[Federal Register Volume 63, Number 84 (Friday, May 1, 1998)] [Rules and Regulations] [Pages 24110-24114] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 98-11626] ======================================================================= ----------------------------------------------------------------------- DEPARTMENT OF AGRICULTURE Forest Service 36 CFR Part 223 RIN 0596-AB41 Sale and Disposal of National Forest Timber; Indices To Determine Market-Related Contract Term Additions AGENCY: Forest Service, USDA. ACTION: Final rule. ----------------------------------------------------------------------- SUMMARY: This final rule amends current regulations providing for Market-Related Contract Term Additions, by requiring the use of Industry Series Producer Price Indices from the Bureau of Labor Statistics, rather than the previously required indices in the Commodity Series. Use of a different Producer Price Index series requires a concomitant change in procedures for determining when market-related contract term additions [[Page 24111]] are needed. In addition to changing the index series, the final rule makes a number of technical changes. The intended affect is to grant timber sale contract term additions based on market criteria that are more representative than those currently used. DATES: This rule is effective June 1, 1998. FOR FURTHER INFORMATION CONTACT: Rex Baumback, Timber Management Staff, MAIL STOP 1105, Forest Service, USDA, P.O. Box 96090, Washington, DC 20090-1105, (202) 205-0855. SUPPLEMENTARY INFORMATION: Background Experience indicates that the lumber market declines that would justify a market-related timber sale contract term addition generally coincide with substantial economic dislocation in the wood products industry. Such economic distress broadly affects community stability, the ability of the wood products industry to supply construction lumber and other wood products from domestic sources, and threatens the existence of wood manufacturing plants needed to meet future demands for wood products. Accordingly, on December 7, 1990, the Department published a final rule (55 FR 50643) to establish procedures at 36 CFR 223.52 for extending contract termination dates to prevent contract default or severe financial loss to the purchaser in response to adverse conditions in the lumber markets. The rule, which has remained in effect until now, provides that if there is a drastic decline in wood product prices a market-related contract term addition would be triggered. The rule also requires the use of various wood product Producer Price Indices, prepared by the Department of Labor, Bureau of Labor Statistics (BLS), to determine whether a drastic reduction in wood product prices has occurred. Since adoption of the rule, a drastic reduction occurred for Douglas-fir, Dressed Index, during the first quarter of 1991 and, most recently, in the second quarter of 1995. As a result, the Forest Service notified purchasers and, upon the purchasers' written request, added an additional year to timber sale contract terms for qualifying contracts. In order to address timber sale purchaser concerns and technical issues related to implementation of this regulation, the Forest Service proposed a revision to this rule and requested public comment on October 21, 1996 (61 FR 54589). The deadline for receiving comments was January 21, 1997. Response to Comments Received Nineteen respondents provided responses to the proposed rule. Comments were received from 14 timber sale purchasers, four timber industry associations, and one consulting forester. A summary of the comments and the Department's response to them follow. General Comments Comment. One respondent requested that efforts to implement changes to Market-Related Contract Term Additions (MRCTA) be delayed until a formal revision of the timber sale contract could be completed. Response. The Department realizes that it would be desirable to consider all possible contract changes at one time. However, while a comprehensive revision of the timber sale contract is being considered, the timeframe for the completion of this revision is undetermined. Furthermore, there will always be a need for periodic revisions of portions of the timber sale contract to meet new situations. The revision of MRCTA procedures will allow the timber sale contract to be more responsive to changing economic conditions; therefore, the Department sees no benefit to delaying amendment of the MRCTA regulations. Comment. One respondent expressed a need for a procedure to address a slow lumber market decline, as well as a rapid lumber market decline. Response. Major softwood lumber market declines during the past 50 years have occurred within a period of 30 months or less. Both the current MRCTA procedures and this final rule evaluate the significance of market changes over a period of 27 months. Data indicate that nearly 50 percent of the total volume sold is contained in contracts shorter than 3 years in length and nearly 80 percent of all timber sale contracts are shorter than 3 years in length. Average contract length has been declining steadily in recent years. A lumber market decline over a period of more than 30 months is unlikely, based on historic trends, and most contracts would not be adversely affected if such a lumber market decline were to occur. Thus, the Department does not agree that there is a need to establish a new procedure to address the unlikely possibility of a slow lumber market decline. Availability of MRCTA Section 223.52(a) of the proposed rule provided that contracts that contain periodic payment requirements will contain a MRCTA provision. Comment. Thirteen respondents stated that since lumber markets are so volatile, MRCTA should be available for all timber sales over 1 year in length or for any sale that is extended beyond 1 year in length for reasons beyond the control of the purchaser. Response. It appears that some of these respondents misinterpreted the proposed rule by concluding that MRCTA would apply only to contracts over 2 years in length. Both the current procedure and the proposed rule provide for MRCTA for any contract that contains periodic payment provisions. Periodic payment provisions are included in contracts that are longer than one full normal operating season. Under current procedures, when contracts are awarded during the normal operating season, the length of the contract could exceed 1 year and not include MRCTA provisions. The Department agrees to change procedures and include MRCTA procedures in timber sale contracts that exceed 1 year in length, regardless of whether or not the contract contains periodic payment provisions, except as provided in Sec. 223.52(a)(3), harvesting rapidly deteriorating timber. However, the Department does not agree with the request to modify timber sale contracts to include MRCTA if those contracts are extended beyond 1 year in length for reasons beyond the control of the purchaser. Since contracts currently contain provisions for compensating purchasers if their contracts are suspended, providing for MRCTA for the few contracts that may be extended beyond 1 year is an additional unnecessary compensation. Selection of Index Section 223.52(a)(2) of the proposed rule provided that the Forest Supervisor would select the price index for contracts. This paragraph in the proposed rule also provides that only one price index may be used in contracts. Comment. Fourteen respondents remarked that purchasers should be allowed to choose the price index when the contract is awarded, based on their assessment of the lumber market and their intended use of the wood from that sale. Some of these respondents said they were concerned about the burden of the Forest Supervisor in choosing an index. Eight respondents said that if purchasers choose the index, the contract could be modified later to change the index if the sale was [[Page 24112]] extended beyond 4 years or was transferred to another party. Response. The index is based on the species and products being sold. It is not a burden on the Forest Supervisor to choose the index, nor are there valid reasons to change the index after the sale is bid. Therefore, the Department declines to change this section of the regulation, based on this comment. Comment. Seventeen respondents proposed using the Wood Chip Index with all qualifying sales, since all sales have a significant chip component and many sales have a mixture of sawtimber and chipable material. Therefore, contract relief would be granted if either the lumber or the wood chip index showed a drastic decline in market price. Response. The Department thinks that the volume of chip by-products produced with a sawlog timber sale is not enough to justify the MRCTA extension, based solely on a drastic decline in the Wood Chip Index. Further, it is the Department's view that inclusion of more than one index in a given timber sale would not meet the ``substantial overriding public interest'' standard required by the National Forest Management Act (16 U.S.C. 472a(c)). Substantial overriding public interest has been determined to exist when the criteria in the regulation have been met. When the criteria in the regulation have been met, there is a disruption of the economy that may result in loss of industry and jobs. If more than one index is used for granting extensions on timber sale contracts, it is unlikely that this criteria for substantial overriding public interest would be met. Harvesting Objective Section 223.52(a)(3)(i) of the proposed rule provided that MRCTA will not be used in timber sales with a primary objective of harvesting damaged, dead, or dying timber. Comment. Nine respondents said that only those sales with accelerated harvest provisions should be exempt from MRCTA and, once the accelerated harvest is completed, the contract should be modified to include MRCTA. These respondents pointed out that many sales containing damaged, dead, or dying timber or salvage are not in need of urgent harvest because the material is not deteriorating rapidly. Response. The Department agrees that some sales containing damaged, dead, or dying timber or salvage are not in need of urgent harvest because the material is not deteriorating rapidly. Therefore, this paragraph has been modified in the final rule to preclude use of MRCTA only when the sale is subject to rapid deterioration. Furthermore, an additional paragraph has been added to state that completion dates specified in such contracts will not be extended, based on MRCTA. Completion dates specified in timber sale contracts usually provide for shorter time periods for the rapid harvest of deteriorating timber or specific timeframes when road construction is required. Stumpage Rate Adjustment Section 223.52(a)(3)(ii) of the proposed rule provided that contracts that contain stumpage rate adjustment provisions will not include MRCTA provisions. Comment. Seventeen respondents indicated that MRCTA and stumpage rate adjustment provisions fulfill separate and distinct functions in the timber sale contract and that both are needed. Response. Market-related contract term addition provides additional time during a significant lumber market decline for purchasers to perform contracts and to avoid a situation requiring administrative intervention. Thus, the MRCTA procedure allows time for the market to improve and provides an opportunity to harvest a mixture of high and low priced sales. Conversely, the stumpage rate adjustment provisions allow the Government and purchaser to share the risk and reward of market fluctuations, protecting the agency's ability to provide an even flow of products in both good and bad markets. The stumpage rate adjustment procedure provides assistance by allowing a reduced price during lumber market declines. Stumpage rate adjustment and market- related contract term addition respond to different problems associated with lumber market declines and both procedures serve useful functions. Therefore, this paragraph is eliminated from the regulation. Price Indices Section 223.52(b)(1)(i) of the proposed rule provided that Bureau of Labor Statistics Producer Price Indices for Hardwood Lumber, Eastern Softwood Lumber, Western Softwood Lumber, and Wood Chips be used in MRCTA provisions. Comment. Eight respondents expressed a need for a separate index for western hardwood sales. Response. There is no index available that represents only western hardwood lumber, since the amount of hardwood lumber produced in the West is too small to provide a meaningful index. The amount of hardwood harvested from Forest Service land in the West is also very small. In addition, the available Hardwood Index is representative of most hardwood markets, including those in the West; therefore, no change is being made from the list of indices from what was proposed. Comment. Eight respondents stated that the Wood Chip Index is based primarily on data on eastern markets (60 percent). They desired more data on western wood chip markets in this index in order to reflect market conditions as closely as possible. Response. Data available for the producer price wood chip index is limited. Using the two lower level indices for short tons (eastern wood chips) and standard units (western wood chips) would weaken the reliability of both indices. Analysis has indicated little difference between the two indices in their ability to identify a severe chip market decline; therefore, the Department will continue using only one national Wood Chip Index in MRCTA. Use of Preliminary Indices Section 223.52(b)(1)(ii) of the proposed rule provided that preliminary index values will be revised when final index values are available, but that the identification of qualifying quarters will not be changed, based on the final index values. Comment. Eight respondents indicated that to simplify recordkeeping and reduce the chance of error, the Forest Service should utilize preliminary indices and not revise indices when final data becomes available. Response. The Department believes that the best available data should be used for determining qualifying quarters for MRCTA and that the chance of an undetected clerical error is slight. Therefore, preliminary indices must be updated as final data becomes available. However, as stated in Sec. 223.52(b)(1)(ii) of the final rule, the determination of qualifying quarters, although based partially on preliminary data, will not be revised when final data becomes available. Significant Market Decline Section 223.52(b)(2) of the proposed rule provided that a significant market decline has occurred when, for 2 or more consecutive quarters, the index is 15 percent below the average index for the four highest of the previous 8 quarters. On average, this criteria indicates an approximate 25 percent decline in price over a 2-year period. [[Page 24113]] Comment. Five respondents stated that the preamble of the proposed rule makes an arbitrary, subjective, and unsupported claim that a significant lumber market decline is defined as a 25 percent decline over a 2-year period. These respondents proposed that the procedures be adjusted to ensure that a market similar to the 1991 lumber market decline trigger an MRCTA for all indices. Response. Between June 1989 and December 1990, the inflation adjusted Softwood Lumber Index declined 16 percent, while the Douglas Fir Dressed lumber index declined 25 percent. Indices, based on a single species, are more volatile. One of the objectives of this MRCTA regulation is to base the drastic wood price determination on indices that are broader-based than a single species. The Department is satisfied with how indices are triggered using the new procedures and no change from the proposed MRCTA triggering procedures is being made. Normal Operating Season Section 223.52(c)(1) of the proposed rule provided that, after the first year of contract time is granted, additional time will be added during the ``normal operating season.'' Comment. Sixteen respondents stated that the term ``normal operating season'' should be redefined for this regulation, so that it includes only time periods which actually allow operations to occur. If the definition of normal operating season is not changed, these respondents suggested that additional time could be added day-for-day to the contract during periods when there are no restrictions on logging. Response. The purpose of a normal operating season is to identify a period of time where additional contract operating time can be granted when the timber sale purchaser is delayed by weather or other reasons. The normal operating season should identify periods of time when the weather is likely to allow logging and operations are not restricted for other reasons. The Department does not believe that a different definition of normal operating season or new criteria for additional contract time is needed for the purposes of this rule. Conclusion The MRCTA rule provides additional contract time on timber sale contracts when severe market declines occur. This final rule revises the current rule to use indices that are more representative of the lumber market and to make technical improvements to procedures. Regulatory Impact This final rule has been reviewed under USDA procedures and Executive Order 12866 on Regulatory Planning and Review. It has been determined that this is not a significant rule. This rule will not have an annual effect of $100 million or more on the economy nor adversely affect productivity, competition, jobs, the environment, public health or safety, nor State or local governments. This rule will not interfere with an action taken or planned by another agency nor raise new legal or policy issues. In short, little or no effect on the national economy will result from this final rule. This action consists of administrative changes to regulations affecting timber sale contract length. The Producer Price Indices selected and revised procedures better reflect the cyclical nature of lumber markets and help the agency determine whether a drastic downturn has actually occurred in these particular markets. Finally, this action will not alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients of such programs. Accordingly, this final rule is not subject to OMB review under Executive Order 12866. Moreover, this final rule has been considered in light of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), and it is hereby certified that this action will not have a significant economic impact on a substantial number of small entities as defined by that Act. Failure to adopt these improved procedures for measuring drastic decline in wood product prices will subject both small purchasers and large purchasers to increased risk of default in those situations where current indices are not as valid as indicators of price decline as those in this final rule. Modifications to timber sale contracts have the intended effect of allowing purchasers of timber sales to complete timber sales when adverse conditions have occurred in the lumber market and when no other means of granting additional contract time are available. Unfunded Mandates Reform Pursuant to Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538), which the President signed into law on March 22, 1995, the Department has assessed the effects of this rule on State, local, and tribal governments and the private sector. This rule does not compel the expenditure of $100 million or more by any State, local, or tribal governments or anyone in the private sector. Therefore, a statement under section 202 of the Act is not required. Environmental Impact This final rule deals with business practices related to timber sale contracts and, as such, has no direct effect on the amount, location, or manner of timber offered for purchase. Section 31.1b of Forest Service Handbook 1909.15 (57 FR 43180; September 18, 1992) excludes from documentation in an environmental assessment or impact statement ``rules, regulations, or policies to establish Service-wide administrative procedures, program processes, or instructions.'' The agency's assessment is that this rule falls within this category of actions and that no extraordinary circumstances exist which would require preparation of an environmental assessment or environmental impact statement. No Takings Implications This rule has been analyzed in accordance with the principles and criteria contained in Executive Order 12630, and it has been determined that the rule does not pose the risk of a taking of Constitutionally- protected private property. There are no Constitutionally-protected private property rights to be affected, since the contract provisions that implement this rule will only be used in new contracts or with contract modifications that are made at the request of the timber sale purchaser. Civil Justice Reform Act This final rule has been reviewed under Executive Order 12988, Civil Justice Reform. This final rule (1) preempts all State and local laws and regulations that are in conflict or which would impede its full implementation; (2) has no retroactive effect; and (3) does not require administrative proceedings before parties may file suit in court challenging its provisions. Controlling Paperwork Burdens on the Public This final rule does not contain any recordkeeping or reporting requirements or other information collection requirements as defined in 5 CFR 1320 and, therefore, imposes no paperwork burden on the public. Accordingly, the review provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501, et seq.) and implementing regulations at 5 CFR part 1320 do not apply. List of Subjects in 36 CFR Part 223 Administrative practice and procedure, Exports, Forests and forest [[Page 24114]] products, Government contracts, National forests, Reporting requirements, Timber sales. Therefore, for the reasons set forth in the preamble, Part 223 of Title 36 of the Code of Federal Regulations is amended, as follows: PART 223--SALE AND DISPOSAL OF NATIONAL FOREST SYSTEM TIMBER 1. The authority citation for part 223 continues to read: Authority: 90 Stat. 2958, 16 U.S.C. 472a; 98 Stat. 2213, 16 U.S.C. 618, 104 Stat. 714-726, 16 U.S.C. 620-620j, unless otherwise noted. 2. Revise Sec. 223.52 to read as follows: Sec. 223.52 Market-related contract term additions. (a) Contract provision. (1) Except as provided in paragraph (a)(3) of this section, each timber sale contract exceeding 1 year in length shall contain a provision for the addition of time to the contract term, under the following conditions: (i) The Chief of the Forest Service has determined that adverse wood products market conditions have resulted in a drastic reduction in wood product prices applicable to the sale; and (ii) The purchaser makes a written request for additional time to perform the contract. (2) The contract term addition provision of the contract must specify the index to be applied to each sale. The Forest Supervisor shall determine, and select from paragraph (b) of this section, the index to be used for each sale based on the species and product characteristics, by volume, being harvested on the sale. The index specified shall represent more than one-half of the advertised volume. (3) A market-related contract term addition provision shall not be included in contracts where the sale has a primary objective of harvesting timber subject to rapid deterioration. (b) Determination of drastic wood product price reductions. (1) The Forest Service shall monitor and use Producer Price Indices, as prepared by the Department of Labor, Bureau of Labor Statistics (BLS), adjusted to a constant dollar base, to determine if market-related contract term additions are warranted. (i) The Forest Service shall monitor and use only the following indices: ------------------------------------------------------------------------ Industry BLS producer price index code ------------------------------------------------------------------------ Hardwood Lumber............................................ 2421# 1 Eastern Softwood Lumber.................................... 2421# 3 Western Softwood Lumber.................................... 2421# 4 Wood Chips................................................. 2421# 5 ------------------------------------------------------------------------ (ii) Preliminary index values will be revised when final index values become available, however, determination of a qualifying quarter will not be revised when final index values become available. (2) The Chief of the Forest Service shall determine that a drastic reduction in wood product prices has occurred when, for 2 or more consecutive quarters, the applicable adjusted price index is less than 85 percent of the average of such adjusted index for the 4 highest of the 8 calendar quarters immediately prior to the qualifying quarter. A qualifying quarter is a quarter where the applicable adjusted index is more than 15 percent below the average of such index for the 4 highest of the previous 8 calendar quarters. Qualifying quarter determinations will be made using the Producer Price Indices for the months of March, June, September, and December. (3) A determination, made pursuant to paragraph (b)(2) of this section, that a drastic reduction in wood product prices has occurred, shall constitute a finding that the substantial overriding public interest justifies the contract term addition. (c) Granting market-related contract term additions. When the Chief of the Forest Service determines, pursuant to this section, that a drastic reduction in wood product prices has occurred, the Forest Service is to notify affected timber sale purchasers. For any contract which has been awarded and has not been terminated, the Forest Service, upon a purchaser's written request, will add 1 year to the contract's terms, except as provided in paragraphs (c)(1) through (4) of this section. This 1-year addition includes time outside of the normal operating season. (1) Additional contract time may not be granted for those portions of the contract which have a required completion date or for those portions of the contract where the Forest Service determines that the timber is in need of urgent removal or that timber deterioration or resource damage will result from delay. (2) For each additional consecutive quarter, in which a contract qualifies for a market-related contract term addition, the Forest Service will, upon the purchaser's written request, add an additional 3 months during the normal operating season to the contract. (3) No more than twice the original contract length or 3 years, whichever is less, shall be added to a contract's term by market- related contract term addition. (4) In no event shall a revised contract term exceed 10 years as a result of market-related contract term additions. (d) Recalculation of periodic payments. Where a contract is lengthened as a result of market conditions, any subsequent periodic payment dates shall be delayed 1 month for each month added to the contract's term. Dated: April 27, 1998. Brian Eliot Burke, Deputy Under Secretary, Natural Resources and Environment. [FR Doc. 98-11626 Filed 4-30-98; 8:45 am] BILLING CODE 3410-11-M