' requirement was to prevent a large
business not involved in the electric power generation, transmission,
or distribution industries from qualifying itself or its electric power
affiliate(s) as small. Based on review of those cases, SBA believes
that requirement under today industry's structure may be too
restrictive and, therefore, unintentionally limiting Federal
contracting opportunities for small businesses involved in electric
generation and distribution. By combining an employee based size
standard with the MWh based size standard, affiliations with other
businesses will be fully captured through number of employees, thereby
rendering the ``primarily engaged'' requirement unnecessary.
Accordingly, SBA has considered adding a 500 employee size standard
along with the 8 million MWh size standard and removing Footnote 1. The
500 employee size standard is based on a comparison of the small
business coverage ratios under the proposed 8 million MWh size standard
and the same small business coverage ratio in terms of number of
employees. An electric power generator with 250 to 500 employees has a
market share of approximately 0.3 percent and the cumulative market
share of approximately 9 percent of the industry electric output.
Although SBA could have also considered proposing a 250 employee size
standard, it believes that a 500 employee size standard is more
appropriate for two reasons. First, a 500 employee size standard is
more consistent with SBA's ``Size Standards Methodology'' that
considers 500 employees as a starting point (i.e., 500 employees is the
employee based anchor size standard) for considering an employee based
size standard for an industry. Second, since the industry coverage
ratios under the 250 employees size standard would be considerably
lower than typically observed in most other industries with receipts
based or employee based size standards, selecting the higher 500
employee size standard may better capture the small business segment
within the electric utilities industry.
Adding number of employees as a component of the size standard
would not be unique to industries in NAICS Industry Group 2211. The
small business size standard for NAICS 324110, Petroleum Refineries,
has had two components to its size standard for at least 20 years.
Currently a petroleum refiner is small for Federal government
procurement if it has no more than 1,500 employees and refining
capacity of 125,000 barrels per calendar day.
As the second alternative to increasing the current size standard
to 8 million MWh, SBA also considered proposing to replace the current
MWh based size standard with a 500 employee size standard. An employee
based size standard has several advantages over the MWh based size
standard. First, as stated earlier, the ``primarily engaged''
requirement (Footnote 1) would no longer be necessary under the
employee based size standard as it will capture the total size of firms
that are involved in both electric services industries and nonelectric
industries. Second, this would eliminate the difficulty in ascertaining
the ``primarily engaged'' requirement in size status protests involving
companies that are engaged in both electric services and other
industries. Third, without the ``primarily engaged'' requirement under
an employee based size standard, new entrants to electric power
industry (especially small firms that generate electric power using
alternative sources and still have significant involvement in other
industries) can qualify for small business contracting opportunities.
Fourth, the number of employees is a more appropriate measure to
determine small business size status. Under the MWh based measure, to
qualify as small for electric services only the electric output
generated, transmitted, or distributed is counted. All other activities
of the firm are not counted in determining its size. Consequently, a
firm involved in multiple industries may be significantly larger than
another firm at the same electric output level that is exclusively
involved in electric services. This is inconsistent with how SBA
defines size standards for other industries in which the size of a firm
includes the employees or receipts from all industries. Fifth, the
number of employees would also be consistent with the size measure SBA
uses for all manufacturers, and several other industries. SBA also uses
an employee based size standard to establish eligibility to provide
manufactured products for Federal government as small distributors.
Electric generation, while not classified as manufacturing under the
NAICS, involves processes that are akin to manufacturing in creating
electric power. The process transforms some form of raw materials (such
as fossil fuel, wind, solar, hydro, etc.) to electric power through the
application of significant levels of capital equipment and
infrastructure. Furthermore, as discussed in SBA's ``Size Standards
Methodology,'' an industry that is capital intensive is generally
viewed by SBA as supporting an employee based size standard. Sixth,
this would enable SBA to analyze size standards for electric services
industries more consistently by using its ``Size Standards
Methodology'' that it applies to all receipts and employee based size
standards. Seventh, an employee based size standard would also help
simplify size standards.
Among the three options considered, SBA strongly favors, for the
reasons discussed above, adopting the second alternative to the MWh
based size standard that would replace the current 4 million MWh size
standard and the ``primarily engaged'' requirement in Footnote 1 with
an employee based size standard of 500 employees. SBA is specifically
interested in comments addressing adverse consequences, if any, of
using a 500 employee size
[[Page 42450]]
standard instead of a MWh based size standard. The comments should
explain how an employee based size standard could impact small
businesses and why the number of employees would be a less preferable
size standard measure to a MWh based measure. Barring any adverse
consequences, SBA would strongly consider eliminating the MWh based
size standard and adopting just an employee size standard instead.
However, the Agency is reluctant to eliminate the MWh based size
standard without first providing the public with an opportunity to
comment on this change, along with an assessment of whether an updated
8 million MWh size standard or combining it with a 500 employee size
standard would be more appropriate instead.
To simplify size standards, SBA has established or proposed common
size standards for closely related industries in other NAICS Sectors.
Within NAICS Sector 22, SBA is proposing a 500 employees common size
standard for all industries in NAICS Industry Group 2211 for
consistency with the current common size standard and for
simplification of size standards by having fewer differing size
standard levels. In addition, as mentioned earlier, Census suppresses
much of the industry level data due to the limited number of electric
generation, transmission, and distribution firms. The data reflect that
activity is concentrated among a few large firms. This makes analyzing
industry specific size standards extremely difficult. In addition, many
businesses engaged in electric services also operate in one or two of
the other industries. Consequently, industry specific size standards
may result in businesses typically engaged in other closely related
industries subject to differing size standards.
Evaluation of Dominance in Field of Operation
SBA has determined that no firm in NAICS Sector 22, Utilities, for
which it has proposed to increase or modify size standards, will be
large enough at the proposed size standard to dominate its field of
operation. At the proposed size standards, if adopted, small business
shares of total industry receipts among those industries vary from 0.3
percent to 1.5 percent. These levels of market share effectively
preclude a firm at the proposed size standards from exerting control on
its industry.
Proposed Changes to Size Standards
Based on the analyses discussed above, SBA proposes to increase
receipts based size standards for three industries and change measure
of size from the megawatt hours to the number of employees in six
industries in Sector 22. The proposed changes are summarized in Table
4, Summary of Proposed Size Standards Revisions, below.
Table 4--Summary of Proposed Size Standards Revisions
----------------------------------------------------------------------------------------------------------------
NAICS Code NAICS industry title Current size standard Proposed size standard
----------------------------------------------------------------------------------------------------------------
221111................... Hydroelectric Power 4 million megawatt hours 500 employees.
Generation.
221112................... Fossil Fuel Electric 4 million megawatt hours 500 employees.
Power Generation.
221113................... Nuclear Electric Power 4 million megawatt hours 500 employees.
Generation.
221119................... Other Electric Power 4 million megawatt hours 500 employees.
Generation.
221121................... Electric Bulk Power 4 million megawatt hours 500 employees.
Transmission and
Control.
221122................... Electric Power 4 million megawatt hours 500 employees.
Distribution.
221310................... Water Supply and $7.0 million............ $25.5 million.
Irrigation Systems.
221320................... Sewage Treatment $7.0 million............ $19.0 million.
Facilities.
221330................... Steam and Air- $12.5 million........... $14.0 million.
Conditioning Supply.
----------------------------------------------------------------------------------------------------------------
Request for Comments
SBA invites public comments on this proposed rule, especially on
the following issues.
1. To simplify size standards, SBA proposes eight fixed levels for
receipts based size standards: $5 million, $7 million, $10 million, $14
million, $19 million, $25.5 million, $30 million, and $35.5 million.
SBA invites comments on whether simplification of size standards in
this way is necessary and if these proposed fixed size levels are
appropriate. SBA welcomes suggestions on alternative approaches to
simplifying small business size standards.
2. SBA seeks feedback on whether the proposed levels of size
standards are appropriate given the economic characteristics of each
industry. SBA also seeks feedback and suggestions on alternative
standards, if they would be more appropriate, including whether the
number of employees is a more suitable measure of size for certain
industries that currently have either receipts or megawatt hours based
size standards and what that employee level should be.
3. SBA's proposed size standards are based on its evaluation of
five primary factors: average firm size, average assets size (as a
proxy of startup costs and entry barriers), four-firm concentration
ratio, distribution of firms by size, and the level and small business
share of Federal contracting dollars. SBA welcomes comments on these
factors and/or suggestions of other factors that it should consider for
assessing industry characteristics when evaluating or revising size
standards. SBA also seeks information on other relevant data sources,
if available.
4. SBA gives equal weight to each of the five primary factors in
all industries. SBA seeks feedback on whether it should continue giving
equal weight to each factor or whether it should give more weight to
one or more factors for certain industries. Recommendations to weigh
some factors more than others should include suggestions on specific
weights for each factor for those industries along with supporting
information.
5. For some industries, based on its analysis of industry and
program data, SBA proposes to increase the existing size standards by a
large amount (such as NAICS 221310 and 221320) while for NAICS 221330
the proposed increase is modest. SBA seeks feedback on whether it
should, as a policy, limit the increase to a size standard and/or
whether it should, as a policy, establish minimum or maximum values for
its size standards. SBA seeks suggestions on appropriate levels of
changes to size standards and on their minimum or maximum levels.
6. SBA has proposed to replace the current 4 million megawatt hours
size standard for all six industries in NAICS Industry Group 2211 with
a 500 employee size standard and eliminate Footnote 1 requiring that a
business concern be primarily engaged in electric generation,
transmission, or distribution to qualify as small for Federal small
[[Page 42451]]
business assistance. SBA invites comments on whether replacing the
current megawatt hours based size standard with an employee based size
standard is appropriate or whether it will have any adverse impacts on
small businesses. Comments that the employee based size standard would
have an adverse impact or that it is not appropriate should explain how
it could impact small businesses and why a standard based on MWh is
preferable to one based on number of employees.
7. SBA also considered proposing to increase the current MWh based
size standard for electric services industries to 8 million MWh as one
alternative and to add a 500 employee size standard to the updated 8
million MWh standard as another alternative. Under the latter
alternative, SBA also considered proposing to eliminate Footnote 1. SBA
seeks comments on whether a combination of megawatt hours and the
number of employees is a more appropriate size standard than either the
number of employees only or megawatt hours only.
8. If SBA were to adopt only the MWh based size standard of 8
million MWh for NAICS Industry Group 2211, it considered revising
Footnote 1 to read as follows: ``NAICS codes 221111, 221112, 221113,
221119, 221121, and 221122--A firm, combined with its affiliates, is
small if its primary industry is the generation, transmission, and/or
distribution of electric energy for sale, and its total electric output
for the preceding fiscal year did not exceed 8 million megawatt hours.
In determining small business eligibility, the megawatt hours of the
firm and each affiliate are combined and the determination of primary
industry is based on the provisions of 13 CFR 121.107.'' SBA seeks
comments on whether the revision to the existing footnote is necessary
and if so whether the revised footnote will sufficiently clarify and
improve upon the application of a primary industry requirement.
9. SBA has proposed a 500 employee based common size standard for
all industries within NAICS Industry Group 2211 (electric generation,
transmission, and distribution). SBA seeks comments on whether it
should continue using a common size standard or adopt separate size
standard for electric generation, transmission, and distribution. If
commenters believe that separate size standards would be more
appropriate, they should explain why and recommend appropriate size
standards for specific industries.
10. For analytical simplicity and efficiency, in this proposed
rule, SBA has refined its size standard methodology to obtain a single
value as a proposed size standard instead of a range of values as it
used in its past size regulations. SBA welcomes any comments on this
procedure and suggestions on alternative methods.
Public comments on the above issues are very valuable to SBA for
validating its size standard methodology and proposed revisions to size
standards in this proposed rule. This will help SBA to move forward
with its review of size standards for other NAICS Sectors. Commenters
addressing size standards for a specific industry or a group of
industries should include relevant data and/or other information
supporting their comments. If comments relate to using size standards
for Federal procurement programs, SBA suggests that commenters provide
information on the size of contracts, the size of businesses that can
undertake the contracts, start-up costs, equipment and other asset
requirements, the amount of subcontracting, other direct and indirect
costs associated with the contracts, the use of mandatory sources of
supply for products and services, and the degree to which contractors
can mark up those costs. Compliance With Executive Orders 12866, 13563,
12988 and 13132, the Paperwork Reduction Act (44 U.S.C. Ch. 35) and the
Regulatory Flexibility Act (5 U.S.C. 601-612).
Executive Order 12866
The Office of Management and Budget (OMB) has determined that this
proposed rule is a ``significant'' regulatory action for purposes of
Executive Order 12866. Accordingly, the next section contains SBA's
Regulatory Impact Analysis. This is not a ``major rule,'' however,
under the Congressional Review Act (5 U.S.C. 800).
Regulatory Impact Analysis
1. Is there a need for the Regulatory Action?
SBA believes that the proposed size standards for a number of
industries in NAICS Sector 22, Utilities, will better reflect the
economic characteristics of small businesses and the Federal government
marketplace in those industries. SBA's mission is to aid and assist
small businesses through a variety of financial, procurement, business
development and advocacy programs. To assist the intended beneficiaries
of these programs, SBA must establish distinct definitions of which
businesses are deemed small businesses. The Small Business Act (15
U.S.C. 632(a)) delegates to SBA's Administrator the responsibility for
establishing small business definitions. The Act also requires that
small business definitions vary to reflect industry differences. The
recently enacted Small Business Jobs Act also requires SBA to review
all size standards and make necessary adjustments to reflect market
conditions. The Supplementary Information section of this proposed rule
explains SBA's methodology for analyzing a size standard for a
particular industry.
2. What are the Potential Benefits and Costs of this Regulatory Action?
The most significant benefit to businesses obtaining small business
status because of this rule is gaining eligibility for Federal small
business assistance programs. These include SBA's financial assistance
programs, economic injury disaster loans, and Federal procurement
programs intended for small businesses. Federal procurement programs
provide targeted opportunities for small businesses under SBA's
business development programs, such as 8(a), Small Disadvantaged
Businesses (SDB), small businesses located in Historically
Underutilized Business Zones (HUBZones), women-owned small businesses
(WOSB), and service-disabled veteran-owned small business concerns
(SDVO SBC). Federal agencies may also use SBA size standards for a
variety of other regulatory and program purposes. These programs assist
small businesses to become more knowledgeable, stable, and competitive.
In nine industries for which SBA has proposed increasing size
standards, SBA estimates that about 400 additional firms will obtain
small business status and become eligible for these programs. That
represents approximately seven percent of the total number of firms
that are classified as small under the current standards in all
industries within NAICS Sector 22 that are reviewed in this proposed
rule. If adopted as proposed, this will increase the small business
share of total industry receipts from approximately 21 percent under
the current size standards to 27 percent.
Three groups will benefit from these proposed size standards if
they are adopted as proposed: (1) Some businesses that are above the
current size standards will gain small business status under the
revised size standards, thereby enabling them to participate in Federal
small business assistance programs; (2) growing small businesses that
are close to exceeding the current size standards will be able to
retain their small business status under the revised size standards,
thereby enabling them to continue their participation in the
[[Page 42452]]
programs; and (3) Federal agencies will have a larger pool of small
businesses from which to draw for their small business procurement
programs.
Under SBA's 7(a) Business and 504 Loan Programs, based on the
fiscal years 2008 to 2010 data, SBA estimates that around 10 to 15
additional loans totaling about $2 million to $3 million in Federal
loan guarantees could be made to these newly defined small businesses
under the proposed size standards. Increasing the size standards will
likely result in an increase in small business guaranteed loans to
businesses in these industries, but it would be impractical to try to
estimate exactly the extent of their number and total amount loaned.
Under the Jobs Act, SBA can now guarantee substantially larger loans
than in the past. In addition, the Jobs Act established an alternative
size standard ($15 million in tangible net worth and $5 million in net
income after income taxes) for business concerns that do not meet the
size standards for their industry. Therefore, SBA finds it similarly
difficult to quantify the impact of these proposed standards on its
7(a) and 504 Loan Programs.
Newly defined small businesses will also benefit from SBA's
Economic Injury Disaster Loan (EIDL) Program. However, since the
benefit under this program is contingent on the occurrence and severity
of a disaster, SBA cannot make a meaningful estimate of benefits for
future disasters.
To the extent that those 400 newly defined additional small firms
could become active in Federal procurement programs, the proposed
changes, if adopted, may entail some additional administrative costs to
the Federal Government associated with additional bidders for Federal
small business procurement opportunities. In addition, there could be
more firms seeking SBA guaranteed loans, more firms eligible for
enrollment in the CCR's Dynamic Small Business Search database and more
firms seeking certification as 8(a) or HUBZone firms or those
qualifying for small business, WOSB, SDVO SBC, and SDB status. Among
those newly defined small businesses seeking SBA assistance, there
could be some additional costs associated with compliance and
verification of small business status and protests of small business
status. These added costs will be minimal because mechanisms are
already in place to handle these administrative requirements.
Additionally, the costs to the Federal Government may be higher on
some Federal contracts. With a greater number of businesses defined as
small, Federal agencies may choose to set aside more contracts for
competition among small businesses rather than using full and open
competition. The movement from unrestricted to small business set-aside
contracting might result in competition among fewer total bidders,
although there will be more small businesses eligible to submit offers.
However, the additional costs associated with fewer bidders, however,
are expected to be minor since, as a matter of law, procurements may be
set aside for small businesses or reserved for the 8(a), HUBZone, WOSB,
or SDVO SBC Programs only if awards are expected to be made at fair and
reasonable prices. In addition, higher costs may result if more full
and open contracts are awarded to HUBZone businesses that receive price
evaluation preferences.
The proposed size standards, if adopted, may have some
distributional effects among large and small businesses. Although SBA
cannot estimate with certainty the actual outcome of the gains and
losses among small and large businesses, it can identify several
probable impacts. There may be a transfer of some Federal contracts to
small businesses from large businesses. Large businesses may have fewer
Federal contract opportunities as Federal agencies decide to set aside
more Federal contracts for small businesses. In addition, some Federal
contracts may be awarded to HUBZone firms instead of large businesses
since these firms may be eligible for a price evaluation preference for
contracts when they compete on a full and open basis. Similarly,
currently defined small businesses may obtain fewer Federal contracts
due to the increased competition from more businesses defined as small.
This transfer may be offset by a greater number of Federal procurements
set aside for all small businesses. The number of newly defined and
expanding small businesses that are willing and able to sell to the
Federal Government will limit the potential transfer of contracts away
from large and currently defined small businesses. SBA cannot estimate
the potential distributional impacts of these transfers with any degree
of precision. The proposed revisions to the existing size standards for
NAICS Sector 22, Utilities, are consistent with SBA's statutory mandate
to assist small business. This regulatory action promotes the
Administration's objectives. One of SBA's goals in support of the
Administration's objectives is to help individual small businesses
succeed through fair and equitable access to capital and credit,
Government contracts, and management and technical assistance.
Reviewing and modifying size standards, when appropriate, ensures that
intended beneficiaries have access to the small business programs
designed to assist them.
Executive Order 13563
A description of the need for this regulatory action and benefits
and costs associated with this action, including possible
distributional impacts that relate to Executive Order 13563, is
included above in the Regulatory Impact Analysis under Executive Order
12866.
In an effort to engage interested parties in this action, SBA has
presented its size standards methodology (discussed above under
Supplementary Information) to various industry associations and trade
groups. SBA also met with various industry groups to get their feedback
on its methodology and other size standards issues. In addition, SBA
presented its size standards methodology to businesses in 13 cities in
the U.S. and sought their input as part of the Jobs Act Tours. The
presentation included information on the status of the comprehensive
size standards review and on how interested parties can provide SBA
with input and feedback on size standards review.
Additionally, SBA sent letters to the Directors of the Offices of
Small and Disadvantaged Business Utilization (OSDBU) at several Federal
agencies with considerable procurement responsibilities requesting
their feedback on how the agencies use SBA size standards and whether
current standards meet their programmatic needs (both procurement and
non-procurement). SBA gave appropriate consideration to all input,
suggestions, recommendations, and relevant information obtained from
industry groups, individual businesses, and Federal agencies in
preparing this proposed rule.
The review of size standards in NAICS Sector 22, Utilities, is
consistent with Executive Order 13563, Section 6, calling for
retrospective analyses of existing rules. As discussed previously,
SBA's last comprehensive review of size standards was during the late
1970s and early 1980s. Since then, except for periodic adjustments of
monetary based size standards for inflation, most reviews were limited
to a few specific industries in response to requests from the public
and Federal agencies. SBA recognizes that changes in industry structure
and the Federal marketplace over time have rendered existing size
standards for some industries no longer supportable by current data.
[[Page 42453]]
Accordingly, in 2007, SBA began a comprehensive review of its size
standards to ensure that existing size standards have supportable bases
and to revise them when necessary. In addition, on September 27, 2010,
the President of the United States signed the Small Business Jobs Act
of 2010 (Jobs Act). The Jobs Act directs SBA to conduct a detailed
review of all size standards and to make appropriate adjustments to
reflect market conditions. Specifically, the Jobs Act requires SBA to
conduct a detailed review of at least one-third of all size standards
during every 18-month period from the date of its enactment and do a
complete review of all size standards not less frequently than once
every 5 years thereafter.
Executive Order 12988
This action meets applicable standards set forth in Sections 3(a)
and 3(b)(2) of Executive Order 12988, Civil Justice reforms, to
minimize litigation, eliminate ambiguity, and reduce burden. The action
does not have retroactive or preemptive effect.
Executive Order 13132
For the purposes of Executive Order 13132, SBA has determined that
this proposed rule will not have substantial, direct effect on the
States, on the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government. Therefore, SBA has determined that this
proposed rule has no federalism implications warranting preparation of
a federalism assessment.
Paperwork Reduction Act
For the purpose of the Paperwork Reduction Act, 44 U.S.C. Ch. 35,
SBA has determined that this rule will not impose new reporting or
record keeping requirements.
Initial Regulatory Flexibility Analysis
Under the Regulatory Flexibility Act (RFA), this proposed rule, if
adopted, may have a significant impact on a substantial number of small
entities in NAICS Sector 22, Utilities. As described above, this rule
may affect small entities seeking Federal contracts, loans under SBA's
7(a), 504 and Economic Injury Disaster Loan Programs, and assistance
under other Federal small business programs.
Immediately below, SBA sets forth an initial regulatory flexibility
analysis (IRFA) of this proposed rule addressing the following
questions: (1) What are the need for and objective of the rule?; (2)
What are SBA's description and estimate of the number of small entities
to which the rule will apply?; (3) What are the projected reporting,
record keeping and other compliance requirements of the rule?; (4) What
are the relevant Federal rules that may duplicate, overlap or conflict
with the rule?; and (5) What alternatives will allow the Agency to
accomplish its regulatory objectives while minimizing the impact on
small entities?
1. What are the need for and objective of the rule?
Most of the size standards in NAICS Sector 22, Utilities, have not
been reviewed since the early 1980s. Technology, productivity growth,
international competition, mergers and acquisitions, and updated
industry definitions may have changed the structure of many industries
in the Sector. Such changes can be sufficient to support a revision to
size standards for some industries. Based on its analysis of the latest
data available, SBA believes that the proposed size standards in this
rule more appropriately reflect the size of businesses in those
industries that need Federal assistance. The recently enacted Small
Business Jobs Act also requires SBA to review all size standards and
make necessary adjustments to reflect market conditions.
2. What is SBA's description and estimate of the number of small
entities to which the rule will apply?
If the proposed rule is adopted in its present form, SBA estimates
that about 400 additional firms will become small because of proposed
revisions to size standards in nine industries. That represents about 7
percent of total firms that are small under current size standards in
all industries within NAICS Sector 22 covered by this proposed rule.
This will result in an increase in the small business share of total
industry receipts for those industries from about 21 percent under the
current size standards to about 27 percent under the proposed size
standards. The proposed size standards, if adopted, will enable more
small businesses to retain their small business status for a longer
period. Many have lost their eligibility and find it difficult to
compete at such low levels with companies that are significantly larger
than they are. SBA believes the competitive impact will be positive for
existing small businesses and for those that exceed the current size
standards but are on the very low end of those that are not small. They
might otherwise be called or referred to as mid-sized businesses,
although SBA only defines what is small; other entities are other than
small.
3. What are the projected reporting, record keeping and other
compliance requirements of the rule?
Proposed size standards changes do not impose any additional
reporting or record keeping requirements on small entities. However,
qualifying for Federal procurement and a number of other Federal
programs requires that entities register in the Central Contractor
Registration (CCR) database and certify at least annually that they are
small in the Online Representations and Certifications Application
(ORCA). Therefore, businesses opting to participate in those programs
must comply with CCR and ORCA requirements. There are no costs
associated with either CCR registration or ORCA certification. Changing
size standards alters eligibility for SBA programs that assist small
businesses, but does not impose a regulatory burden as they neither
regulate nor control business behavior.
4. What are the relevant Federal rules, which may duplicate, overlap or
conflict with the rule?
Under Sec. 3(a)(2)(C) of the Small Business Act, 15 U.S.C.
632(a)(2)(c), Federal agencies must use SBA's size standards to define
a small business, unless specifically authorized by statute to do
otherwise. In 1995, SBA published in the Federal Register a list of
statutory and regulatory size standards that identified the application
of SBA's size standards as well as other size standards used by Federal
agencies (60 FR 57988 (November 24, 1995)). SBA is not aware of any
Federal rule that would duplicate or conflict with establishing size
standards.
However, the Small Business Act and SBA's regulations allow Federal
agencies to develop different size standards if they believe that SBA's
size standards are not appropriate for their programs, with the
approval of SBA's Administrator (13 CFR 121.903). Additionally, the
Regulatory Flexibility Act authorizes an Agency to establish an
alternative small business definition after consultation with the
Office of Advocacy of the U.S. Small Business Administration (5 U.S.C.
601(3)).
5. What alternatives will allow the Agency to accomplish its regulatory
objectives while minimizing the impact on small entities?
By law, SBA is required to develop numerical size standards for
establishing eligibility for Federal small
[[Page 42454]]
business assistance programs. Other than varying size standards by
industry and changing the size measures, no practical alternative
exists to the systems of numerical size standards.
List of Subjects in 13 CFR Part 121
Administrative practice and procedure, Government procurement,
Government property, Grant programs--business, Individuals with
disabilities, Loan programs--business, Reporting and recordkeeping
requirements, Small businesses.
For the reasons set forth in the preamble, SBA proposes to amend 13
CFR part 121 as follows:
PART 121--SMALL BUSINESS SIZE REGULATIONS
1. The authority citation for part 121 continues to read as
follows:
Authority: 15 U.S.C. 632, 634(b)(6), 662, and 694a(9).
2. In Sec. 121.201, in the table, revise the entries for
``221111'', ``221112'', ``221113'', ``221119'',''221121'', ``221122'',
``221310'', ``221320'', and ``221330'' to read as follows:
Sec. 121.201 What size standards has SBA identified by North American
Industry Classification System codes?
* * * * *
Small Business Size Standards by NAICS Industry
------------------------------------------------------------------------
Size standards Size standards
NAICS codes NAICS U.S. industry in millions of in number of
title dollars employees
------------------------------------------------------------------------
* * * * * * *
221111........ Hydroelectric Power .............. 500
Generation.
221112........ Fossil Fuel Electric .............. 500
Power Generation.
221113........ Nuclear Electric Power .............. 500
Generation.
221119........ Other Electric Power .............. 500
Generation.
221121........ Electric Bulk Power .............. 500
Transmission and
Control.
221122........ Electric Power .............. 500
Distribution.
* * * * * * *
221310........ Water Supply and $25.5 ..............
Irrigation Systems.
221320........ Sewage Treatment 19.0 ..............
Facilities.
221330........ Steam and Air- 14.0 ..............
Conditioning Supply.
* * * * * * *
------------------------------------------------------------------------
3. In Sec. 121.201, at the end the table ``Small Business Size
Standards by NAICS Industry,'' remove and reserve Footnote 1 to read as
follows:
* * * * *
FOOTNOTES
1. [Reserved].
* * * * *
Dated: February 28, 2012.
Karen G. Mills,
Administrator.
[FR Doc. 2012-17441 Filed 7-18-12; 8:45 am]
BILLING CODE 8025-01-P