Executive Order 13272; Consideration of Small Entities in Agency Rulemaking

AGENCY:

Office of the General Counsel, Department of Energy.

ACTION:

Notice of procedures and policies.

SUMMARY:

The Department of Energy (DOE) is adopting procedures and policies to ensure that the potential impacts of its draft rules on small businesses, small governmental jurisdictions, and small organizations are properly considered during the rulemaking process. These procedures and policies, which are published for the benefit of the public, also are available on the Office of General Counsel's Web site: http://www.gc.doe.gov.

EFFECTIVE DATE:

The procedures and policies in this notice are effective February 19, 2003.

FOR FURTHER INFORMATION CONTACT:

Michael W. Bowers, Office of the Assistant General Counsel for Regulatory Law, U.S. Department of Energy, 1000 Independence Avenue, SW., GC-74, Washington, DC 20585, (202) 586-2902.

SUPPLEMENTARY INFORMATION:

On August 13, 2002, President Bush issued Executive Order 13272, “Proper Consideration of Small Entities in Agency Rulemaking,” 67 FR 53461 (Aug. 16, 2002). E.O. 13272 generally calls on agencies to establish procedures and policies to promote compliance with the Regulatory Flexibility Act, 5 U.S.C. 601 et seq. More specifically, section 3(a) of the Executive Order requires all Executive agencies to “issue written procedures and policies, consistent with the Act, to ensure that the potential impacts of agencies' draft rules on small businesses, small governmental jurisdictions, and small organizations are properly considered during the rulemaking process.” It also requires agencies to make their procedures and policies available to the public through the Internet or other easily accessible means. Section 3(b) of the Executive Order requires agencies to notify the Chief Counsel for Advocacy of the Small Business Administration (“Office of Advocacy”) of any draft rules that may have a significant economic impact on a substantial number of small entities. Such notification must be made either: (i) When the agency submits a draft rule to the Office of Information and Regulatory Affairs of the Office of Management and Budget under Executive Order 12866, or (ii) if review under E.O. 12866 is not required, at a reasonable time prior to publication of the rule in the Federal Register. Section 3(c) of the Executive Order provides that the agency must give appropriate consideration to Office of Advocacy comments on a draft rule and, subject to narrow exceptions, respond in the notice of final rulemaking to any written comments submitted by the Office of Advocacy on the proposed rule.

The procedures and policies in this notice were reviewed by the Office of Advocacy pursuant to section 3(a) of E.O. 13272, and the Secretary of Energy has approved their publication in the Federal Register.

On the basis of the foregoing, DOE adopts the following Procedures and Policies:

Department of Energy (DOE) Procedures and Policies for Implementing Executive Order 13272; Consideration of Small Entities in Agency Rulemaking

I. Purpose

These procedures and policies implement Executive Order 13272, “Proper Consideration of Small Entities in Agency Rulemaking,” 67 FR 53461 (Aug. 16, 2002), consistent with the Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (“Act”).

II. Applicability

These procedures and policies, which have been approved by the Secretary of Energy, apply to the development of any regulation by DOE (including by the National Nuclear Security Administration) that is subject to notice and comment rulemaking under section 553 of the Administrative Procedure Act (APA), 5 U.S.C. 553, or any other law. For purposes of these procedures and policies, the Federal Energy Regulatory Commission is not considered to be part of DOE.

III. Procedures and Policies

1. Preliminary Determination. In developing a proposed rule, a DOE program office must determine whether an initial regulatory flexibility analysis (IRFA) is required by the Act. The Act requires an agency to prepare and make available for public comment an IRFA for any rule subject to notice and comment requirements (5 U.S.C. 603(a)). The agency must prepare a final regulatory flexibility analysis (FRFA) for a final rule (5 U.S.C. 604(a)). However, the Act provides that these analysis requirements do not apply if the head of the agency certifies that the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities (5 U.S.C. 605(b)).

To make the foregoing determinations, the program office must conduct a preliminary informal analysis to determine if there is any impact on small entities and the magnitude of any impacts. The preliminary analysis must be sufficient to answer the following questions:

a. Does the Act Apply?

The Act applies to any rule subject to notice and comment rulemaking under section 553 of the APA or any other law, including notice and comment rulemaking required by an agency regulation. Among the exemptions from the APA's notice and comment rulemaking requirements are matters relating to agency management or personnel or to public property, loans, grants, benefits, or contracts (5 U.S.C. 553(a)). In addition, the Act does not apply to rules of particular applicability relating to rates, wages, corporate or financial structures or reorganizations thereof, prices, facilities, appliances, services or allowances (see definition of “rule,” 5 U.S.C. 601(2)). Although exempted from notice and comment requirements under the APA, certain rulemakings involving procurement contracts are subject to notice and comment requirements under 41 U.S.C. 418b, and therefore are subject to the Act.

If a rule is being promulgated in response to an emergency that makes compliance with the analysis requirements of the Act impracticable, DOE may delay the completion of a FRFA for a period of up to 180 days after issuance of the rule (5 U.S.C. 608). If a FRFA is not prepared within the 180-day period, the rule will lapse and have no effect.

Program office staff should direct questions regarding the applicability of the Act to a particular rulemaking or category of rulemaking to program counsel at DOE, who may consult the Assistant General Counsel for Regulatory Law.

b. What Is the Applicable Definition of a Small Entity?

The Act defines three categories of small entities: “small business,” “small organization,” and “small governmental jurisdiction.”

The Act defines a “small business” as having the same meaning as “small business concern” under section 3 of the Small Business Act (5 U.S.C. 601(3)). Section 3 of the Small Business Act provides that a small business concern includes any firm that is “independently owned and operated” and is “not dominant in its field of operation” (15 U.S.C. 632). In addition, the Small Business Administration (SBA), as authorized by section 3, has developed specific size standards and related regulations (13 CFR 121.201) that further define “small business concern.” In performing regulatory flexibility analyses, DOE program staff must use SBA size standards for determining the number of small businesses that would be affected by a proposed rule unless an alternative definition of “small business” is adopted following procedures required by the Act (discussed below). The SBA's size standards generally are based on the total number of employees or on gross annual receipts of an enterprise (including affiliates). Beginning on October 1, 2000, the SBA size standards used the North American Industry Classification System (NAICS) to categorize businesses on an industry-by-industry basis. Previously, the SBA size standards were based on the less-detailed Standard Industrial Classification (SIC) codes.

The Act defines a “small organization” as any not-for-profit enterprise that is independently owned and operated and not dominant in its field (5 U.S.C. 601(4)). The Act defines “small governmental jurisdiction” as governments of cities, counties, towns, townships, villages, school districts, or special districts with a population of less than 50,000 (5 U.S.C. 601(5)).

If an agency wishes to use an alternative definition of “small business,” “small organization,” or “small governmental jurisdiction” for purposes of its actions required by the Act, it must consult with the Office of Advocacy on an appropriate alternative definition and publish the proposed alternative definition for public comment in the Federal Register. In addition, if an agency seeks to change the definition of “small business” for rulemaking purposes (i.e., for purposes of determining how a regulation applies to a business of a certain size), the agency must obtain the approval of the SBA Administrator using the procedures outlined in the Small Business Act (see 15 U.S.C. 632(a)(2)(C)(i)-(ii)) and in SBA's regulations (see 13 CFR 121.902(b)). The Administrator's approval is not required, however, if a different standard is specifically authorized by statute.

The Office of Advocacy can assist program office staff who have questions regarding the definitions of small entities and the process for using alternative definitions. Program staff with such questions should contact the Office of Advocacy, U.S. Small Business Administration, 409 Third Street, SW., Washington, DC 20416; telephone (202) 205-6533. In addition, these definitions are discussed in Chapter 1 of the Office of Advocacy's guide for complying with the Act, entitled The Regulatory Flexibility Act: An Implementation Guide for Federal Agencies (“Office of Advocacy Guide”), which is available on the Office of Advocacy's Internet site at: http://www.sba.gov/advo/.

c. What Is the Preliminary Assessment of a Proposed Rule's Economic Impact Based on the Size and Type of Entities Affected and the Likely Overall Cost?

After defining the small entities that would be affected by a proposed rule, the program office staff must gather and consider sufficient information for determining whether the rule, if promulgated, will have a significant economic impact on a substantial number of small entities. There are no “hard” boundaries for the terms “significant economic impact” and “substantial number” of small entities. Significance should be considered relative to the size of the small businesses, the size of competitors' businesses, and any disparity in impact the rule might have on small businesses. It may be appropriate to group small businesses and other small entities into more than one category for purposes of the analysis. The Office of Advocacy Guide, Chapter 1, suggests criteria that may be used to determine significance, including the percentage of revenue or profits affected and effect on the ability of firms to make capital investments. The interpretation of “substantial number” should be made on an industry-specific basis. As explained in the Office of Advocacy Guide, Chapter 1, the absolute number of small entities required to meet the “substantial number” test may vary greatly depending on the size of the universe of small entities within a particular economic or other activity.

The level, scope and complexity of the preliminary analysis under the Act also will vary depending on the characteristics and composition of the industry to be regulated and the nature of proposed regulatory requirements. For example, the level of data collection and analysis in the preliminary assessment will be different for: (1) A proposed rule to establish new energy efficiency standards for a type of home appliance (e.g., refrigerators or furnaces), and (2) a procurement regulation that applies principally to DOE's management and operating contractors but has requirements that flow down to subcontractors, some of whom may be small entities. In the former example of appliance standards, a fairly rigorous analysis of the economic impact on small manufacturers may be warranted because new energy efficiency standards often impose costs on all manufacturers of the affected products, and competition within the industry may be affected. In the latter procurement contract example, it may be difficult to estimate the number of small subcontractors who would be affected by new contract requirements. However, if DOE is contractually obligated to reimburse contractors for the cost of complying with regulatory requirements, the proposed rule would not have a significant economic impact on small entities. Because it is clear that such a proposed rule would not have an adverse economic impact, there is no need to determine the exact number of small contractors that might be affected by the proposed new requirements.

d. Is There Sufficient Factual Basis for Concluding That the Proposed Rule Would Not Have a Significant Economic Impact on a Substantial Number of Small Entities?

The Act permits the head of the agency to forego the preparation of an IRFA upon a written certification that the rule will not have a significant economic impact on a substantial number of small entities. The Act requires certifications to be supported by a “statement of factual basis” (5 U.S.C. 605(b)). At a minimum, the statement of factual basis must contain a description of the small entities that would be directly affected by the proposed rule and the potential economic impacts, as well as the program office's reasoning and assumptions underlying the certification. This statement will be subject to public comment, which will assure either that the certification was not erroneous, or that erroneous certifications are corrected. If the program office is uncertain of the impact on small entities, it should consider: (1) Performing an IRFA with the available data and information, and (2) soliciting public comment on the issue of impacts on small entities. Based on information obtained during the comment process, the program office may determine that a sufficient factual basis exists to certify, in the notice of final rulemaking, that the rule will not have a significant economic impact on a substantial number of small entities.

The Office of Advocacy Guide, Chapter 1, gives examples of adequate and inadequate certifications. One example given of an inadequate certification is an agency statement that the rule would not have a significant economic impact on small entities because they would not be subject to any requirements not applicable to large entities. The Office of Advocacy filed comments with the agency, objecting to the certification because a principal purpose of the Act was to address disproportionate impacts of “one-size-fits-all” regulations on small entities. Therefore, the justification that the same requirements applied to both small and large businesses was inadequate. Other examples of inadequate certifications referenced in the Office of Advocacy Guide involve unsupported generalizations that were inconsistent with readily available factual information about the small entities that would be regulated by a proposed rule.

2. The Initial Regulatory Flexibility Analysis and Notification to Advocacy. If an IRFA is required, the DOE program office must inform the Office of General Counsel point of contact for the Office of Information and Regulatory Affairs in the Office of Management and Budget (OIRA) — currently the Assistant General Counsel for Regulatory Law—that an IRFA is being prepared. This notice may be given when a draft notice of proposed rulemaking is submitted to the Office of General Counsel for review. To comply with the notification requirement in section 3(b) of E.O. 13272, the Office of General Counsel point of contact for OIRA will provide a copy of the draft notice of proposed rulemaking and the draft IRFA to the Office of Advocacy either when: (i) The submission is made to OIRA under E.O. 12866, or (ii) if review under E.O. 12866 is not required, no later than 10 business days before the notice of proposed rulemaking is published in the Federal Register.

The IRFA, or a summary, must be included in the Supplementary Information portion of the notice of proposed rulemaking. The IRFA must describe the economic impact of the proposed rule on small entities that would be directly affected by the proposed rule. Sections 603(b) and (c) of the Act set forth the elements of an IRFA. Each of the elements is discussed in more detail in Chapter 2 of the Office of Advocacy Guide. Section 603(b) requires that the IRFA contain:

• Reasons why action by the agency is being considered;
• A succinct statement of the objectives of, and legal basis for, the proposed rule;
• A description of and, if feasible, an estimate of the number of small entities to which the proposed rule would apply;
• A description of the projected reporting, recordkeeping, and other compliance requirements of the proposed rule, including an estimate of the classes of small entities that would be subject to the requirements and the type of professional skills needed to comply; and
• An identification, to the extent practicable, of all federal rules that may duplicate, overlap or conflict with the proposed rule.

Section 603(c) of the Act provides that the IRFA also must contain:

• A description of any significant alternatives to the proposed rule that would minimize the economic impact on small entities while accomplishing the stated objectives of the applicable statutes; and
• Consistent with applicable statutes, a discussion of significant alternatives such as: (1) Differing compliance or reporting requirements or timetables for small entities; (2) the clarification, consolidation or simplification of compliance and reporting requirements for small entities; (3) the use of performance rather than design standards; and (4) exemption from coverage of the rule, or any part thereof, for small entities.

To estimate the number of small entities to which the proposed rule would apply, DOE program staff should identify each of the affected classes of small businesses according to its NAICS code. They can then use the NAICS code in combination with U.S. Census data to arrive at an estimate of the number of entities in each class. To help agencies with this element of the IRFA, the Office of Advocacy provides a full listing of NAICS codes along with the U.S. Census data for each class on its web page (http://www.sba.gov/advo/stats/us99_n6.pdf).

The Act requires the IRFA to provide either quantifiable or numerical estimates of the impacts of a proposed rule and alternatives to the proposed rule, although more general descriptive statements concerning effects may be provided if quantification is not practicable or reliable (5 U.S.C. 607). The level of the analysis in the IRFA also will depend on such factors as the quality and quantity of available information and the anticipated severity of a rule's impacts on small entities that will be affected by the rule. Generally, the agency must examine the costs and other economic impacts for the industry sectors targeted by the rule. Impacts examined may include economic viability (including closure), competitiveness, productivity, and employment. The analysis should identify cost burdens for the industry sector and for the individual small entities affected. Costs might include engineering and hardware acquisition, maintenance and operation, employee skill and training, and administrative practices (including recordkeeping and reporting). The results of the analysis should allow interested persons to compare the impacts of regulatory alternatives on the differing sizes and types of entities targeted or affected by the rule. The results should enable direct comparison of small and large entities to determine the degree to which the alternatives chosen disproportionately affect small entities or a targeted sector. Furthermore, the analysis should examine whether the alternatives are effectively designed to capture benefits to the public and accomplish the purposes of the statute authorizing the regulations.

The Act provides that agencies may prepare regulatory flexibility analyses in conjunction with, or as a part of, any other analysis required by law as long as the Act's requirements are met (5 U.S.C. 605(a)). For significant regulatory actions requiring preparation of a regulatory impact analysis under Executive Order 12866, the IRFA and the regulatory impact analysis may be prepared together. Program staff must, however, explicitly explain how the requirements of the Act are satisfied.

The DOE program office also must include in the Supplementary Information portion of the notice of proposed rulemaking a summary of the actions that have been or will be taken to assure that small entities are given an opportunity to participate in the rulemaking. Examples of the techniques for accomplishing this are set forth in 5 U.S.C. 609 and include: (1) A statement in an advance notice of proposed rulemaking alerting small entities that the rulemaking may have a significant impact on them; (2) publication of the notice of proposed rulemaking in publications likely to be obtained by small entities; (3) direct notification; (4) conferences or workshops targeted to small entities; and

(5) modification of procedural rules to reduce the cost or complexity of small entity participation in the rulemaking. In addition, for any rulemaking that may significantly or uniquely affect small governments, program offices must follow DOE's policy on intergovernmental consultation under the Unfunded Mandates Reform Act of 1995. See Notice of Final Statement of Policy, 62 FR 12820 (March 19, 1997), which is posted on the Office of General Counsel's Web site: http://www.gc.doe.gov.

Program staff may obtain additional guidance on how to prepare an IRFA from the Office of Advocacy's Internet site: http://www.sba.gov/advo/. Chapter 2 of the Office of Advocacy Guide deals with IRFAs.

3. The Final Regulatory Flexibility Analysis. A FRFA must be prepared for any final rule that will have a significant economic impact on a substantial number of small entities (5 U.S.C. 604). The elements of the FRFA resemble, but are somewhat different than, those for an IRFA. Section 604(a)(1)-(5) of the Act requires that the FRFA include:

• A succinct statement of the need for, and objectives of, the rule;
• A response to significant issues raised by the public comments in response to the IRFA, including a statement of any changes made in the rule as result of public comments;
• A description and an estimate of the number of small entities to which the rule would apply or an explanation of why no such estimate is provided;
• A description of the projected reporting, recordkeeping, and other compliance requirements of the rule, including an estimate of the classes of small entities that will be subject to the requirements and the types of professional skills needed to comply; and
• A description of the steps taken by the agency to minimize the significant economic impact on small entities consistent with applicable statutes, including a statement of the factual, policy, and legal reasons for selecting the alternative adopted in the final rule and why each of the other significant alternatives to the rule considered by the agency was rejected.

In addition, section 3(c) of E.O.13272 provides that, subject to narrow exceptions, an agency must respond in the notice of final rulemaking to any written comments submitted by the Office of Advocacy on the proposed rule.

Section 604(b) of the Act provides that an agency must publish the FRFA, or a summary, in the Federal Register and make it available to the pubic. In most cases, this publication will be included in the notice of final rulemaking. An agency may delay, but not waive, the completion of a FRFA for up to 180 days after issuance of a rule if the rule is being promulgated in response to an emergency that makes compliance with the Act impracticable (see section III.1.a. of these Procedures and Policies). If a FRFA is not prepared within the 180-day period, the rule will lapse and have no effect.

IV. Legal Effect

These procedures and policies are intended only to improve the internal management of the federal government. They do not create any right or benefit, substantive or procedural, enforceable at law or in equity, against the Department of Energy, its officers or employees, any federal agency or any other person.