Federal Register Vol. 80, No.87,

The National Organic Program (NOP) is authorized by the Organic Foods Protection Act (OFPA) of 1990, as amended (7 U.S.C. 6501-6522). The USDA Agricultural Marketing Service (AMS) administers the NOP. Final regulations implementing the NOP were published December 21, 2000 (65 FR 80548), and became effective on October 21, 2002. Through these regulations, the AMS oversees national standards for the production, handling, and labeling of organically produced agricultural products.

The OFPA authorizes the certification and inspection of crop, wild crop, livestock, or handling operations that label, market or represent agricultural products as organic. The OFPA also provides authorization for the NOP to accredit state and private certifying agents to certify organic crop, wild crop, livestock, or handling operations to the USDA organic regulations in the United States and internationally. Since becoming fully effective in 2002, the USDA organic regulations have been frequently amended. Most of these amendments were changes to the National List of Allowed and Prohibited Substances (National List) in 7 CFR 205.601-205.606.

This National List identifies the synthetic substances that may be used and the nonsynthetic (natural) substances that may not be used in organic production. The National List also identifies synthetic, nonsynthetic nonagricultural, and nonorganic agricultural substances that may be used in organic handling. The OFPA and the NOP regulations, in § 205.105, specifically prohibit the use of any synthetic substance in organic production and handling unless the synthetic substance is on the National List. Section 205.105 also requires that any nonorganic agricultural and any nonsynthetic nonagricultural substance used in organic handling appear on the National List.

Recommendations to amend the National List are developed by the National Organic Standards Board (NOSB), a 15-member advisory board composed of four organic farmers; two organic handlers; one retailer; three experts in environmental protection and resource conservation; three consumer or public interest group members; one expert in toxicology, ecology, or biochemistry and; one certifying agent representative. The NOSB is organized under the Federal Advisory Committee Act (5 U.S.C. App. 2 et seq.) to assist in the development of standards for substances to be used or not used in organic production and handling, and to advise the Secretary on any other sections of the USDA organic regulations. NOSB members are nominated by the organic community and selected by the Secretary. The OFPA also requires a review of all substances on the National List within 5 years of their addition or renewal. If a substance is not reviewed by the NOSB and renewed through rulemaking by the USDA within the five year period, its allowance or prohibition on the National List is no longer in effect (7 U.S.C. 6517(e)).

As of January 2, 2014, there are 27,108 producer and handler operations certified to the USDA organic regulations. Some of these certified operations are certified as “grower groups,” certified as a single entity, but consisting of groups of ten to thousands of small organic producers. The USDA organic regulations, as authorized by the OFPA, are implemented and applied uniformly and are designed to benefit all entities, regardless of size.

On March 24, 2006, the AMS published in the Federal Register (71 FR 14827), its schedule to review certain regulations, including the NOP, under criteria contained in section 610 of the RFA (5 U.S.C. 601-612). Because many AMS regulations impact small entities, AMS decided, as a matter of policy, to periodically review certain regulations, irrespective of whether specific regulations meet the threshold requirement for mandatory review established by the RFA.

A Notice of Regulatory Flexibility Act: Section 610 Review of the USDA organic regulations was published in the Federal Register on February 25, 2011 (76 FR 10527). This notice indicated AMS would implement specific criteria contained in section 610 of the RFA during the review of the USDA organic regulations that have a significant effect on a substantial number of small entities to determine whether any effect can be decreased or minimized. The purpose of the review is for AMS to determine whether the USDA organic regulations should be continued without change, amended or rescinded, consistent with the objectives of OFPA, to minimize impact on small entities. The review considered these factors: (1) The continued need for the regulations; (2) the nature of complaints or comments received from the public concerning the regulations; (3) the complexity of the regulations; (4) the extent to which the regulations overlap, duplicate, or conflict with other Federal rules, and, to the extent feasible, with State and local government rules; and (5) the length of time since the regulations have been evaluated or the degree to which technology, economic conditions, or other factors have changed in the area affected by the regulations. The notice invited the general public and interested parties to submit written comments on the impact of the regulations on small business.

In response to this notice, the NOP received written comments from five organic producers (two crop, one wild crop, and two livestock), three accredited certifying agents, three handlers (an ingredient supplier, a retailer, and a beverage association), two consumers, and an organic business consultant, for a total of fourteen comments.

Of the fourteen comments received, eight commenters specifically addressed the need for the regulations to continue, and not be terminated or rescinded. Five additional commenters proposed amendments or made recommendations about issues for the NOP to consider. One commenter stated that certification of organic products was unfair because of time commitment and expense. This commenter alternatively proposed that conventional operations should be certified to assess inputs used on these operations. Nine commenters described their concerns with the program or described concerns regarding the regulations. Eight commenters specifically addressed the complexity of the regulations either by indicating that the complexity of the regulations can be problematic at times, or that a significant level of complexity is needed to ensure organic product integrity. There were five comments on whether the regulations overlap, duplicate, or conflict with other Federal, State or Local government regulation. Four commenters specifically addressed the RFA section 610 review criteria regarding impacts on small entities as a result of changes in technology, economic conditions, or other factors that may have impacted an area affected by the regulations since the regulations became effective on October 21, 2002.

One commenter, a certifying agent, addressed all of the factors considered in the RFA section 610 review of the USDA organic regulations. Most of the commenters addressed three out of five of the review factors. Comments are categorically grouped and discussed below.

Comments from organic producers supported continuation of the regulations, but some did include concerns with the program or included proposed amendments for improving it. An organic seed producer expressed support for the continuation of the regulations, but suggested that NOP has not adequately enforced the requirement for the use of organic seed when commercially available as required by 7 CFR 205.204(a). This commenter also suggested that some certifying agents may be routinely allowing the use of non-organic seed, even though high quality organic seed is available in commercial quality and quantity. The commenter requested increased enforcement of the organic seed regulation requirements to ensure organic seed is being utilized by organic producers. In response to comments received at public meetings, the NOSB provided the NOP with recommendations that outlined concepts and procedures for determining commercial availability of organic seeds and planting stock. In response, the NOP published final guidance NOP 5029: Seeds, Annual Seedlings, and Planting Stock in Organic Crop Production, in the NOP Program Handbook on February 28, 2013.1 This guidance describes practices for certified operations to use to obtain all organic seeds, annual seedlings, and planting stock in support of their organic production. The guidance also describes the responsibilities of organic operations and certifying agents for sourcing organic seeds and planting stock and emphasizes the utilization of organic seed is a requirement of the regulations.

A certified organic fruit producer commented on being prevented from using an organic label claim on his organic fruit alcohol product because of added sulfites. The commenter stated that because of the restriction with added sulfites limited for use with only organic grapes, a “made with organic. . .” claim could not be used on the product label. On October 31, 2011, the NOP published Policy Memo 10-2: Sulfur Dioxide in wine made with organic fruit, in the Program Handbook.2 This policy memo stipulates that added sulfites, as sulfur dioxide, can only be used in organic wine made from organic grapes as specified on the National List in § 205.605(b). The allowance for sulfur dioxide on the National List limits the use of sulfur dioxide to only wine made with organic grapes and can only be labeled as “made with organic grapes.” Changing the allowance of sulfur dioxide in organic wine can be considered through submission of a National List petition to amend the annotation, and subsequent rulemaking to amend the regulations. As per 7 CFR 205.607 of the USDA organic regulations, any person may submit a petition to change or amend the National List according to petition procedures published on January 18, 2007 (72 FR 2167).3

An organic wild crop producer supported continuation of the regulations, concluding there is an ongoing need for Federal regulation and oversight of the term “organic” as it applies to all products being produced and handled organically. The commenter also stated accredited certifying agents should ensure that organic livestock producers are providing organic livestock with organic feed ingredients. The commenter specifically mentioned organic wild harvested kelp. The commenter claimed ensuring the feeding of organic kelp would enhance his organization's opportunity to develop and maintain additional certified organic wild crop harvesting sites for kelp, and would support the growth of the business. On February 28, 2013, the NOP published guidance document NOP 5057: The Use of Kelp in Organic Livestock Feed.4 This guidance establishes that kelp may be certified organic as a wild crop under 7 CFR 205.207 and must be certified organic if used as an ingredient in livestock feed per § 205.237. The guidance applies to all NOP certifying agents that certify kelp and certified organic operations that feed kelp to organic livestock.

A small livestock producer requested the program increase the $5,000 exemption limit for organic certification. There is an exemption from certification for organic producers and handlers who sell less than $5,000 in organic agricultural products per year (7 U.S.C. 6505; 7 CFR 205.101(a)). The livestock producer pointed out that the OFPA was passed in 1990, and the $5,000 limit has been subject to inflation since 1990. This commenter proposed that the small operation exemption be raised to $10,000 or $20,000. Since the $5,000 exemption from certification is a specific OFPA requirement, an increase in the exemption amount must be enacted through Congress and cannot be amended through the regulatory process.

A veterinarian, who also is an organic egg producer, supports the NOP, stating there is a good system of certifiers and inspectors in place. However, this commenter expressed concern with changes in poultry health care practices and living condition standards being advocated by some organizations. The comments addressed issues on poultry access to pasture, animal behavior, bird stocking rate, age of bird, and temporary confinement. According to the commenter, changes in the organic standards on these issues should be based upon scientific merit, and not on human desires and social interactions. During NOSB deliberations, the NOSB considered technical information on livestock practice standards. In 2009 and 2011, the NOSB forwarded several recommendations on establishing more specific animal welfare requirements. These recommendations addressed issues on animal handling and transport and animal welfare, including stocking rates and livestock health care. The NOP is currently evaluating these recommendations to determine how to effectively process these recommendations through rulemaking.

Three accredited certifying agents provided comments in support of continuation of the regulations. A small accredited certifying agent commented on the burden of the expense of the periodic USDA-required accreditation audits on small organic certifiers and requested that audit fees should be scaled upon the size of the certifier. The two larger certifying agents also commented on the paperwork burden on operations seeking certification or continuing with certification. One certifying agent affirmed the need for regulations as critical to assure integrity and maintain consumer confidence in the organic industry. However, comments received from clients regarding the regulations were mostly concerned with the amount of paperwork required for recordkeeping, which some considered to be excessive and burdensome. This certifying agent stated there is a need to streamline paperwork and recordkeeping requirements for all organic operations. Another certifying agent also addressed the burden faced by certified operations, specifically organic dairy operations complying with pasture practice standards. This commenter stated that the pasture practice standards rule (75 FR 7154) was not needed, was excessively complex, would cause significant adverse effects for many small farms, and would be difficult for certifying agents to effectively implement. The NOP is aware of the commenter's concerns and notes that the pasture practice standards were developed over a period of five years with input of multiple stakeholders. There were a significant number of oral and written responses submitted during public comment periods associated with the development of this rule. The majority of commenters, including many dairy operations, supported the addition of detailed pasture practice standards.

During NOP trainings for accredited certifying agents conducted in 2012 and 2013, the NOP received statements from certifying agents on farmers reporting that they are spending too much of their time completing program forms and maintaining program records. As required in 7 CFR 205.103, recordkeeping is essential to ensure organic operations are implementing required organic practice standards. The NOP has considered how to minimize the regulatory burden when implementing the regulations. As a result, the NOP began implementing an initiative in 2013 to identify and remove barriers to certification, to streamline the certification process, to focus enforcement activities, and to work with organic producers and handlers to correct small issues before they become larger issues. When developing this initiative, the NOP outlined five objectives: (1) Develop efficient processes by eliminating bureaucratic processes that do not contribute to organic integrity; (2) streamline recordkeeping requirements to ensure that required records support organic integrity and are not a barrier for farms and businesses to maintain organic compliance; (3) apply common sense to an operation's organic system plans that clearly capture organic practices; (4) implement fair and focused enforcement; and (5) maintain or improve organic integrity by focusing on factors that impact organic integrity. The NOP continues to work with certifying agents to implement these objectives with regard to the recordkeeping and reporting requirements for certifying agents and organic producers and handlers.

Three organic handlers commented on the RFA Section 610 review. An ingredient processor submitted a comment requesting clarification on why non-organic ethanol is not permitted in the U.S. for use in processing organic products. The processor stated that their product, processed with ethanol, was marketed with an organic label in the European Union (EU), where ethanol is allowed for organic processing in the EU regulations. In the U.S., ethanol is available in certified organic, natural, and synthetic forms. The use of certified organic ethanol would be permitted in the production of the processor's product under the USDA organic regulations. Non-organic ethanol is allowed for use in organic crop and livestock production as a sanitizer. Non-organic ethanol cannot be used in organic processing under the USDA organic regulations since it is not included on the National List in either 7 CFR 205.605 or 7 CFR 205.606. Use of non-organic ethanol in organic processing requires amendment of the National List through the petition process to include non-organic ethanol on the National List, and subsequent rulemaking.

A beverage association comment disagreed with Alcohol, Tobacco Tax, and Trade Bureau (TTB) labeling requirements for wine that requires approval for changes to a vintage year on an organic wine label that was previously approved. This requirement is outside of the scope of the USDA organic regulations. The TTB reviews and approves wine labels, including any requirements for changing the vintage year. Under a Memorandum of Understanding between AMS and TTB, the TTB receives, reviews, and approves or rejects labeling applications for alcohol products bearing an organic claim. TTB has informed the NOP of their change in the TTB list of the allowable revisions that may be made to an approved label without the need for resubmission contained on the TTB Application for and certification of label/bottle approval. TTB removed the caveat that the change in vintage dates did not apply to organic products.

A comment from an organic co-operative retailer supported the continued need for the regulations. The commenter gave a description of the positive impacts of the complexity of the regulation on their business, and emphasized that the regulations do not overlap, duplicate, or conflict with other Federal, state or local rules for the operation.

A comment from a consumer claimed that certification requirements for organic operations are unfair because nonorganic operations are not required to disclose to the public the uses of harmful substances. All food products in the normal stream of commerce are subject to Federal, state, and local laws and regulatory requirements that contribute to maintaining food safety and restrict or prohibit the use of harmful substances.

Another consumer comment expressed support for continuation of the regulations. This commenter chooses organic products to assure that the food is raised humanely and without synthetic ingredients. However, the commenter also expressed concern that the regulations may be more burdensome to small dairy operations. As noted in prior discussion, the NOP started an initiative on 2013 to reduce the regulatory burden on organic operations.

An organic agricultural business expressed strong support for continuation of the regulations. This commenter stated that the regulations need to be routinely amended since organic production is based upon a concept of continual improvement, and the regulation should adhere to this principle. Such amendments should take into account innovations and improvements by organic practitioners. The commenter proposed several amendments to the regulations, some of these proposed amendments were identified as opportunities to decrease regulatory complexity and reduce regulatory burden without sacrificing organic integrity or compromise consumer confidence. A summary of these proposed amendments include:

• The NOP should prohibit blending of organic and non-organic forms of the same ingredient in “made with organic” products. On May 2, 2014, the NOP published final guidance NOP 5032: Products in the “made with Organic * * * Labeling Category to address this issue.5 This guidance describes requirements for products in the “made with organic (specified ingredients or food group(s))” category. This guidance clarifies product composition, labeling claims, use of organic and nonorganic forms of the same ingredient, percentage of organic ingredient statements, and ingredients or food groups in the “made with organic * * *” claim.

• The regulations should allow the use of non-synthetic substances allowed for use in crop production to control pest infestation in post-harvest handling pest control when preventive practices are ineffective. On April 25, 2014, the NOP published draft guidance, NOP 5023: Substances Used in Post-Harvest Handling of Organic Products.6 This draft guidance describes substances that may be used in post-harvest handling of organic products. The guidance clarifies: (1) What substances may be used; (2) the difference between post-harvest handling of raw agricultural crops and further processing; and (3) the provisions for facility pest management.

• The NOP should amend 7 CFR 205.237(a) to allow commercial availability to be applied to minor agricultural ingredients fed to organic livestock to alleviate burden on small organic livestock producers. On February 28, 2013, the NOP published NOP 5030, Evaluating Allowed Ingredients and Sources of Vitamins and Minerals For Organic Livestock Feed.7 This guidance clarifies the agricultural, nonsynthetic, and synthetic ingredients permitted in organic livestock feed and also addresses the feed supplements and feed additives that must be reviewed for compliance with regulations. Under the USDA organic regulations, organic producers must provide livestock feed pursuant to 7 CFR 205.237. Section 205.237 states that agricultural ingredients included in the ingredients list for livestock feed products must be organically produced.

• The NOP should amend the National List petition procedures and processes as they are complicated, costly, lengthy, arbitrary, and may not provide due process to the petitioners. In May 2014, the NOP in collaboration with the NOSB initiated a process to revise National List petition procedures in an effort to make the petition submission procedures clearer for petitioners. The revised procedures will clarify how to submit complete petitions, explain to petitioners what to expect in the petition process, and make the review process for the NOSB clearer and more consistent.

• The NOP should increase collaboration between NOP and other government agencies with authority related to organic agricultural production. Historically, NOP has established and maintained collaborative interactions with the U.S. Food and Drug Administration (FDA) on organic food processing and handling and livestock healthcare products and feed ingredients; with the U.S. Environmental Protection Agency (EPA) on pest control ingredients and applications; with TTB on labeling of organic alcohol beverages; and with the Federal Trade Commission on product labeling. As part of these interactions, NOP continues to collaborate regarding agricultural products that fall within the scope of organic certification.

• The NOP should alter restrictions on the use of plastic mulch (§ 205.601(b)(2)(ii)) so that biodegradable plastic mulch could remain on the soil beyond harvest or end of the growing season. The commenter indicated there is no listing for mulch made from biodegradable plastic on the National List, and a petition would have to be submitted to add this new material. In August 2013, the NOP published proposed rule (78 FR 52100), based upon NOSB recommendations, which would add a new definition for biodegradable biobased mulch film to 7 CFR 205.2 and add biodegradable biobased mulch film to the National List in 7 CFR 205.601 for use in organic crop production.8

Based upon the review, AMS has determined that the NOP should continue. The USDA organic regulations are dynamic in nature and the NOP continues to collaborate with the NOSB and the organic community on rulemaking and development of guidance documents, such as recently published rulemaking on pesticide residue testing, and published guidance on composting, wild crop harvesting, handling unpackaged organic goods, and the list of permitted substances for crops.

HUD and USDA have a statutory responsibility to adopt minimum energy standards for new construction of certain HUD- and USDA-assisted housing, following procedures established in EISA. Section 481 of EISA amended section 109 of the Cranston-Gonzalez National Affordable Housing Act of 1990 (Cranston-Gonzalez) (42 U.S.C. 12709), which establishes procedures for setting minimum energy standards for certain HUD and USDA programs. The two standards referenced in EISA (the IECC and ASHRAE 90.1) apply to different building types: the IECC standard applies to single family homes and low-rise multifamily buildings (up to three stories), while ASHRAE 90.1 applies to multifamily mid- or high-rise residential buildings (four or more stories).1

The following HUD and USDA programs are specified in the statute:

(A) New construction of public and assisted housing and single family and multifamily residential housing (other than manufactured homes) subject to mortgages insured under the National Housing Act; 2

(B) New construction of single family housing (other than manufactured homes) subject to mortgages insured, guaranteed, or made by the Secretary of Agriculture under title V of the Housing Act of 1949; 3 and,

(C) Rehabilitation and new construction of public and assisted housing funded by HOPE VI revitalization grants under section 24 of the United States Housing Act of 1937 (42 U.S.C. 1437v).

In addition to these EISA-specified categories, sections 215(a)(1)(F) and (b)(4) of Cranston-Gonzalez make new construction of rental housing and homeownership housing assisted under the HOME Investment Partnerships Program (HOME) subject to section 109 of Cranston-Gonzalez and, therefore, to section 481 of EISA. From the beginning of the HOME program, the regulation at 24 CFR 92.251 implemented section 109. However, compliance with section 109 of Cranston-Gonzalez was omitted from the July 2013 HOME program final rule because HUD planned to update and implement energy efficiency standards through a separate proposed rule (see the discussion in the preamble to the HOME proposed rule published on December 16, 2011 (76 FR 78344)). Although the energy standards at 24 CFR 92.251(a)(2)(ii) are reserved in the July 2013 HOME final program rule, the statutory requirements of section 109 continue to apply to all newly-constructed housing funded by the HOME program. Therefore, this notice is applicable to the HOME program when the regulations at 24 CFR 92.251 in the 2013 HOME final rule (78 FR 44627) become effective. The HOME program will issue Guidance for HOME Participating Jurisdictions (PJs) that provides notice that the new standard takes effect. A conforming amendment to the HOME regulation will be published at a later date.

Section 109(a) of Cranston Gonzalez, as amended by EISA, required HUD and USDA to collaborate and develop their own energy efficiency building standards if they met or exceeded the 2006 IECC or ASHRAE 90.1-2004, but if the two agencies did not act on this option, EISA specifies that the 2006 IECC and ASHRAE 90.1-2004 standards would apply. The two agencies did not develop independent energy efficiency building standards, and, therefore, the 2006 IECC or ASHRAE 90.1-2004 applied to covered HUD and USDA programs, and the provision of section 109(d) of Cranston-Gonzalez must be followed.

This notice implements section 109(d) of Cranston-Gonzalez, as amended by EISA, which establishes procedures for updating HUD and USDA energy standards, following periodic revisions to the 2006 IECC and ASHRAE 90.1-2004 codes. Specifically, section 109(d) provides that subsequent revisions to the IECC or ASHRAE codes will apply to HUD and/or USDA's programs if: (1) Either agency “make[s] a determination that the revised codes do not negatively affect the availability or affordability” of new construction housing covered by the Act, and (2) the Secretary of Energy has made a determination under section 304 of the Energy Conservation and Production Act (42 U.S.C. 6833) that the revised codes would improve energy efficiency (see 42 U.S.C. 12709(d)). Otherwise, the 2006 IECC and ASHRAE 90.1-2004 will continue to apply.

On April 15, 2014, at 79 FR 21259, HUD and USDA announced in the Federal Register their Preliminary Determination that the 2009 IECC and ASHRAE 90.1-2007 would not negatively affect the affordability and availability of housing covered by the Act. This Preliminary Determination followed the Department of Energy's (DOE) Determination that the 2009 IECC and ASHRAE 90.1-2007 standards would improve energy efficiency.4 The April 15, 2014, HUD-USDA notice solicited public comment on this Preliminary Determination for a period of 45 days, and the public comment period concluded on May 30, 2014. HUD and USDA convened a conference call for interested parties on May 15, 2014, at which the agencies summarized the key features of the notice and answered several questions from participants.

HUD received 13 public comments, representing 28 organizations or individuals, on this notice. Comments were received from a wide range of stakeholders, including one state (Colorado), the two code bodies represented in this notice (the International Code Council and ASHRAE), as well as several national associations representing mortgage lenders, home builders, environmental and energy efficiency advocates, consumers, State energy offices, insulation and other building product trade associations, and other interested parties. All but two of the comments were from single organizations or individuals. Multiple organizations were represented in two comments, one submitted on behalf of another three organizations, and another on behalf of 16 additional national organizations.

The overwhelming majority of the comments expressed support for HUD's and USDA's Preliminary Determination. Of these supportive comments, most expressed support for HUD's and USDA's methodology and conclusions, but in turn urged HUD and USDA to rapidly move to adopt the more recent IECC or ASHRAE 90.1 codes that have been promulgated since the publication of the 2009 edition of the IECC and the 2007 edition of ASHRAE 90.1 that are addressed in this notice. In addition, several commenters suggested that HUD and USDA allow alternative compliance pathways for these standards through equivalent or higher state standards, or through one or more green building standards that have seen rapid growth in adoption rates in recent years.

Three of the 13 comments expressed concerns or opposition to one or more features of the Preliminary Determination. The concerns raised were in three primary areas: the use of the Social Cost of Carbon (SCC) as an appropriate cost-benefit metric for this determination; the proposed timetable for implementing the proposed standards after a Final Determination is published; and the relatively longer payback periods of 10 or more years estimated by HUD and USDA for adoption of ASHRAE 90.1-2007 in some States.

This discussion of the public comments received on the Preliminary Determination presents the significant issues and questions raised by the commenters.

Comment: Support for Preliminary Determination. The large majority of comments supported the Preliminary Determination. These comments generally agreed with HUD's and USDA's methodology in arriving at the determination that the 2009 IECC and ASHRAE 90.1-2007 would not negatively impact the affordability and availability of the housing covered by the Determination.

One commenter noted, for example, “that it is well settled and no longer in dispute that the 2009 IECC, as well as the 2007 ASHRAE 90.1 . . . increase the energy efficiency of homes and buildings constructed to meet them.” The commenter commended HUD and USDA for “an exceptionally thorough and comprehensive review of both the available research and literature relating to the cost effectiveness of building homes and multifamily units to the IECC and/or ASHRAE 90.1,” and pointed out that HUD and USDA had reached the same conclusion as experts and building code authorities in the majority of States: that building single family and multifamily homes to the 2009 IECC is cost-effective, results in greater affordability, and lowers energy use and energy expenses.

The commenter also stressed the importance of assessing affordability on the basis of operating costs as well as the first cost of the home: “if the monthly utility bill is lowered by 10 or 20 percent, as a result of energy efficient code requirements, the home is more affordable, even if the initial cost increases by several thousand dollars, since the increase in the monthly amortized mortgage cost will be less than the decrease in utility costs.”

Another representative comment characterized the HUD and USDA determination as a “comprehensive and robust evaluation of the reasons to adopt the current updated standards under consideration based on the Departments' statutory responsibilities under federal law to establish minimum energy standards.” Another commenter stated that “HUD and USDA's determination . . . is well supported by law and policy.”

Another commenter indicated that recent experience with the adoption of the 2009 IECC and ASHRAE 90.1-2007 codes, as well as with “premium” labels such as ENERGY STAR, offers clear and convincing evidence that the codes do not harm affordability and availability. The commenter noted that “[i]f builders were unable or unwilling to build homes that meet the codes, or buyers were unable or unwilling to pay for them, there would not be new homes in states that have adopted the codes, or new homes with green labels.”

The commenter also provided national data reflecting housing production in the 32 States and the District of Columbia that have adopted the 2009 IECC or a comparable statewide code as follows: 1.6 million residential building permits were issued between when the 2009 IECC went into effect and the end of 2013, with 538,000 permits issued in the 12 months after the 2009 IECC went into effect, compared to 433,000 beforehand-an increase of 24 percent. For ASHRAE 90.1-2007, the commenter provided similar data: 650,000 units were built since the codes were implemented in 37 States and the District of Columbia, 168,000 of them in the first 12 months after the codes were enacted, compared to 109,000 in the previous 12 months. The commenter concludes that “codes do not seem to be harming construction in states that have implemented them,” and also references the significant number of homes (81,000 in 2012 alone) that have been built voluntarily to a higher (ENERGY STAR) standard.

HUD-USDA Response: HUD and USDA acknowledge the support expressed by these commenters for the Preliminary Determination. These comments indicate confidence in HUD and USDA's use of DOE's and the Pacific Northwest National Laboratory's (PNNL's) analysis of the subject codes, and in their overall conclusions regarding the lack of a negative impact that these codes would have on the affordability and availability of housing covered by EISA.

Comment: HUD should proceed quickly to adoption of the more recent IECC/ASHRAE codes. Several commenters who were supportive of the Preliminary Determination also encouraged HUD and USDA to move quickly to adoption of the next or most recent IECC and ASHRAE codes. One commenter urged HUD and USDA to “provide a consistent Federal Government approach” by endorsing ASHRAE 90.1-2010, and to “promptly update their regulations” to ASHRAE 90.1-2013 upon a favorable DOE determination. The commenter noted that “[a] single, consistent U.S. Standard will enable better enforcement and compliance and avoid marketplace confusion, ultimately moving the U.S. toward President Obama's goal of significant improvement in building energy efficiency.”

Another commenter and 16 national consumer, environmental, energy efficiency, or building organizations urged HUD and USDA to finalize this determination and incorporate the codes into their loan processes as soon as possible, and to “move quickly to complete a determination on the 2012 IECC and ASHRAE 90.1-2010, which have already been determined by DOE to save energy, and which have been shown to be very cost-effective.” The commenter also urged HUD and USDA to “help and encourage builders to comply with the new requirements” through education and quality assurance efforts.

HUD-USDA Response: HUD and USDA will address the affordability of the more recent IECC and ASHRAE 90.1 codes in an advance notice in the near future, according to the timetable prescribed in EISA. For adoption or consideration of these codes and future code revisions, HUD and USDA are committed to timely and expeditious compliance with the EISA statutory requirements. However, it is unlikely that HUD and USDA will be able to meet the statutory one-year compliance period prescribed under Cranston-Gonzalez section 109(c) as amended by EISA, because of the time required to do the following: publish a Preliminary Determination, allow for public comments on the Preliminary Determination, and publish a Final Determination along with the requisite clearances by HUD and USDA and the Office of Management and Budget (OMB).

Accordingly, while HUD and USDA will continue to explore ways to comply with the one-year compliance period set forth in section 109(c), HUD and USDA intend to address the next code cycles under the requirements of section 109(d) of Cranston-Gonzalez. Section 109(d) requires that, after failure to comply with section 109(c), the two agencies will conduct an analysis of the impact that the new code will have on the “affordability and availability” of covered housing. As is the case for this Final Determination on the 2009 IECC and ASHRAE 90.1-2007, for future code determinations HUD and USDA will rely on the following reports or notices from DOE and PNNL: (1) An efficiency determination required under Title III of the Energy Conservation and Production Act of 2005; and (2) a subsequent cost analysis by PNNL.

Comment: The payback periods shown for ASHRAE 90.1-2007 that exceed 10 years are too long to require compliance with this standard. One commenter recommends that, while the 2009 IECC shows payback periods of less than 10 years, this is not the case for ASHRAE 90.1-2007. Appendix 4 in the Preliminary Determination showed that six of the 11 states evaluated for ASHRAE 90.1-2007 have payback periods that exceed this period. The commenter also maintains that multifamily rental property investors expect to see annual rental receipts that are approximately 11 percent of the value of the property. This implies a 100 percent increased first cost/11 percent increase in rental receipts or a 9-year simple payback on energy efficiency requirements. If that rate of return is not achieved, then the likelihood of a project being built will be reduced. Paybacks of greater than 9 years may therefore reduce the future availability of multifamily rental properties. Given these “two realities,” the commenter does not support the HUD-USDA finding that compliance with ASHRAE 90.1-2007 will not negatively affect the affordability and availability of housing covered by EISA—at least in those six States with longer payback periods of more than 10 years.

HUD-USDA Response: Note that ASHRAE 90.1-2007 only impacts HUD-insured or -assisted properties; USDA multifamily properties are not covered by EISA. Of the 12 States that have not yet adopted this standard, Appendix 4 of the Preliminary Determination (amended as Table 6 in this Final Determination) showed six States with paybacks of more than 10 years: Hawaii, Colorado, Minnesota, Missouri, Oklahoma, and Tennessee. With the exception of Hawaii, all of these States showed simple paybacks of less than 15 years:

The estimated energy cost savings per unit and simple paybacks provided in this table in the Preliminary Determination used national average prices for natural gas of $1.2201 per therm, and $.0939 per kWh for electricity, using the methodology used by PNNL in their cost determination of ASHRAE 90.1-2007.5 In this Final Determination, HUD and USDA have updated the PNNL methodology by using individualized state-by-state fuel and electricity prices, in order to provide a more current and accurate estimate of cost savings. The updated and revised estimated cost savings and paybacks are now presented in Table 6 of the Final Determination as follows:

Using individual state-by-state fuel and electricity prices, rather than a national average as used by PNNL, of the 12 States that have not yet adopted ASHRAE 90.1-2007, seven States show simple paybacks of less than 10 years (Alaska, Arizona, Kansas, Maine, Oklahoma, South Dakota, and Wyoming) and four States show paybacks of less than 15 years (Colorado, Minnesota, Missouri, Tennessee). One state (Hawaii) shows a payback of more than 15 years (15.1 years).

With regard to the five States with paybacks of more than 10 years, while we agree that shorter paybacks are generally better when considering simple payback periods as a measure of cost-effectiveness or affordability, we believe that the 10-year simple payback limit proposed by the commenter is too limiting for the purpose of this analysis, for two reasons. First, the life of the energy efficient equipment or materials installed as a result of complying with ASHRAE 90.1-2007 (e.g., windows, doors, insulation, boilers, etc.) is likely to be significantly longer than 10 years, in some cases for the life of the building; a cost-benefit analysis for these measures indicates a net-positive result over the much longer life of the equipment. Second, as noted in the Preliminary Determination, another important factor is the incremental cost involved; the per-unit costs shown above (in the $300-$400 range) are a small fraction of the Total Development Cost (TDC) per unit.

In addition, the price-ratio measure referenced by the commenter may mix the expected return on an entire property with the expected return on a particular aspect of the property (the upgraded features). In order to cause a development not to be pursued, the new standard would have to violate the return threshold for the entire property. And, it ignores the possibility that efficiency measures, to some extent, would be internalized in rent receipts.

To best understand the profitability of multifamily housing, it may be preferable to examine the capitalization rate (rental income less operating costs divided by the market value of the property) rather than the rent-to-price ratio, since the capitalization rate takes into account operating costs and therefore is more likely to reflect the building's energy efficiency than the rent-to-price ratio. According to the 2012 Rental Housing Finance Survey (RHFS), the median capitalization rate of rental buildings is 6 percent. For some states, the cost savings are close to 6 percent. However, as described in the notice, the return on investment (ROI) is almost always positive, which would increase affordability. Perhaps most important, at an estimated average cost per unit of $441, the cost of compliance is less than 1 percent (0.24%) of the average TDC per unit of $185,000, and is more than offset by the benefits of this notice. Thus, the value of the construction project will not be adversely affected by the higher code adopted as a result of this notice.

Comment: HUD should ease compliance with the code requirements for single family homes by updating and accepting Form HUD-92541 as evidence of compliance. One commenter indicated that, while it “does not disagree with USDA and HUD's estimates about affordability,” it is concerned about how mortgage lenders should demonstrate compliance for single-family new construction. The commenter noted that this is “particularly important when underwriting loans for new construction in unincorporated localities, where there may not be public inspectors and other third-party specialists, such as Home Energy Rating System (HERS) rating specialists within several hundred miles, such as in states like Colorado or South Dakota.” The commenter recommends that HUD modify form HUD-92541 by changing box number four, “International Energy Conservation Code (IECC) 2006,” to read “IECC 2009 or a higher standard,” and that this form should be available when the Final Determination is issued. The commenter also recommends that the HUD handbook be updated to reflect the single family new construction requirement and that Form HUD-92541 be treated as an acceptable method of certifying the property's minimum energy efficient status.

HUD-USDA Response: HUD agrees that Builder's Certification form HUD-92541 will be the primary tool for ensuring compliance of single family FHA-insured properties with the 2009 IECC and intends to update the form to reflect the code (the 2009 IECC) established by this notice. HUD cannot commit to this being completed simultaneously with the publication of the Final Determination, in light of Paperwork Reduction Act requirements; however, it is anticipated that the updated Builder's Certification form HUD-92451, as well as any handbook updates, will be completed during the 180-day implementation period, in order to ensure maximum compliance with the new code requirement.

Comment: The Social Cost of Carbon (SCC) should not be included in this notice. One commenter objected to the use of the Social Cost of Carbon in this notice, and proposed its deletion. The commenter maintained that the SCC is “discordant with the best scientific literature on the equilibrium climate sensitivity and the fertilization effect of carbon dioxide—two critically important parameters for establishing the net externality of carbon dioxide emissions.” The commenter also notes that the SCC [is] “at odds with existing Office of Management and Budget (OMB) guidelines for preparing regulatory analyses, and founded upon the output of Integrated Assessment Models (IAMs) which encapsulate such large uncertainties as to provide no reliable guidance as to the sign, much less the magnitude of the social cost of carbon.” The commenter also suggests that the IAMs, as run by the Interagency Working Group (IWG) produce “illogical results” that indicate a “misleading disconnect between a climate change and the SCC value.” Further, the commenter believes that sea-level rise projections (and thus SCC) of at least one of the IAMs (DICE 2010) cannot be supported by the mainstream climate science.

Based on these objections to the SCC, the commenter proposes that the SCC should be “barred from use in this and all other federal rulemaking. It is better not to include any value for the SCC in cost/benefit analyses such as these, than to include a value which is knowingly improper, inaccurate and misleading.” The commenter proposes “to remove any and all analyses in this Preliminary Determination that makes reference to, or incorporates a value of, the social cost of carbon as determined by the federal Interagency Working Group.” Specifically, the commenter proposes that HUD-USDA remove Table 8 and related text from the notice.

An alternative, supportive, view of the SCC was provided by another commenter. This commenter strongly argues for the use of the SCC as a measure of nonenergy benefits. This commenter notes that “SCC calculations are important for evaluating the costs of activities that produce greenhouse gas emissions and contribute to climate change, such as burning fossil fuels to produce energy. The SCC is also important for evaluating the benefits of policies that would reduce the amount of those emissions going into the atmosphere. For example, in order to properly evaluate standards that reduce the use of carbon-intensive energy or that improve energy efficiency—like the proposed updated energy codes—it is important to understand the benefits they will provide, including the benefit of reducing carbon pollution and the harm it causes.”

This commenter also defends the Interagency Working Group's (IWG) analysis as “science-based, open, and transparent” and believes that “the IWG correctly used a global SCC value.” While conceding that the IWG can improve its SCC methodology, the commenter nevertheless argues that “HUD and USDA should continue to use the current IWG estimate of the SCC.”

HUD Response: HUD and USDA acknowledge the critique of the SCC from the commenter, but believe that the SCC is an important and established element of a regulatory impact analysis for energy-related governmental regulations. Lower energy consumption involving fossil fuels will by default result in lower carbon emissions; there are economic, health and safety costs associated with these emissions, and, conversely, cost benefits when these emissions are reduced. While the commenter is correct that the SCC is not specifically required for the affordability or availability analysis specified under EISA (the primary analysis for that purpose involves energy and cost savings accruing directly to the property owner or resident) the SCC is relevant to the larger economic costs and benefits required for a regulatory impact analysis. The cost benefits of carbon saved as a result of adopting the higher standards specified in the notice can and should be incorporated in the regulatory impact analysis, and do not affect, or undermine, the underlying affordability or availability findings of the notice.

Comment: Additional research shows similar results as DOE findings. One commenter cited a study by the National Association of Home Builders (NAHB) Research Center (now the Home Innovation Research Labs) (Research Center) that shows the national average simple payback for the 2009 IECC of 5.6 years compared to the DOE study cited in the Preliminary Determination of 5.1 years. The commenter notes that the slightly longer payback from the Research Center may be because the initial construction costs were assumed to be about 35 percent higher in the Research Center analysis than in the PNNL analysis for DOE, due to the Research Center's reference home being based on national averages with more wall area than assumed in the PNNL analysis (2,580 vs. 2,380 sq. ft.) while having slightly less floor area (2,352 vs. 2,400 sq. ft.). In addition, the commenter points out that construction costs used in the Research Center study generated by actual builders were higher than those used by PNNL, which were developed by commercial estimators.

HUD-USDA Response: HUD and USDA relied on DOE and PNNL analysis of the 2009 IECC and ASHRAE 90.1-2007 in order to maximize alignment of our findings with those of other Federal agencies. We appreciate and recognize the additional independent findings on the 2009 IECC referenced by the commenter in the Research Center report. Despite the differences noted in the characteristics of the assumed reference house, the NAHB Research Center's results show very similar payback periods to those arrived at by DOE and PNNL (5.6 years vs. 5.1 years), thereby confirming and reinforcing HUD and USDA's findings on the cost effectiveness of the 2009 IECC.6 While the PNNL and Research Center paybacks are similar, the incremental costs for the 2009 IECC in the Research Center report are higher than those determined by PNNL.

These incremental cost differences result from the differences in the reference homes used in each report. The PNNL methodology defines a residential prototype building to be representative of typical new residential construction using data from the U.S. Census Bureau, the American Housing Survey, and NAHB, and establishes typical construction and operating assumptions, whereas the Research Center uses national averages. The assumptions were subjected to a public review through a Request for Information (RFI) process.7 We believe that the PNNL methodology provides an objective prototype most suitable for a national sample.

Comment: Updated information in local or statewide adoption of the subject codes. The Preliminary Determination identified 18 States that have not yet adopted the 2009 IECC and 12 States that have not yet adopted ASHRAE 90.1-2007. Two commenters provided updated information that at least five of these States (Colorado, Arizona, Kansas, Missouri and Maine) have seen significant local adoption of the 2009, or even the 2012, IECC. In Colorado, for example, jurisdictions that have adopted either of these standards represent 90 percent of the statewide population; in Arizona, it is estimated at 70 percent. It was also noted by one commenter that two States (Kentucky and Louisiana) have “already adopted” the 2009 IECC or “almost its equivalent,” while two additional States are either in the final stages of adopting or are in the process of adopting the 2009 IECC (Minnesota and Arkansas, respectively).

HUD-USDA Response: HUD and USDA recognize these updates on State or local adoption of the 2009 or 2012 IECC. Statewide adoption of energy codes is an evolving process, with new States (or home rule municipalities) adopting the more recent codes on an ongoing basis. The 18 states that had not yet adopted the 2009 IECC or ASHRAE 90.1-2007 cited in the Preliminary Determination reflected information posted by DOE's Building Energy Codes Program (BECP) at or near the time of publication of the Preliminary Determination. The updated data on two additional States provided by the commenters does not change the overall affordability and availability finding for the remaining States that have not yet adopted the 2009 IECC or ASHRAE 90.1-2007 (that the subject codes will not negatively impact the affordability and availability of covered housing); rather, these data have the effect of lowering the number of units estimated to be impacted by the adoption of the codes addressed in this notice. Similarly, to the extent that there are local jurisdictions that have adopted higher codes than those adopted by local jurisdictions within States that have not yet adopted the code statewide, this will have the effect of lowering the overall costs (and related benefits) associated with this notice. HUD and USDA have updated the estimated impacts in the Final Determination, in order to reflect the most recent code adoption status reported by the BECP at http://www.energycodes.gov/adoption/states (as of May 2014).

Comment: HUD and USDA should accept one or more green building standards as alternative compliance paths. One commenter proposed that the ICC 700 National Green Building Standard (NGBS) should be accepted as an alternative compliance certification, for the following reasons: NGBS certification requirements ensure that all certified buildings achieve a minimum energy efficiency performance 15 percent more efficient than the 2009 IECC, and many homes/buildings that achieve NGBS certification far exceed that baseline; the NGBS is designed to cover all residential construction, and can be applied to all housing types noted in the notice; and NGBS certification offers a quality assurance mechanism, in that all units are verified by an independent, third-party NGBS Green Verifier. Another commenter proposed similar adoption by HUD and USDA of LEED for Homes (Version 8) as a compliance path, and another commenter indicated that the codes referenced in the notice are already included as a minimum requirement in the Enterprise Green Communities standard.

Comment: Equivalent energy performance. One commenter suggested that HUD and USDA recognize State and/or local jurisdictions that have established standards that have equal or better energy savings. The commenter cites title IV, section 410, of the American Recovery and Reinvestment Act, that provided specific language that dealt with equivalency by considering any energy code that “achieves equivalent or greater energy savings” as an acceptable alternative code. This would benefit States such as California that already exceed the 2009 IECC with their independently developed Title 24 energy efficiency standard. The commenter suggests that a reference to energy equivalency be included in the “Implementation” section of the notice.

HUD-USDA Response: The 2009 IECC and ASHRAE 90.1-2007 codes addressed in this Determination establish a floor, not a ceiling, for HUD- and USDA-covered programs. HUD and USDA recognize that the green building certifications referenced by the commenters, such as the NGBS (Performance Path), LEED for Homes, and Enterprise Green Communities, have incorporated the 2009 IECC or ASHRAE 90.1-2007 as minimum required energy standards. Accordingly, HUD and USDA will accept these standards as evidence of compliance with the 2009 IECC or ASHRAE 90.1-2007. In addition to these standards, these may include LEED for New Construction, ENERGY STAR Certified New Homes or ENERGY STAR for Multifamily High Rise, Enterprise Green Communities, and other regionally or locally recognized green building standards, such as Earth Advantage, Earthcraft, and others.

With regard to State standards that have equivalent or higher standards, there is documented evidence that Title 24 in California exceeds the standards specified in the HUD-USDA notice, so by definition any project in California complying with Title 24 will automatically comply with the 2009 IECC and/or ASHRAE 90.1-2007. If documented evidence is provided to HUD and USDA that a specific state standard equals or exceeds the standards specified in this notice, these State standards will also be accepted as a compliance path.

Comment: Hawaii should not be exempted from ASHRAE 90.1-2007. HUD and USDA solicited comments on whether Hawaii should be exempted from complying with ASHRAE 90.1-2007, as was proposed in the Preliminary Determination. Using average national electricity prices in the Preliminary Determination, Hawaii showed a 58-year payback for adoption of ASHRAE 90.1-2007; however, using Hawaii electricity prices, the payback dropped to 17 years. (As discussed below, this Final Determination uses more recent October 2014 electricity prices, and the resulting payback for Hawaii declines further to 15.1 years.)

Two commenters disagreed with the Preliminary Determination's finding that exempted Hawaii from adopting ASHRAE 90.1-2007 and proposed instead that HUD and USDA require Hawaii compliance with ASHRAE 90.1-2007. The most detailed comment was provided by one commenter. This commenter notes that the Hawaii State Building Code Council has approved the 2009 IECC (roughly equivalent to ASHRAE 90.1-2007) for adoption in its four counties, and one county has already adopted these requirements. The commenter argues that “if Hawaii has already found the code to be sensible for all residential and commercial buildings in its unique climate zone, we do not see any reason to exclude it from the updated HUD/USDA energy efficiency standard.”

The commenter also maintains that Hawaii's cooling needs are very different from New York's, on which HUD's and USDA's conclusion was based, and that “a simple payback analysis is [not] a complete enough foundation from which to make a decision on cost-effectiveness.” The Preliminary Determination found that when Hawaii's average electricity costs are applied to the HUD/USDA analysis (rather than a national average), mid-rise apartment buildings achieved simple payback in 17 years. The commenter suggested that a 17-year payback should not automatically be deemed not cost-effective, considering the expected lifetime of a multifamily building (30 to 100 years). The commenter suggests that a closer consideration of Hawaii will demonstrate a much more rapid payback, but even if the payback period is 17 years, EISA does not set a specific simple payback period or even require a simple payback analysis. The commenter notes that the relevant inquiry is whether the home or dwelling unit is “affordable,” and by a life-cycle analysis of 30 years, “multifamily buildings in Hawaii should be required to meet ASHRAE 90.1-2007.”

Another commenter reached a similar conclusion. The commenter noted Hawaii has exceptionally high energy prices, and Hawaii is in a different climate zone with different requirements and thus will have different costs than New York, on which the Preliminary Determination was based. In fact, the Hawaii Building Code Council adopted the 2009 IECC (roughly equivalent for commercial buildings to ASHRAE 90.1-2007) with amendments, suggesting that the Hawaiians found the code reasonable for their State.

HUD-USDA Response: In this Final Determination HUD and USDA are amending the proposed exemption in the Preliminary Determination of HUD-assisted or FHA-insured multifamily properties in Hawaii from compliance with ASHRAE 90.1-2007. HUD acknowledges that the Hawaii Building Code Council has already adopted the 2009 IECC (roughly equivalent to ASHRAE 90.1-2007), as well as the fact that current (October 2014) EIA data show the average cost per kilowatt hour in Hawaii as of October 2014 has risen to 36 cents per kilowatt hour—even higher than the 32 cents cited in the Preliminary Determination, thereby lowering the estimated payback period for Hawaii to 15.1 years. At 36 cents per kilowatt hour, the simple payback of 15.1 years for energy savings in Hawaii is consistent with the other four States shown in table 6 with paybacks that are longer than 10 years; i.e., Colorado, Minnesota, Missouri, and Tennessee, whose paybacks range from 10.1 years to 13.3 years. Accordingly, HUD-assisted or FHA-insured multifamily properties in Hawaii are covered under this Final Determination.

Comment: Extend implementation period for ASHRAE 90.1-2007 for multifamily buildings from 90 to 180 days. Two commenters requested that the implementation timetable for multifamily properties be extended to 180 days. The notice currently states that for FHA-insured multifamily programs, the new standard would apply to those properties for which mortgage insurance applications are received by HUD 90 days after the effective date of a final determination. One commenter maintains that multifamily loan applications must include “almost full” plans and specifications; the design of the project will therefore have been completed or nearly-completed at the time of the loan application within 90 days. A 90-day notice may therefore result in developers having to modify plans and specs, which could be costly so late in the design process. Similarly, another commenter expressed a concern that multifamily new construction or substantial rehabilitation transactions have a long lead time and, for locations where the new standard represents a change, a longer lead time would ensure that the standard would not affect financings already in the development or application stages.

HUD Response: HUD proposes to retain the 90-day implementation period for multifamily properties but, to address the concerns expressed by the commenters that this could impact projects already in the development or application stages, HUD will clarify that the 90 days refers to the preapplication; i.e., not the application for Firm Commitment. This 90-day period would commence 30 days after the Final Determination is published, thereby effectively providing a 120-day implementation period.8 Multifamily properties have different compliance dates than single family properties, since the process is different for securing FHA single family mortgage insurance or USDA single family loan guarantees versus multifamily insurance. Multifamily developers submit preapplication proposals to FHA for insurance very early in the application process, whereas there is no such similar preapplication requirement for FHA single family. HUD does not want the implementation to impede or slow down projects in the pipeline, but is also aware that there have been two code cycles since ASHRAE 90.1-2007 and that it is important that this standard be implemented as expeditiously as possible.

After consideration of the public comments on the Preliminary Determination, HUD and USDA adopt the Preliminary Determination as their Final Determination. This Final Determination takes into consideration the public comments received in response to HUD and USDA's Preliminary Determination.

After careful consideration of the issues raised by the comments, HUD and USDA have made five changes as follows:

This notice does not address the more recent IECC and ASHRAE codes for which DOE has published efficiency determinations:

DOE has also completed a cost analysis of the 2012 IECC for 43 of the 50 States and the District of Columbia, a national cost analysis of ASHRAE 90.1-2010, and a cost analysis of the ASHRAE 90.1-2010 for 22 of the 50 States and the District of Columbia.11 DOE intends to publish a similar national cost-effectiveness analysis for ASHRAE 90.1-2013 in 2015.

The impact of these more recent codes on the affordability and availability of HUD- and USDA-funded new construction is currently being assessed by the two agencies. Since HUD and USDA's affordability determination relies on DOE's analysis, HUD and USDA will address the affordability of these codes in a subsequent notice in the near future. It is HUD's and USDA's intention that while adoption of future IECC and ASHRAE 90.1 standards can be implemented with a Determination such as this one, each program will subsequently update its handbooks, mortgagee letters, relevant forms, or other administrative procedures each time HUD and USDA determine that the new standard will not negatively impact the affordability or availability of housing under the covered programs.

Although HUD and USDA are adopting the 2009 IECC and ASHRAE 90.1-2007 energy codes, as noted in their April 15, 2014, Preliminary Determination, HUD and USDA, along with other Federal agencies, have also adopted the December 2011 energy alignment framework of the interagency Rental Policy Working Group. According to this framework, several HUD competitive grant programs already require or provide incentives to grantees to comply with energy efficiency standards that exceed the 2009 IECC and ASHRAE 90.1-2007 standards outlined in this notice.12 This standard is typically ENERGY STAR Certified New Homes for single family properties or ENERGY STAR for Multifamily High Rise for multifamily properties. Nothing in this notice will preclude these competitive programs from maintaining these higher standards, or raising them further. A list of current program requirements or incentives prior to publication of this notice is shown in Table 1, below.

The specific HUD and USDA programs covered by this notice are listed in Appendix I. While not specifically referenced in EISA, the Home Investment Partnerships Program (HOME) is covered, pursuant to a requirement in the HOME statute at section 215(b)(4) (42 U.S.C. 12745(b)(4)) and section 215(a)(1)(F) (42 U.S.C. 12745(a)(1)(f)) of Cranston-Gonzalez, which set the minimum standard for new construction of HOME-funded units at the standard established through this determination under Cranston-Gonzalez section 109.

Several exclusions are worth noting. EISA's application to the “rehabilitation and new construction of public and assisted housing funded by HOPE VI revitalization grants” is no longer applicable, since funding for HOPE VI has been discontinued. HUD's Housing Choice Voucher program, also known as Section 8 Tenant-Based Rental Assistance (TBRA), is excluded since the agency does not have the authority or ability to establish housing standards for properties before they are rented by tenant households under that program; i.e., when they are newly built. Indian housing programs are excluded because they do not constitute assisted housing and are not authorized under the National Housing Act (12 U.S.C. 1701 et seq.) as specified in EISA. For instance, the Section 184 Loan Guarantee Program is authorized under section 184 of the Housing and Community Development Act of 1992 (42 U.S.C. 1715z-13a). Similarly, housing financed with Community Development Block Grant (CDBG) funds is not included, since CDBG, which is authorized by the Housing and Community Development Act of 1974 (42 U.S.C. 5301 et seq.), is neither an assisted housing program nor a National Housing Act mortgage insurance program. Finally, only single family USDA programs are covered by EISA, whereas both single family and multifamily HUD programs are covered.

Before focusing on the specific costs and benefits associated with adoption of the IECC and ASHRAE codes addressed in this notice, the extent to which market failures or barriers exist in the residential sector that may prompt the need for these higher codes is discussed below. There is a wide body of literature on a range of market failures that have resulted in an “energy efficiency gap” between the actual level of investment in energy efficiency and the higher level of investment that would be cost beneficial from the consumer's (i.e., the individual's or firm's) point of view.13 More broadly, market failures involve externalities, market power, and inadequate or asymmetric information. Market barriers include capital market barriers and incomplete markets for energy efficiency; i.e., the fact that energy efficiency is generally purchased as an attribute of another product (in this case shelter or a building).

Within this broader world of market failures and barriers, suboptimal energy efficient investment in housing imposes two primary costs: Increased energy expenditures for households and an increase in the negative externalities associated with energy consumption. In addition to complying with the EISA statute, HUD and USDA have two primary motivations in the promulgation of this notice: (1) To reduce the total cost of operating and thereby increasing the affordability of housing by promoting the adoption of cost-effective energy technologies, and (2) to reduce the social costs (negative externalities) imposed by residential energy consumption. The first justification (lowering housing costs) requires that there exist significant market failures or other barriers that deter builders from supplying the energy efficiency demanded by consumers of housing. Alternatively, there may be market barriers that limit consumer demand for energy efficiency, which builders might readily supply if such demand existed. While the gains from cost-effective investments in energy efficiency are potentially very large, the argument that the market will not provide energy efficient housing demanded by households is somewhat complex.

The second justification (reducing social costs) requires that the consumption of energy imposes external costs that are not internalized by the market. There is near universal agreement among scientists and economists that energy consumption leads to indirect costs. The challenge is to measure those costs.

The production of energy efficient housing may be substantial, but if there are market failures or barriers that are not reflected in the return on the investment, the market penetration of energy efficient investments in housing will be less than optimal.

When analyzing energy efficiency standards, the generation of savings is typically the greatest of the different categories of benefits. Using potential private benefits to justify costly energy efficiency standards is often criticized.14 A skeptic of this approach of measuring the benefits discussed in this notice would indicate that if, indeed, there were net private benefits to energy efficient housing, consumers would place a premium on that characteristic and builders would respond to market incentives and provide energy-efficient homes. The noninterventionist might argue that the analyst who finds net benefits of implementing a standard did not measure the benefits and costs correctly.15 The existence of unobserved costs (either upfront or periodic) is a potential explanation for low levels of investment in energy-saving technology. Finally, a proponent of the market approach could argue that the very existence of energy efficient homes is ample proof that the market functions well. If developers build energy efficient housing, the theoretical challenge is to explain why there is an undersupply.

Despite the economic argument for nonintervention, there are many compelling economic arguments for the existence of an energy efficiency gap. Thaler and Sunstein attribute the energy efficiency gap to incentive problems that are exaggerated because upfront costs are borne by the builder, whereas the benefits are enjoyed over the long term by tenants.16 Four justifications deserve special consideration: (1) Imperfect information concerning energy efficiency, (2) inattention to energy efficiency, (3) split incentives for energy efficient investments in the housing market, and (4) lack of financing for energy efficient retrofits.17

(1) Imperfect information. Assuming information concerning energy efficiency affects investment, one can imagine two scenarios in which imperfect information would lead to an underinvestment in energy efficiency. First, consumers may be unaware of the potential gains from energy efficiency or even of the existence of a particular energy-saving investment. Second, imperfect information may inhibit energy efficient investments. A consumer may be perfectly capable of evaluating energy efficiency and making rational economic decisions but researching the options is costly. Establishing standards reduces search costs: consumers will know that newer housing possesses a minimal level of efficiency. Similarly, because it may be costly for consumers to identify energy efficient housing, the real estate industry may hesitate to invest in energy efficiency.

(2) Consumer inattention to energy efficiency. Consumers may be inattentive to long-run operating costs (energy bills) when purchasing durable energy-using goods.18 Procrastination and self-control also may affect the rationality of long-run decisions.19 These behavioral phenomena may deter energy efficiency choices. Establishing minimal standards that do not impose excessive costs but generate economic gains will benefit consumers who, when making housing choices, concentrate on other characteristics of the property.

(3) Split incentives. For owner-occupied homes, the prospect of ownership transfer may create a barrier to energy efficient investment.20 If owners, builders, or buyers do not believe that they will be able to recapture the value of the investment upon selling their home, they will be deterred from investing in energy efficiency. As indicated by McKinsey and Company in their landmark 2009 report, the length of the payback period and lifetime of the stream of benefits is longer than a large proportion of households' tenure. This concern may lead to the exclusive pursuit of investments for which there is an immediate payback.

For rental housing, split incentives exist that lead to sub-optimal housing.21 There is an agency problem when the landlord pays the energy bill and cannot observe tenant behavior or when the tenant pays the energy bill and cannot observe the landlord's investment behavior.22

(4) Lack of financing. Energy efficient investment may require a significant investment that cannot be equity financed. Capital constraints are a formidable barrier to energy efficiency for low-income households.23 While there is a wide variety of financing alternatives for home purchases, there are not many financing alternatives specifically for undertaking energy retrofits of for-sale housing.24 Building energy efficiency into housing at the time of construction allows homeowners and landlords to finance the energy-saving improvement with a lower mortgage interest rate, as opposed to a less affordable home improvement loan specifically for energy retrofits.25

Even if there were no investment inefficiencies and individual consumers who were able to satisfy their need for energy efficiency, nonenergy consumption externalities could justify energy conservation policy. The primary nonenergy co-benefits of reducing energy consumption are the reduction of emissions, and health benefits. The emission of pollutants (such as particulate matter) cause health and property damage. Greenhouse gases (such as carbon dioxide) cause global warming, which imposes a cost on health, agriculture, and other sectors. Greater energy efficiency allows households to afford energy for heating during severe cold or cooling during intense heat, which could have positive health effects for vulnerable populations. For example, studies have found a strong link between health outcomes and indoor environmental quality, of which temperature, lighting, and ventilation are important determinants.26 Clinch and Healy discuss how to value the effect on mortality and morbidity in a cost-benefit analysis of energy efficiency.27

In addition to the direct health benefits for residents of energy efficient housing, there will be indirect public health benefits. First, the local population will gain from reducing emissions of particulate matter that have harmful health effects. Second, there may be a positive safety effect from reducing the probability of fires by eliminating the need for supplemental heating sources.28

The IECC is a model energy code developed by the ICC through a public hearing process involving national experts for single family residential and commercial buildings.29 The code contains minimum energy efficiency provisions for residential buildings, defined as single family homes and low-rise residential buildings up to three stories, offering both prescriptive and performance-based approaches. Key elements of the code are building envelope requirements for thermal performance and air leakage control.

The IECC is typically published every 3 years, though there are some exceptions. In the last two decades, full editions of its predecessor, the Model Energy Code, came out in 1989, 1992, 1993, and 1995, and full editions of the IECC came out in 1998, 2000, 2003, 2006, 2009, and 2012. Though there were changes in each edition of the IECC from the previous one, the IECC can be categorized into two general eras: 2003 and before, and 2004 and after. The residential portion of the IECC was heavily revised in 2004. The climate zones were completely revised (reduced from 17 zones to 8 primary zones), and the building envelope requirements were restructured into a different format.30 The post-2004 code became much more concise and simpler to use, but these changes complicate comparisons of State codes based on pre-2004 versions of the IECC to the 2009 IECC.

The 2009 IECC substantially revised the 2006 code as follows: 31

As of November 2014, 34 States and the District of Columbia have voluntarily adopted the 2009 IECC, its equivalent, or a more recent energy code (Table 2).32 The remaining 16 States have not yet adopted the 2009 IECC.33 (In certain cases, cities or counties within a State have a different code from the rest of the State. For example, the cities of Austin and Houston, Texas, have adopted energy codes that exceed the minimum Texas statewide code).34 35 HUD and USDA are primarily interested in those States that have not yet adopted the 2009 IECC, since it is in these States that any affordability impacts will be felt relative to the cost of housing built to current State codes. As noted, in instances where a local entity has a more stringent standard, the affordability impacts within a State will differ.

An increasing number of States have in recent years adopted, or plan to adopt, the 2009 IECC, in part due to section 410 of the American Recovery and Reinvestment Act of 2009 (ARRA) (Pub L. 111-5, approved February 17, 2009), which established as a condition of receiving State energy grants the adoption of an energy code that meets or exceeds the 2009 IECC (and ASHRAE 90.1-2007), and achievement of 90 percent compliance by 2017. All 50 State governors subsequently submitted letters notifying DOE that the provisions of section 410 would be met.36

In this  notice, HUD and USDA address two aspects of housing affordability in assessing the impact that the revised code will have on housing affordability. As described further below, the primary affordability test is a life-cycle cost (LCC) savings test, the extent to which the additional, or incremental, investments required to comply with the revised code are cost effective; i.e., the additional measures pay for themselves with energy cost savings over a typical 30-year mortgage period. A second test is whether the incremental cost of complying with the code as a share of total construction costs—regardless of the energy savings associated with the investment—is affordable to the borrower or renter of the home.

In determining the impact that the 2009 IECC will have on HUD and USDA assisted, guaranteed or insured new homes, the agencies have relied on a cost-benefit analysis of the 2009 IECC completed by PNNL for DOE.38 This study provides an assessment of both the initial costs and the long-term estimated savings and cost-benefits associated with complying with the 2009 IECC. It offers evidence that the 2009 IECC may not negatively impact the affordability of housing covered by EISA. The financing assumptions used in the LCC analysis prepared by PNNL for DOE contains several variables that may not fully represent the target population of FHA-insured and USDA-guaranteed borrowers relative to borrowers utilizing conventional financing. For example, it assumes a higher down payment (20 percent) than FHA single family borrowers usually have, and it does not incorporate the Mortgage Insurance Premiums associated with FHA-insured single family mortgages.39 However, these variables do not change the overall affordability and/or availability findings in this Determination. While FHA average housing prices are lower than the national average, and the down payment requirements are lower for FHA than for conventional financing (3.5 percent vs. as high as 20 percent), these differences do not impact the overall cost-benefit findings, given the very small incremental costs involved. For example, the lower 3.5 percent down payment allowed by FHA will make the “mortgage payback” for the incremental cost of the higher energy code somewhat more attractive—in that the increase in the down payment to cover the added construction cost for the new energy code will be lower for FHA than conventional financing. The remaining amount will be amortized over 30 years for the FHA loan and will therefore actually improve cash flow to the consumer.

Note that there may be other benefits associated with energy efficient homes, in addition to positive cash flows. A March 2013 study by the University of North Carolina (UNC) Center for Community Capital and the Institute for Market Transformation (IMT) shows a correlation between greater energy efficiency and lower mortgage default risk for new homes. The UNC study surveyed 71,000 ENERGY STAR-rated homes and found that mortgage default risks are 32 percent lower for these more energy efficient homes than homes without ENERGY STAR ratings.40

The DOE study, National Energy and Cost Savings for New Single and Multifamily Homes: A Comparison of the 2006, 2009, and 2012 Editions of the IECC, published in April 2012 (2012 DOE study), shows positive results for the cost effectiveness of the 2009 IECC for new homes. This national study projects energy and cost savings, as well as LCC savings that assume that the initial costs are mortgaged over 30 years. The LCC method is a “robust cost-benefit metric that sums the costs and benefits of a code change over a specified time frame. LCC is a well-known approach to assessing cost effectiveness.” 41 In September 2011, DOE solicited input via Federal Register notice on their proposed cost-benefit methodology 42 and this input was incorporated into the final methodology posted on DOE's Web site in April 2012.43 A further Technical Support Document was published in April 2013.44

In summary, DOE calculates energy use for new homes using EnergyPlusTM energy modeling software, Version 5.0. Two buildings are simulated: A 2,400 square foot single family home and an apartment building (a three-story multifamily prototype with six dwelling units per floor) with 1,200 square-foot per dwelling. DOE combines the results into a composite average dwelling unit based on 2010 Census building permit data for each State and eight climate zones. Single family home construction is more common than low-rise multifamily construction; the results are weighted accordingly to reflect this. Census data also is used to determine climate zone and national averages weighted for construction activity.

Four heating systems are considered: Natural gas furnaces, oil furnaces, electric heat pumps, and electric resistance furnaces. The market share of heating system types are obtained from the U.S. Department of Energy Residential Energy Consumption Survey (2009). Domestic water heating systems are assumed to use the same fuel as the space heating system.

For all 50 States, DOE estimates that the 2009 IECC saves 10.8 percent of energy costs for heating, cooling, water heating, and lighting over the 2006 IECC. LCC savings over a 30-year period are significant in all climate zones: Average consumer savings range from $1,944 in Climate Zone 3, to $9,147 in Climate Zone 8 when comparing the 2009 IECC to the 2006 IECC.45

The published cost and savings data for all 50 States provides weighted average costs and savings for both single family and low-rise multifamily buildings. For the 16 States impacted by this notice, DOE provided disaggregated data for single family homes and low-rise multifamily housing to HUD and USDA. These disaggregated data are shown in Table 3. Front-end construction costs range from $550 (Kansas) to $1,950 (Hawaii) for the 2009 IECC over the 2006 IECC. On the savings side, average LCC savings over a 30-year period of ownership range from $1,633 in Utah to $6,187 in Alaska when comparing the 2009 IECC to the 2006 IECC.46

In addition to LCC savings, the 2012 DOE study also provides simple paybacks and “net positive cash flows” for these investments. These are additional measures of cost effectiveness. Simple payback is a measure, expressed in years, of how long it will take for the owner to repay the initial investment with the estimated annual savings associated with that investment. Positive cash flow assumes that the measure will be financed with a 30-year mortgage, and reflects the break-even point—equivalent to the number of months or years after loan closing—at which the cost savings from the incremental energy investment exceeds the combined cost of: (1) The additional down payment requirement and (2) the additional monthly debt service resulting from the added investment.

For example, the average LCC for Minnesota's adoption of the 2009 IECC over its current standard (the 2006 IECC) is estimated at $2,174, with a simple payback of 7.2 years, and a net positive cash flow (mortgage payback) of 2 years. Mississippi homeowners will save $2,674 over 30 years under the 2009 IECC, with a simple payback of 3.8 years, and a positive cash flow of 1 year on the initial investment. As shown in Table 3, below, similar results were obtained for the remaining States analyzed, with simple paybacks ranging from a high of 8.3 years (Louisiana) to a low of 2.6 years (Alaska). The positive cash flow for all 18 impacted States is always 1 or 2 years, while the simple payback averages 5.1 years, and is always less than 10 years (the longest payback is 8.3 years in Louisiana).

As noted, the costs and savings estimates for the 16 States presented here do not use the composite single family/low-rise multifamily data presented in the 2012 DOE study. Rather, DOE provided HUD and USDA with the unpublished underlying disaggregated data for single family housing, to more accurately reflect the housing type receiving FHA single family mortgage insurance or USDA loan guarantees. These disaggregated data for single family homes are available at www.hud.gov/resilience.

HUD and USDA are aware of studies that discuss limitations associated with cost-savings models such as these developed by PNNL for DOE. For example, Alcott and Greenstone suggest that “it is difficult to take at face value the quantitative conclusions of the engineering analyses” associated with these models, as they suffer from several empirical problems.48 They cite two problems in particular. First, engineering costs typically incorporate upfront capital costs only and omit opportunity costs or other unobserved factors. For example, one study found that nearly half of the investments that engineering assessments showed would have short payback periods were not adopted due to unaccounted physical costs, risks, or opportunity costs. Second, engineering estimates of energy savings can overstate true field returns, sometimes by a large amount, and some engineering simulation models have still not been fully calibrated to approximate actual returns. Another limitation may be the uncertainty as to the extent to which home rule municipalities have adopted higher energy codes in the absence of statewide adoption.

HUD and USDA nevertheless believe that the PNNL-DOE model used to estimate the savings shown in this notice represents the current state-of-the art for such modeling, is the product of significant public comment and input, and is now the standard for all of DOE's energy code simulations and models.

For reasons discussed below, HUD and USDA project that affordability will not decrease for many low-income consumers of HUD- or USDA-funded units as a result of the determination in this notice. The purpose of this regulatory action is to lower gross housing costs. For rental housing, the gross housing cost equals contract rent plus utilities (unless the contract rent includes utilities, in which case gross housing costs equal the contract rent). For homeowners, housing cost equals mortgage payments, property taxes, insurance, utilities, and other maintenance expenditures. Reducing periodic utility payments is achieved through an upfront investment in energy efficiency. The cost of building energy efficient housing will be passed on to residents (either renters or homeowners) through the price of the unit (either rent or sales price). Households will gain so long as the net present value of energy savings to the consumer is greater than the cost to the builder of providing energy efficiency. The 2012 DOE study cited in this notice provides compelling evidence that this is the case for the energy standards in question; i.e., that they would have a positive impact on affordability. In the 16 States impacted by the 2009 IECC, one of two codes addressed in the notice, the average incremental cost of going to the higher standard is just $1,019 per unit, with average annual savings of $215, for a 5.0 year simple payback, and a 1.3 year net positive cash flow.49

Households that would gain the most from this regulatory action would be those that consume energy the most intensively. However, it is possible, although unlikely, that a minority of households could experience a net increase in housing costs as a result of the regulatory action. Households that consume significantly less energy than the average household could experience a net gain in housing costs if their energy expenditures do not justify paying the cost of providing energy efficient housing.

There are a few reasons why a significant number of these households are not expected to be inconvenienced. First, in the rare case that a household does not value the benefits of energy efficient housing, much of the preexisting housing stock is available at a lower standard. Those that would lose from the capitalization of energy savings in more efficient housing could choose alternative housing from the large stock of existing and less energy efficient housing.

Second, to the extent that the majority of users of HUD/USDA programs are likely to be lower-income households, these households may suffer more from the “energy efficiency gap” than higher income households. Low-income households pay a larger portion of their income on utilities and so are not likely to be adversely affected by requiring energy efficiency rules. According to data from the 2012 Consumer Expenditure Survey, utilities represent almost 10 percent of total expenditures for the lowest-income households, as opposed to just 5 percent for the highest income. A declining expenditure share indicates that utilities are a necessary good. One study of earlier data from the Consumer Expenditure Survey found a short-run income elasticity of demand of 0.23 (indicating that energy is a normal and necessary good).50 Given these caveats, the expectation is that the overwhelming majority of low-income households will gain from this regulatory action.

Third, as noted above, the standards under consideration in this notice are not overly restrictive and are expected to yield a high benefit-cost return.

Notwithstanding the LCC savings and rapid simple paybacks on the initial investment described in this notice, low-income households face severe capital constraints; as a result there may be a question as to whether low-income families could be adversely impacted by the front-end incremental costs associated with adopting these codes. Based on the analysis provided in this Determination, the incremental costs are not sufficiently large to disadvantage low-income families in relation to the immediate benefits of that cost. Assuming a 3.5 percent down payment for an FHA-insured mortgage, low-income families will be required to pay an additional $35 at closing on the average incremental cost of approximately $1,000 required for the 2009 IECC. In addition, while HUD and USDA recognize the disproportionate burden that the incremental cost associated with higher code adoption has on low-income families, the benefits would also be shared disproportionately (this time positively), as a result of the much higher share of income low-income families spend on utilities relative to other households.

For the 34 States and the District of Columbia that have already adopted the 2009 IECC or a stricter code, there will be little or no impact on HUD and USDA's adoption of this standard for the programs covered under EISA, since all housing in these States is already required to meet this standard as a result of state legislation. For the remaining 16 States that have not yet adopted the 2009 IECC, HUD and USDA expect no negative affordability impacts from adoption of the code as a result of the low incremental first costs, the rapid simple payback times, and the LCC savings documented above.

For the States that have not yet adopted the 2009 IECC, the evidence shows that the 2009 IECC is cost effective in all climate zones and on a national basis. Cost effectiveness is based on LCC cost savings estimated by DOE for energy-savings equipment financed over a 30-year period. In addition, simple paybacks on these investments are typically less than 10 years, and positive cash flows are in the 1- to 2-year range. HUD and USDA therefore determine that the adoption of the 2009 IECC code for HUD and USDA assisted and insured new single family home construction does not negatively impact the affordability of those homes.

EISA requires HUD to consider the adoption of ASHRAE 90.1 for HUD-assisted multifamily programs (USDA multifamily programs are not covered). ASHRAE 90.1 is an energy code published by the ASHRAE for commercial buildings, which, by definition, include multifamily residential buildings of more than three stories. The standard provides minimum requirements for the energy efficient design of commercial buildings, including high-rise residential buildings (four or more stories). By design of the standard revision process, ASHRAE 90.1 sets requirements for the cost-effective use of energy in commercial buildings.

Beginning with ASHRAE 90.1-2001, the standard moved to a 3-year publication cycle. Substantial revisions to the standard have occurred since 1989. Significant requirements in ASHRAE 90.1-2007 over the previous (2004) code included stronger building insulation, simplified fenestration requirements, demand control ventilation requirements for higher density occupancy, and separate simple and complex mechanical requirements.

ASHRAE 90.1-2007 included 44 changes, or addenda, to ASHRAE 90.1-2004.51 In an analysis of the code, DOE preliminarily determined that 30 of the 44 would have a neutral impact on overall building efficiency; these included editorial changes, changes to reference standards, changes to alternative compliance paths, and other changes to the text of the standard that may improve the usability of the standard, but do not generally improve or degrade the energy efficiency of the building. Eleven changes were determined to have a positive impact on energy efficiency and two changes to have a negative impact.52

The 11 addendums with positive impacts on energy efficiency include: increased requirement for building vestibules, removal of data processing centers from exceptions to HVAC requirements, removal of hotel room exceptions to HVAC requirements, modification of demand-controlled ventilation requirements, modification of fan power limitations, modification of retail display lighting requirements, modification of cooling tower testing requirements, modification of commercial boiler requirements, modification of part load fan requirements, modification of opaque envelope requirements, and modification of fenestration envelope requirements.

Thirty-eight States and the District of Columbia have adopted ASHRAE 90.1-2007, its equivalent, or a stronger commercial energy standard (Table 5).53 In many cases, that standard is adopted by reference through adoption of the commercial buildings section of the 2009 IECC, while in other cases ASHRAE 90.1 is adopted separately. Twelve States either have previous ASHRAE codes in place or no statewide codes. ASHRAE 90.1-2007 was also the baseline energy standard established under ARRA for commercial buildings (including multifamily properties), to be adopted by all 50 States and for achieving a 90 percent compliance rate by 2017.54

Section 304(b) of Energy Conservation and Policy Act of 2005 (ECPA) requires the Secretary of DOE to determine whether a revision to the most recent ASHRAE standard for energy efficiency in commercial buildings will improve energy efficiency in those buildings.55 In its determination of improved energy efficiency for commercial buildings, DOE developed both a “qualitative” analysis and a “quantitative” analysis to assess increased efficiency of ASHRAE Standard 90.1.56 The qualitative analysis evaluates the changes from one version of Standard 90.1 to the next and assesses if each individual change saves energy overall. The quantitative analysis estimates the energy savings associated with the change, and is developed from whole building simulations of a standard set of buildings built to the standard over a range of U.S. climates.

DOE's quantitative analysis for ASHRAE 90.1-2007 concluded that on average for mid-rise apartment buildings nationwide, electric energy use intensity would decrease by 2.1 percent and natural gas energy use intensity would decrease by 11.5 percent, for a total site decrease in energy use intensity of 4.3 percent under ASHRAE 90.1-2007.57 The energy cost index for this building type was also calculated to decrease by 3 percent.

DOE also completed a state-by-state assessment of the impacts of ASHRAE 90.1-2007 on residential (mid-rise apartments), nonresidential, and semi-heated buildings subject to commercial building codes.58 This analysis included energy and cost savings over current commercial building codes by both State and climate zone, by comparing each State's base code at the time of the study to ASHRAE standard 90.1-2007. Results of this savings analysis for the 12 States that have not yet adopted Standard 90.1-2007 can be found in Appendix 2. Results are shown for the percent reduction estimated by DOE in both overall site energy use and energy cost resulting from adoption of Standard 90.1-2007 over the base case.59 ASHRAE 90.1-2007 was projected to generate both energy and cost savings in all States in all climate zones over existing codes.

As shown in Appendix 2, the highest energy and cost savings projected by DOE for residential buildings, for example, was in Topeka, Kansas (Climate Zone 4A), where adoption of ASHRAE 90.1-2007 would provide 10.3 percent energy savings and 6.8 percent cost savings over the current energy code of the State of Kansas. The lowest energy and cost savings estimated by DOE for residential buildings were in Honolulu, Hawaii (Climate Zone 1A), at 0.8 percent in reduced electricity consumption and costs. (Differentials between energy savings and cost savings reflect price differences and varying shares of the total for different fuel sources.)

As shown in Table 6, estimated front-end construction costs for the 12 States that have not yet adopted ASHRAE Standard 90.1-2007 range from $309 (Oklahoma) to $489 (Alaska). On the savings side, the estimated cost savings per unit range from a low of $28.70/year/unit in Colorado, to a high of $80.13/year/unit in Kansas. Simple paybacks on the initial investment range from a low of 4.2 years (Kansas) to a high of 15.1 years (Hawaii).

As discussed above, while DOE has completed an analysis of projected savings that will result from ASHRAE 90.1-2007, an equivalent to the cost studies conducted by DOE of the 2009 IECC does not exist for ASHRAE 90.1-2007. However, in 2009 PNNL completed an analysis for DOE of the incremental costs and associated cost benefits of complying with the new standard for the State of New York, and this analysis was used by HUD and USDA as the basis for determining the overall affordability impacts of the new standard.61 Note, however, a number of limitations exist in this analysis. For their cost analysis, PNNL compared ASHRAE 90.1-2007 to the prevailing code in New York at the time, the 2003 IECC (that references ASHRAE 90.1-2001) whereas the current minimum standard for HUD-assisted multifamily buildings is ASHRAE 90.1-2004. On the other hand, for their benefits analysis (i.e., energy savings) PNNL compared savings that would result from the adoption of ASHRAE 90.1-2007 to prevailing state codes at the time. For the 12 states that have not yet adopted ASHRAE 90.1-2007, the prevailing state codes used by PNNL were equivalent to the current HUD standard, ASHRAE 90.1-2004, in three States. For the remaining States, the prevailing State codes used by PNNL were ASHRAE 90.1-2001 in two States, a State-specific code in one State (Minnesota) and ASHRAE 90.1-1999 in five States in the absence of a statewide code. Despite these limitations as to the baseline codes used by PNNL compared to current minimum HUD standards, the PNNL baseline analysis as used in this Determination is the best available analysis upon which to base a Determination on the costs and benefits associated with the adoption of ASHRAE 90.1-2007.

In its New York analysis, PNNL found that adoption of ASHRAE 90.1-2007 would be cost effective for all commercial building types, including multifamily buildings, in all climate zones in the State. The incremental first cost of adopting the revised standard for a hypothetical 31-unit mid-rise residential prototype building in New York was projected to be $21,083, $10,423, and $9,525 per building for each of three climate zones in New York (Climate Zones 4A, 5A, and 6A, respectively), for an average across all climate zones of $13,677 per building, or $441 per dwelling unit. (Costs in Climate Zone 4A were high because the sample location chosen for construction costs was New York City.)

Annual energy cost savings in New York were projected to be $2,050, $1,234, and $1,185 for Climate Zones 4A, 5A, and 6A per building, respectively, for an average building, yielding cost savings of $1,489 per building for all climate zones, and average savings of $45 per unit. The average simple payback period for this investment in New York is 9.8 years, with a range of approximately 8 to 10 years.

Using New York as a baseline, HUD and USDA used Total Development Cost (TDC) adjustment factors developed by HUD in order to determine an estimate of the incremental costs associated with ASHRAE 90.1-2007 in the 12 States that have not yet adopted this code. HUD develops annual TDC limits for multifamily units for major metropolitan areas in each State. The average TDC for each State was derived by averaging TDCs for walkup- and elevator-style building types in each of several metropolitan areas in that State. Note that TDC costs include soft costs, site improvement costs, and management costs, and are derived by a standard adjustment factor applied to hard construction costs, referred to as Housing Construction Costs (HCC). HCC limits are determined by averaging R.S. Means “average” and Marshall and Swift “good” cost indices. Section 6(b) of the United States Housing Act of 1937 and regulations at 24 CFR 941.306 require HUD to establish TDC limits by multiplying the HCC construction cost guideline by 1.6 for elevator type structures and by 1.75 for non-elevator type structures. For the State of New York, TDCs were averaged for all of the State's metro areas, and arrived at an average New York TDC of $221,607 per unit.62 HUD and USDA then developed a TDC adjustment factor, which consists of the ratio of the average New York TDC of $221,607 for a two-bedroom unit against the average TDC for a similar unit in other States (Appendix 3). This TDC adjustment factor was then applied to the average cost per unit of $441 for complying with ASHRAE 90.1-2007 in New York, to arrive at an incremental cost per unit for the 12 States that have not yet adopted ASHRAE 90.1-2007 (Table 6).

In developing this adjustment factor, HUD considered whether to use IECC location cost indices developed by PNNL 63 or HCC costs (TDC minus soft and site improvement costs) rather than TDC costs. With regard to possible use of the IECC cost indices, since TDC cost indices were specifically developed for HUD-assisted properties, they are appropriately used here rather than the IECC cost indices. In addition, TDC (and HCC) costs apply to mid- and high-rise multifamily properties, while the IECC cost indices may or may not be transferable since they were developed for a different building type (single family or low-rise multifamily). With regard to using the HCC rather than the TDC, since the TDC is a standard function of the HCC, the adjustment factor will be the same for both the TDC (including soft costs) and the HCC (excluding soft costs).

In their April 15 Preliminary Determination HUD and USDA used national averages for electricity and fuel rates to estimate energy savings. In this Final Determination HUD and USDA use current State average electricity and natural gas rates (October 2014) published by the EIA, and apply those rates to an average of DOE's estimated energy savings across climate zones in each State to generate statewide energy savings estimates and to calculate simple payback periods for the ASHRAE 90.1-2007 investments.64 For example, as shown in Table 6 and Appendix 2, the average annual cost savings per unit resulting from adopting ASHRAE 90.1-2007 in Arizona is estimated to be 5.5 percent of baseline utility costs of $1,393 per unit per year, or $76.88 in per unit annual energy cost savings. For an estimated average incremental cost of $340 per unit, the simple payback derived from these costs savings in Arizona is 4.4 years.65 Note that the same baseline code used for the New York incremental cost analysis (the IECC 2003 or ASHRAE 90.1-2001) is assumed for these States; the actual baseline codes in these States may vary from the New York baseline (see Appendix 2).

USDA's multifamily programs are not covered by EISA, and therefore will not be impacted by ASHRAE 90.1. For impacted HUD programs in the 38 States and the District of Columbia that have adopted ASHRAE 90.1-2007 or a higher standard, there will, by default, be no adverse affordability impacts of adopting this standard. For the remaining 12 States that have not yet adopted ASHRAE 90.1-2007, HUD and USDA estimate the incremental cost of ASHRAE 90.1-2007 compliance at under $500 per dwelling unit, with the highest incremental cost at $490 per dwelling unit (Alaska), and the lowest cost at $310 per dwelling unit (Oklahoma). This estimate compares favorably to the cost of complying with the 2009 IECC for single family homes, which shows a somewhat higher average incremental cost of $1,019 per dwelling unit. With one exception (Hawaii), simple payback times using the most recent State average energy prices from EIA are 15 years or under.

The estimated payback for Hawaii slightly exceeds 15 years (15.1 years). While the Preliminary Determination had proposed to exempt Hawaii, as a result of this Final Determination, HUD will require Hawaii to comply with ASHRAE 90.1-2007 for HUD-assisted or FHA-insured multifamily properties specified in EISA. This is because the Hawaii Building Code Council has already adopted the 2009 IECC (roughly equivalent to ASHRAE 90.1-2007), as well as the fact that current (October 2014) EIA data show the average cost per kilowatt hour in that State as of February 2014 has risen to 36 cents per kilowatt hour, thereby lowering the payback period to 15.1 years. The payback of 15.1 years is consistent with the other four States shown in Table 6 with paybacks that are longer than 10 years.

Accordingly, given the low incremental cost of compliance with the new standard and the generally favorable simple payback times, HUD and USDA have determined that adoption of ASHRAE 90.1-2007 by the covered HUD programs will not negatively impact the affordability of multifamily buildings built to the revised standard in the 12 States that have not yet adopted this standard.

EISA requires that HUD and USDA assess both the affordability and availability of housing covered by the Act. This section of this notice addresses the impact that the EISA requirements would have on the “availability” of housing covered by the Act. “Affordability” is assumed to be a measure of whether a home built to the updated energy code is affordable to potential homebuyers or renters, while “availability” of housing is a measure associated with whether builders will make such housing available to consumers at the higher code level; i.e., whether the higher cost per unit as a result of complying with the revised code will impact whether that unit is likely to be built or not. A key aspect of determining the impact on availability is the proportion of affected units in relation to total units funded by HUD and USDA or total for-sale units. These issues are discussed below.

Though both higher construction costs and hedonic increases in demand for more energy-efficient housing are expected to contribute to an increase in housing prices or contract rents, HUD and USDA do not project such higher prices to decrease the quantity of affordable housing exchanged in the market. For reasons explained in the above discussion of market failures, improved standards are expected to reduce operating costs per square foot, which will motivate consumers to increase demand for more housing at each rent level, and for developers or builders to respond to such demand with increased supply. Therefore, regulatory action that leads to investments with positive net present value can be expected to maintain or increase the quantity of housing consumed.

Measuring the hedonic value (demand effect) of energy efficiency improvements is fraught with difficulty, and there is little consensus in the empirical literature concerning the degree of capitalization.66 However, whatever their methodology, studies do suggest a significant and positive influence of energy efficiency on real estate values. One of the most complete studies on the hedonic effects of energy efficiency is on commercial buildings.67 The results indicate that a commercial building with an ENERGY STAR certification will rent for about 3 percent more per square foot, increase effective rents by 7 percent, and sell for as much as 16 percent more. The authors skillfully disentangle the energy savings required to obtain a label from the unobserved effects of the label itself. Energy savings are important: a 10 percent decrease in energy consumption leads to an increase in value of about 1 percent, over and above the rent and value premium for a labeled building. According to the authors of the study, the “intangible effects of the label itself” seem to play a role in determining the value of green buildings.

For the 34 States and the District of Columbia that have already adopted the 2009 IECC, there will be few negative effects on the availability of housing covered by EISA as a result of HUD and USDA establishing the 2009 IECC as a minimum standard. For those 16 States that have not yet adopted the revised codes, HUD and USDA have estimated the number of new construction units built under the affected programs in FY 2011. As detailed in Table 7, in FY 2011, a total of 15,425 units of HUD- and USDA-assisted new single family homes were built in these States, including 11,533 that were FHA-insured new homes, 850 that received USDA Section 502 direct loans, and 2,864 that received Section 502 guaranteed loans. Overall, this represented 4.6 percent of all new single family home sales in the United States, and 0.3 percent of all U.S. single family home sales in FY 2011.68

Assuming similar levels of production as in 2011, the share of units estimated as likely to be impacted by the IECC in the 16 States that have not yet adopted this code is likely to be similar; i.e., approximately 4.6 percent of all new single family home sales in those 16 States, and 0.3 percent of all single family home sales in those 16 States.

Adoption of the 2009 IECC for affected HUD and USDA programs represents an estimated one-time incremental cost increase for new construction single family units of $15 million nationwide, and an estimated annual benefit of $3.0 million in energy cost savings, for an estimated simple payback of 5 years, as shown in Appendix 5.

ASHRAE 90.1-2007 has been adopted by 38 States and the District of Columbia; the availability of HUD- assisted housing will therefore not be negatively impacted in these States with the adoption of this standard by the two agencies. As shown in Table 8, in the 12 States that have not yet adopted this code, 5,256 new multifamily units were funded or insured through HUD programs in FY 2011. HUD and USDA project that of the units produced in the programs shown in Table 8, only units for which HOME Investment Partnership Program (HOME) funds are committed on or after January 24, 2015, and future units under FHA-insured multifamily programs will be affected by this Notice of Final Determination. Using FY 2011 unit production as the baseline, HUD and USDA project this to be approximately 3,217 units annually. This total, as well as other totals in Table 8 below, reflect a discount factor for Arizona and Colorado to reflect current home rule adoption of higher codes in those States (70 percent and 90 percent, respectively).

Although covered under EISA, HUD's Public Housing Capital Fund, the Sections 202 and 811 Supportive Housing and the HOPE VI programs are not projected to be covered by the codes addressed in this notice, due to the fact that the Public Housing Capital Fund currently already requires a more recent building energy code for new construction (ASHRAE 90.1-2010); the Sections 202 and 811 Supportive Housing programs no longer fund new construction, and, in any case have established higher standards for new construction in recent notices of funding availability (NOFAs) (ENERGY STAR Certified New Homes and ENERGY STAR Certified Multifamily High Rise buildings); and HOPE VI is no longer active.

Of the total, approximately 15 new multifamily projects with 1,932 units were endorsed by FHA in 2011 in these States. The 1,932 multifamily units endorsed by FHA in FY 2011 in States that have not yet adopted ASHRAE 90.1-2007 represented approximately 1 percent of a total of 180,367 units receiving FHA multifamily endorsements nationwide in FY 2011. The 15 projects with affected units represented a mortgage value of $187 million, or 1.6 percent of a total FHA-insured mortgage amount of $11.68 billion in FY 2011. Assuming a similar share of impacted units as in FY 2011 in future years, HUD and USDA assume that approximately 1 percent of FHA multifamily endorsements will be impacted by ASHRAE 90.1-2007, and less than 2 percent of total loan volume.

For both HOME and FHA-insured units shown in Table 8 (above) adoption of ASHRAE 90.1-2007 by the covered HUD programs represents an estimated one-time incremental cost increase for new multifamily residential units of $1 million nationwide, and an estimated annual benefit of $93,400 nationwide, resulting in an estimated simple payback time of less than 12 years, as shown in Appendix 5.

Given the extremely low incremental costs associated with adopting both the 2009 IECC and ASHRAE 90.1-2007 described above, and that the estimated number of new construction units built under the affected programs in FY 2011 in States that have not yet adopted the revised codes is a small percentage of the total number of new construction units in those programs nationwide, HUD and USDA have determined that adoption of the codes will not adversely impact the availability of the affected units.

Section 109(d) of Cranston-Gonzalez automatically applies 2009 IECC and ASHRAE 90.1-2007 to all covered programs upon completion of this determination by HUD and USDA, and the previously published energy efficiency determinations by DOE. Accordingly, the adoption of the 2009 IECC or ASHRAE 90.1-2007 new construction standards described in this notice will take effect as follows:

(1) For FHA-insured multifamily programs, to those properties for which mortgage insurance pre-applications are received by HUD 90 days after the effective date of this Final Determination;

(2) For FHA-insured and USDA-guaranteed single family loan programs, to properties for which building permits are issued 180 days after the effective date of a Final Determination.

(3) For the HOME program, the standards set forth by this notice are applicable to projects upon publication of guidance by HUD related to property standard requirements at 24 CFR 92.251.

HUD and USDA will take such administrative actions as are necessary to ensure timely implementation of, and compliance with, the energy codes, to include mortgagee letters, notices, Builder's Certification form HUD-92541, and amendments to relevant handbooks. Conforming rulemaking will also be required for one HUD program to update previous regulatory standards: the Federal Housing Administration's (FHA) single family minimum property standards, for which the regulations are codified at 24 CFR 200.926d. In addition, USDA will update minimum energy requirements codified in USDA regulations at 7 CFR 1924.

HUD and USDA will accept certifications for a range of energy and green building standards that require energy efficiency levels that meet or exceed the 2009 IECC or ASHRAE 90.1-2007 as evidence of compliance with the standards addressed in this notice. These include the ICC-700 National Green Building Standard (Performance Path), Enterprise Green Communities, ENERGY STAR Certified New Homes, ENERGY STAR Multifamily High Rise, LEED-NC, LEED-H, or LEED-H Midrise, and several regional or local green building standards, such as Earthcraft House, Earthcraft Multifamily, Earth Advantage New Homes, or GreenPoint Rated New Homes. These standards all require energy efficiency levels that meet or exceed the 2009 IECC and ASHRAE 90.1-2007. In addition, several States have adopted energy efficiency codes or standards that exceed the efficiency levels of the 2009 IECC and ASHRAE 90.1-2007, including, for example, the Title 24 California Energy Code in California, and Focus on Energy in Wisconsin. HUD and USDA will accept certifications of compliance with these State codes or standards as well as other State codes or standards for which credible third-party documentation exists that these exceed the 2009 IECC and ASHRAE 90.1-2007.

For both single family units complying with the 2009 IECC and multifamily units complying with ASHRAE 90.1-2007, the combined cost of implementing the updated codes is estimated at $16.1 million, with an estimated annual energy cost savings of $3.1 million, yielding a simple payback of 5.2 years. Annualized costs for this initial investment over 10 years are $1.8 million. Over 10 years, the present value of these cost savings, using a discount rate of 3 percent, is $27.0 million, for a net present value savings of $10.9 million over 10 years.

In addition to energy savings (described above) that will result from adoption of the energy standards addressed in this Determination, additional benefits are realized (in the form of lower social costs) from the resulting reductions in emissions of pollutants (such as particulate matter) that cause health and property damage and greenhouse gases (such as carbon dioxide) (CO2) that cause global warming.

The “social cost of carbon” (SCC) is an estimate used by EPA and other Federal agencies to describe the economic damages associated with a small increase in CO2 emissions, conventionally 1 metric ton, in a given year. This dollar figure also represents the value of damages avoided for a small emission reduction (i.e., the benefit of a CO2 reduction).69 The SCC is meant to be a comprehensive estimate of climate change damages and includes, but is not limited to, changes in net agricultural productivity, human health, and property damages from increased flood risk.70

The marginal social cost of carbon is taken from the Interagency Working Group on Social Cost of Carbon (2013) and adjusted by the Gross Domestic Product deflator to the 2012 price level. To calculate the social cost of carbon in any given year, the Interagency Working Group on Social Cost of Carbon estimated the future damages to agriculture, human health, and other market and nonmarket sectors from an additional unit (metric ton) of carbon dioxide emitted in a particular year.71 The interagency group provides estimates of the damage for every year of the analysis from a future value of $39 in 2013 to $96 in 2027 (a 25-year stream of benefits). A worst-case scenario was presented by the Interagency Working Group with costs starting at $110 in 2013 and rising to $196 by 2037.

The emission rate of metric tons of CO2 for each British thermal unit (BTU) consumed varies by power or fuel source. The primary source for these data is emissions factors developed by the U.S. Energy Information Administration (EIA) and utilized by the EIA Voluntary Reporting of Greenhouse Gases Program, as well as other EIA sources.72

HUD uses a range for its emission factor of 0.107 to 0.137 metric tons of CO2 per million BTUs. The lower figure of 0.107 metric tons of CO2 per million BTUs was derived as follows: the most direct method of calculating the CO2 emission rate for the residential sector is to divide total reported CO2 emissions from energy consumption in the energy sector (1,162 million metric tons) by the corresponding energy consumption (10,833 trillion BTUs) including coal, natural gas, petroleum, and retail electricity. The average emission factor would be 107 kg CO2 per million BTUs.

The higher figure of 0.137 metric tons of CO2 per million BTUs was derived using a more detailed and comprehensive analysis for specific power or fuel sources: the emission rates for coal, natural gas, and petroleum 73 are those for the residential and commercial sectors as provided the EIA. Carbon dioxide emission coefficients from the generation of electricity were calculated from the 2012 United States Electricity Profile 2012.74 HUD included both direct (sales) and indirect (energy losses) emissions using an emission factor of 169.8 metric tons of CO2 per million BTUs for both.75 HUD found that the weighted average CO2 emission factor is 137.7 metric tons CO2 per million BTUs by weighting the emission coefficient factors by the share of residential energy consumption from each power source except biomass.76

Given that both approaches are credible but arrive at a different estimate, HUD and USDA used a range for its emission factor of from 0.107 to 0.137 metric tons of CO2 per million BTUs.

Based on studies by DOE, HUD estimates energy savings of 1.79 million BTUs per housing unit per year from the ASHRAE 90.1-2007 standard and a reduction of 7.3 million BTUs per housing unit per year from the 2009 IECC. The expected aggregate energy savings (technical efficiency) is approximately 118,300 million BTUs annually.77

Whatever the predicted energy savings (technical efficiencies) of an energy efficiency upgrade, the actual energy savings by a household are likely to be smaller due to a behavioral response known as the “rebound effect.” A rebound effect has been observed when an energy efficient investment effectively lowers the price of the outputs of energy (heat, cooling, and lighting), which may lead to both income and substitution effects by raising the demand for energy. Increasing energy efficiency reduces the expense of physical comfort and may thus increase the demand for comfort. To account for the wide range of estimates for the scale of the rebound effect and the uncertainty surrounding these estimates, HUD assumes a range of between 10 and 30 percent.78 The size of the rebound effect does not reduce the benefit to a consumer of energy efficiency but indicates how those benefits are allocated between reduced energy costs and increased comfort. Taking account of the rebound effect, the technical efficiencies provided by the energy standards discussed in this notice produce an estimated energy savings between 82,810 million and 106,470 million BTUs.

Table 9 below summarizes the aggregate social benefits realized from reducing carbon emissions for different marginal social cost scenarios (average and worst case), lifecycles, and scenario assumptions. The highest benefits will be for a high marginal social cost of carbon, long life cycle, low rebound factor, and high emissions factor.

Marginal Social Costs as used here are a measure of the non-energy economic costs associated with carbon emissions. Marginal Social Costs are defined by the Business Dictionary as the “incremental cost of an activity as viewed by the society and expressed as the sum of marginal external cost and marginal private cost.” As discussed in more detail above, the Marginal Social Cost of carbon is the social cost of each additional ton of CO2 resulting from energy consumption. As defined by the Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis, “(t)he SCC is an estimate of the monetized damages associated with an incremental increase in carbon emissions in a given year. It is intended to include (but is not limited to) changes in net agricultural productivity, human health, property damages from increased flood risk, and the value of ecosystem services due to climate change.79

The annualized value of the social benefits of reducing carbon emissions, discounted at 3 percent, ranges from $390,000 (median MSC over 10 years) to $2.18 million (high MSC over 25 years).80 The corresponding present values range from $3.4 to $16.3 million over 10 years and from $7.9 million to $39 million over 25 years.

A Finding of No Significant Impact with respect to the environment was made with respect to the preliminary affordability determination in accordance with HUD regulations at 24 CFR part 50, which implement section 102(2)(C) of the National Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)), and remains applicable to this final affordability determination. That finding is posted at www.regulations.gov and www.hud.gov/resilience and is available for public inspection between the hours of 8 a.m. and 5 p.m., weekdays, in the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street SW., Room 10276, Washington, DC 20410-0500. Due to security measures at the HUD Headquarters building, please schedule an appointment to review the finding by calling the Regulations Division at 202-402-3055 (this is not a toll-free number).

Table of Contents I. Background II. Summary of Comments and Final Amendments III. Regulatory Procedures I. Background

In 2010, in response to the preceding financial crisis, the Board comprehensively revised NCUA's regulations governing Corporates and their activities.1 The Board also amended those regulations twice more in 2011.2 In November 2014, the Board issued a proposed rule (Proposal) to further amend the Corporate regulations by clarifying or modifying several provisions and making several non-substantive, technical corrections.3 The Proposal not only clarified and streamlined the Corporate regulations, but it also enhanced their readability and provided a degree of regulatory relief to Corporates. This final rule adopts all of the amendments in the Proposal, with one change.

In response to the Proposal, NCUA received 20 comments, nine from Corporates, 10 from trade associations and state credit union leagues, and one from a natural person credit union. All of the commenters generally supported the clarifications and technical changes. As discussed more fully below, however, most commenters suggested additional changes beyond the scope of the Proposal or commented on provisions of the current Corporate regulations that were not addressed in the Proposal. The Board adopts the Proposal as issued with only one modification.

In the definitions section, the Board deleted several terms it determined were duplicative and redefined a number of other terms to minimize confusion and enhance the effectiveness of the Corporate regulations. The Board removed the definitions of “adjusted core capital” and “core capital” and incorporated them into the definition of “Tier 1 capital.” The Board also deleted the term “capital” when that term was used as a specific measure, and replaced it with the term “total capital.” The Board removed the definition of “supplementary capital” and incorporated it into the definition of “Tier 2 capital.” The Board also eliminated the definitions of certain terms in Appendix C to part 704, which are no longer relevant to Corporates. Finally, the Board modified a number of additional definitions to provide greater clarity or to make them consistent with other NCUA regulations.

In response to these proposed changes, NCUA received one comment that supported the proposed definition of retained earnings, stating that the change would make it easier for the continuing credit union in a merger situation to count retained earnings carried on the books of the merging credit union. In addition, there were a number of comments on definitions in the Corporate regulations that were outside the scope of the Proposal. Specifically, 16 commenters objected to the requirement that perpetual contributed capital (PCC) be discounted over time from what may be counted as Tier 1 capital. This requirement, which is in the current rule, was not the subject of any proposed amendment. Commenters, however, stated that PCC is consistent with the definition of “Tier 1 capital” or “core capital” as used by banking regulators, the Securities and Exchange Commission, and the U.S. Treasury, and thus questioned the rationale of requiring certain amounts to be excluded from the calculation of Tier 1 Capital, as discussed below. Some commenters suggested that the mandatory phase-out of PCC would have the effect of altering a Corporate's Tier 1 Capital after the specified dates, even though nothing substantive had changed in the structure of the PCC account because of its nature as permanent capital. Another commenter suggested that the rule be changed to provide for a more explicit retained earnings requirement.

With respect to the comments on PCC and a more explicit retained earnings requirement, the Board notes that these are outside the scope of the Proposal. However, the Board notes that it was NCUA's intent, with the adoption of the final Corporate regulations in 2010, to ensure that the Corporates would never again present the sort of systemic risk to the entire credit union system that the Corporates did in that time period and which required NCUA to take extraordinary regulatory action.

An aspect of the 2010 Corporate regulations was to incent Corporates to build greater reserves of retained earnings to absorb potential losses. Retained earnings are considered to be the most superior form of capital carried by a Corporate, as retained earnings absorb losses without causing a corresponding loss to another party, such as a natural person credit union that purchased contributed capital from that Corporate. As referenced in the comment letters, part 704 contains provisions, effective in 2016, that limit the amount of contributed capital, including PCC, which may be counted toward a Corporate's regulatory capital. NCUA intended this provision to encourage a Corporate to build its retained earnings. By increasing retained earnings, a Corporate could count more contributed capital as regulatory capital.

As noted by commenters, PCC has elements that are consistent with Tier 1 capital. However, one distinguishing element of PCC is that it is almost entirely sourced from member credit unions. Accordingly, losses that deplete PCC would summarily impair investments made by credit union members and their corresponding capital. This downstream effect poses increased risk to the National Credit Union Share Insurance Fund that capital sourced from external sources would not. Should Corporates successfully raise meaningful amounts of capital from external sources, the Board may consider easing the restrictions on contributed capital in a future rulemaking.

The Board is finalizing the proposed amendments to the definitions section and Appendix C to part 704 without change.

The Proposal included amendments to § 704.3(b)(5) and (c)(3) regarding corporate capital. The proposed amendments clarified that upon redeeming or calling nonperpetual capital accounts or PCC instruments, a Corporate must continue to meet its minimum required capital and net economic value ratios. These clarifications made the provisions consistent with each other and with the terms and conditions of contributed capital included in the Model Forms in Appendix A to part 704. The Proposal also deleted § 704.3(f)(4), as that provision refers to a regulatory requirement that Corporates were to have complied with before December 20, 2011.

NCUA received only one comment on this section. That commenter requested that the rule be modified to provide enhanced guidance to Corporates on how to handle the redemption of PCC. The Board notes that this comment is outside the scope of the Proposal. Further, the Board does not believe it is appropriate to consider issuing a proposed rule to address this comment at this time. However, if Corporates continue to satisfactorily rebuild retained earnings that were depleted during the credit crisis of 2007, then NCUA may consider revisiting this issue in the future.

The Board is finalizing the proposed amendments to this section as proposed.

The Proposal included an amendment to § 704.5(j) regarding grandfathering certain Corporate investments. This amendment clarified that, while a Corporate may continue to hold an investment that was permissible at the time of purchase but later became impermissible because of a regulatory change, the investment is still subject to all other sections of part 704 that apply to investments, including those pertaining to credit risk management, asset and liability management, liquidity management, and investment action plans.

NCUA received no comments on this section and is adopting the amendment as proposed.

The Proposal provided clarification on how to value investments when calculating whether a Corporate is in compliance with various sector and issuer limits. NCUA received one comment on this section, which suggested that the Board should amend the rule to provide an exception to the single issuer limit for auto and equipment dealer floor plan asset-backed securities so that such securities would receive treatment similar to credit card master trust asset-backed securities. This comment is outside the scope of the Proposal, and the Board does not believe such an exception is warranted as auto and equipment asset-backed security issuances are widely available. The Board is adopting the amendments to this section as proposed.

Section 704.7(c) currently restricts a Corporate's unsecured member lending to 50 percent of capital and its secured member lending to 100 percent of capital. The Proposal provided greater flexibility to Corporates by permitting them to lend on a secured basis up to 150 percent of their total capital to any individual credit union borrower. No commenters opposed this change, but eight commenters recommended that NCUA include an additional exclusion from the lending limit for a bridge loan made to a natural person member credit union in connection with that credit union receiving approval for a loan from the Central Liquidity Facility (CLF). All of the commenters who commented on this aspect of the Proposal supported a ten-day maturity limit on these bridge loans.

The Board agrees with these commenters and intends to provide an exclusion from the lending limit for bridge loans related to CLF loans. As this issue was not included in the Proposal, the Board, in compliance with the Administrative Procedure Act, will issue a subsequent notice of proposed rulemaking to effect this change.

Current § 704.8 establishes requirements to identify, measure, monitor, and control risk in the management of assets and liabilities. These requirements include interest rate sensitivity analyses, net interest income modeling, and limiting the weighted average life of assets. Current § 704.8(j) also imposes reporting and other requirements on Corporates that experience a decline in net economic value (NEV) or other NEV-related measures beyond certain thresholds. The Proposal included an amendment to clarify that if a Corporate experiences such NEV-related breaches, but is able to adjust its balance sheet to meet required regulatory limits within 10 days, then the Corporate will not be considered to be in violation of the regulation. The Proposal clarified that a regulatory violation would exist only if a Corporate could not timely resolve a breach.

NCUA received several comments on this section. One commenter suggested that Corporates should be given more than 10 days to complete an adjustment to its balance sheet to satisfy the requirements of § 704.8(d), (f), and (g). This commenter suggested a 60-day grace period and an opportunity to re-test at the expiration of the grace period.

The Board recognizes that, through the normal course of business, a Corporate may temporarily experience an NEV-related breach. Often, a Corporate can resolve the breach within a timely manner, which is why the current regulation permits a Corporate to resolve any breach within 10 days prior to further regulatory action being taken. The Board is concerned that lengthening the grace period could allow a Corporate to circumvent the purpose of the regulation, which is to address breaches that are not resolved in a timely manner. The Board, therefore, continues to believe the proposed 10-day grace period is appropriate.

In addition, four commenters suggested that the rule be expanded to provide for treatment of government securities, including agency securities, as cash equivalent for purposes of assigning weighted average life (WAL) values, resulting in such securities receiving a zero WAL valuation. The Board recognizes that government-guaranteed securities present a different risk profile than other investments that Corporates are permitted to purchase. However, these securities can pose risks to a Corporate. Specifically, government-issued or government-guaranteed securities may have longer-dated maturities that do not match a Corporate's funding structure. In addition, they are subject to prepayment, extension, and interest rate risks. Given those risks, the Board does not believe that government-issued or government-guaranteed securities merit a cash equivalent designation for purposes of assigning WAL values. It is also important to note that government-guaranteed securities (when compared to non-government-issued or non-government-guaranteed securities) are allowed a preferential factoring for purposes of calculating WAL tests pursuant to § 704.8.

Four commenters also suggested that NCUA should anticipate that certain government-sponsored enterprises will increasingly require that investors in their mortgage-backed securities agree to certain credit-risk sharing features. These commenters suggested that NCUA should amend its regulations to specifically allow Corporates to acquire these types of investments. This issue is outside the scope of the Proposal, but the Board will continue to consider these comments for future rulemakings.

Section 704.9(b) currently restricts a Corporate's general borrowing limit to the lower of 10 times capital or 50 percent of capital and shares. The Proposal included several changes to this section. First, the Proposal changed the limit to 10 times total capital, consistent with the definitional changes discussed above. Second, the Proposal removed the restriction of 50 percent of capital and shares. Finally, the Proposal increased the secured borrowing maturity limit from 30 days to 120 days to accommodate seasonality in the borrowing patterns of member credit unions.

Fifteen commenters requested that the borrowing maturity limit be increased beyond 120 days. Most of the commenters addressing this topic advocated an extension of one to two years. In addition, one commenter advocated the elimination of any specific maturity limit. Another commenter sought to tie the maturity limit to the use of highly liquid collateral. Finally, several commenters argued for a system that would allow a Corporate to request a waiver from the borrowing limits.

The Board has considered all of these comments and has determined to extend the maturity limit to 180 days. The Board believes this additional extension will not materially increase risk, yet will provide the corporate greater flexibility in accommodating the fluctuation of its share base attributed to seasonal changes in member credit union liquidity demands. For example, credit unions incur routine deposit and withdrawal patterns associated with payrolls and consumer spending that can occur on an intra-month or multi-month basis. This seasonality of behavior has a direct impact on credit union funds held on deposit with the corporate. The Board believes the extension of the maturity limit will allow corporate credit unions to better serve the unique attributes of their members.

One commenter recommended that the Board remove the current limitation on the amount of secured borrowings permitted for non-liquidity purposes, and to simply allow such borrowings as long as all capital ratios continue to exceed the levels required to remain well capitalized. The Board believes that Corporates should be limited in their ability to borrow on a secured basis for other than liquidity purposes. The borrowing limitation is intended to preclude leveraging for investment purposes, which can introduce greater risk when markets encounter disruption. Secured lenders require collateral to be valued at market, and they impose an additional margin to ensure the borrowing is fully and continuously collateralized. Market shocks can create short-term market values that are significantly below long-term intrinsic values, which can magnify potential losses if the creditor seizes the collateral and sells it as permitted by the lending agreements. The Board is adopting the amendments as proposed, except as noted above.

The Proposal included several amendments to this section of the regulations. First, the Proposal eliminated dates included in § 704.11(e) that have since passed and are no longer relevant. Second, the Proposal added a requirement to § 704.11(g) that a Corporate CUSO provide to NCUA and, if applicable, the appropriate state supervisory authority (SSA), the kinds of reports required to be produced and submitted by natural person credit union service organizations pursuant to a recent revision to NCUA's natural person credit union service organization rule.4

Three commenters opposed this provision, all of whom challenged NCUA's authority to impose this requirement. Two of these commenters noted that the effect of this provision is likely to place CUSOs at a competitive disadvantage relative to other service providers. One commenter noted that this provision could expose a CUSO to the public release of confidential materials should its report become the subject of a Freedom of Information Act (FOIA) request. One commenter requested further clarification in the rule of the term “level of activity of each credit union” which the commenter mistakenly asserted appears in this section. One commenter, while not opposing the substance of this provision, opposed NCUA's use of incorporation by reference to the natural person credit union service organization rule.

The Board recognizes the concerns raised by commenters and notes that FOIA, as well as applicable FOIA exemptions, apply to any data or information submitted by natural person credit union service organizations and Corporate CUSOs to NCUA. The Board anticipates that natural person credit union service organization and Corporate CUSO submissions often will contain or consist of “trade secrets and commercial or financial information obtained from a person [that is] privileged or confidential.” 5 This type of information generally is subject to withholding under exemption 4 of FOIA. In addition, information that is “contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions” is generally subject to withholding under exemption 8 of FOIA. To the extent, however, that natural person credit union service organization or Corporate CUSO submissions may contain or consist of data or information not subject to an applicable FOIA exemption, for example, an entity's name, address, or other publicly available information, that data or information would be releasable under FOIA.

Further, pursuant to approved Corporate CUSO activities, as found on the agency Web site, all Corporate CUSOs engaged in a particular approved activity must currently provide NCUA with quarterly and annual reports. Most of the reporting required by the Proposal is currently required by NCUA via the agency Web site. The Board is adopting the proposed changes to this section.

The Proposal clarified the provisions in the current regulation pertaining to the qualifications required of a Corporate's directors, and specified that any candidate for a position on the board of a Corporate must currently hold a senior management position at a member credit union and hold that position at the time he or she is seated on the board of a Corporate. The Board received no comments in opposition to this proposed changed and is adopting it as proposed.

The Proposal made technical changes to this section by eliminating dates that are no longer relevant and corrected a typographical error. The Board received no comment on these changes and is adopting them as proposed.

The Proposal changed the measure in this section from core capital to Tier 1 capital, consistent with the definitional changes discussed above. The Board received no comments on this change and is adopting it as proposed.

The Proposal removed the minimum education and background requirements in this section applicable to an independent risk management expert. The Board received two comments, which advocated that this entire section be the subject of guidance, rather than included in the regulations. The Board disagrees with these comments and believes ERM should be addressed formally through regulation. Without emphasis placed on a strong ERM program, Corporates may be practicing good risk management on an exposure-by-exposure basis, but they may not be paying close enough attention to the aggregation of exposures across the entire institution. A Corporate must measure and understand all the individual risks associated with its various business components, and also understand how they interact dynamically. Accordingly, the Board is adopting the changes in this section as proposed.

The Proposal removed expired forms and redesignated the remaining forms as A-D. The Proposal also removed a sentence from the introductory note to current Model Form G, redesignated as Model Form C, to clarify that in some instances previously issued “paid-in capital” may not be considered PCC. The Board received no comments on these changes and is adopting them as proposed.

Consistent with the earlier discussion regarding the simplification of terms relating to capital, the Proposal substituted “leverage ratio” for “capital ratio” and “total capital” for “capital” in this appendix. The Board received no comments on these changes and is adopting them as proposed.

The Proposal removed references to assets and activities that are not consistent with the regular business activities of Corporates. The Board received no comments on these changes and is adopting them as proposed.

The Regulatory Flexibility Act requires NCUA to prepare an analysis of any significant economic impact a regulation may have on a substantial number of small entities (primarily those under $50 million in assets).6 This final rule only affects Corporates, all of which have more than $50 million in assets. Furthermore, the final rule consists primarily of technical and clarifying amendments. Accordingly, NCUA certifies the rule will not have a significant economic impact on a substantial number of small credit unions.

The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in which an agency by rule creates a new paperwork burden or increases an existing burden.7 For purposes of the PRA, a paperwork burden may take the form of a reporting or recordkeeping requirement, both referred to as information collections. Under the final rule, a Corporate with an investment in or loan to a Corporate CUSO will need to revise the current agreement it has with the Corporate CUSO to provide that the Corporate CUSO will prepare and submit basic or expanded reports directly to NCUA and, if applicable, the appropriate SSA.

Currently, there are 13 Corporates and approximately 16 Corporate CUSOs, 13 of which provide the complex or high-risk services that require expanded reporting. The information collection burdens imposed, on an annual basis, are analyzed below.

Changing the written agreement relating to reports to NCUA.

Frequency of response: One-time.

Initial hour burden: 4.

4 hours × 13 = 52 hours.

Initial Corporate CUSO reporting to NCUA and SSA—basic information.

Frequency of response: One-time.

Initial hour burden: 0.5.

0.5 hours × 16 = 8 hours.

Initial Corporate CUSO reporting to NCUA and SSA—expanded information.

Frequency of response: One-time.

Initial hour burden: 3.

3 hours × 13 = 39 hours.

Annual Corporate CUSO reporting to NCUA and SSA—expanded information.

Frequency of response: Annual.

Annual hour burden: 3.

3 hours × 13 = 39 hours.

As required by the PRA, NCUA submitted a copy of this Proposal to OMB for its review and approval.

Executive Order 13132 encourages independent regulatory agencies to consider the impact of their actions on state and local interests. NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies with the executive order to adhere to fundamental federalism principles. The final rule does not have substantial direct effects on the states, on the relationship between the national government and the states, or on the distribution of power and responsibilities among the various levels of government. NCUA has, therefore, determined that this final rule does not constitute a policy that has federalism implications for purposes of the executive order.

NCUA has determined that this final rule will not affect family well-being within the meaning of section 654 of the Treasury and General Government Appropriations Act, 1999, Public Law 105-277, 112 Stat. 2681 (1998).

The Small Business Regulatory Enforcement Fairness Act of 1996 8 (SBREFA) provides generally for congressional review of agency rules. A reporting requirement is triggered in instances where NCUA issues a final rule as defined by Section 551 of the Administrative Procedure Act.9 NCUA does not believe this final rule is a “major rule” within the meaning of the relevant sections of SBREFA because it only clarifies the mechanics of a number of regulatory provisions and makes several non-substantive, technical corrections. NCUA has submitted the rule to the Office of Management and Budget for its determination in that regard.

For the reasons discussed above, the National Credit Union Administration amends 12 CFR part 704 as follows:

The Federal Trade Commission is revising certain rules in parts 3 and 4 of its rules of practice to reflect new features in the Commission's electronic filing system, eliminate outdated requirements for the filing and service of documents, and clarify the applicability of the rules.

Because these rule revisions relate solely to agency procedure and practice, publication for notice and comment is not required under the Administrative Procedure Act. 5 U.S.C. 553(b).1 These rule revisions are effective on May 12, 2015 and will govern all Commission adjudicatory proceedings that are commenced after that date. They will also govern all Commission adjudicatory proceedings that are pending on May 12, 2015, unless otherwise ordered by the Commission.

The Commission is amending Rule 4.2(c) to specify that documents filed before the Commission or an Administrative Law Judge in an adjudicative proceeding under part 3 of the Commission's rules may be filed in either of two ways: In hard copy, or through the Commission's electronic filing system.

Part 3 documents filed in hard copy must include a paper original, one paper copy, and one electronic copy in Adobe portable document format or other format specified by the Secretary. The Commission is eliminating the requirement to provide 12 paper copies for filings before the Commission.

Part 3 documents filed through the electronic filing system must comply with the Secretary's directions for using that system. Additional information about the electronic filing system is available at https://ftcefile.gov/HomePage.aspx. Documents labeled “In Camera” or “Confidential” may be filed through the electronic filing system, although—as discussed further below—they may not be served through that system. Because the electronic filing system is now configured to accept “In Camera” or “Confidential” documents, the Commission is deleting the existing requirement that “In Camera” or “Confidential” documents be filed only in hard copy and be accompanied by an electronic copy on a CD or DVD.

For other documents filed with the Commission that are governed by Rule 4.2(d)—including petitions to quash or limit compulsory process, reports of compliance, and requests to reopen—the Commission is eliminating the existing requirement to provide 12 paper copies and a CD or DVD containing an electronic copy of the document. Instead, such documents must include a paper original, one paper copy, and one electronic copy in Adobe portable document format, unless otherwise directed by the Secretary.

In Rule 4.2(e), the Commission is deleting an outdated exception for briefs filed in support of appeals from initial decisions and an outdated cross-reference to formatting requirements for such briefs under Rule 3.52(e).

In Rule 4.2(f), the Commission is adding an explanation of the acceptable signature methods for documents that are filed electronically.

The Commission is also making other edits throughout Rule 4.2 so that the Rule's requirements are format-neutral.

The Commission is amending Rule 4.3(c) so that, if a document is served electronically, there will be a 1-day extension for any parties required or permitted to respond within a prescribed period after service of the document. As discussed in more detail below, documents can now be filed through the electronically filing system until 11:59 p.m. For documents that are electronically filed and served late at night, it is unrealistic to expect opposing parties to read the service notification until the next morning. Rule 4.3(c) therefore provides a 1-day extension for responding to electronically served documents. Although the federal courts provide a 3-day extension for responding to electronically served documents, see Fed. R. Civ. P. 6(d), the Commission has decided—due to the way that time is computed under the Commission's rules—that a 1-day extension in Rule 4.3(c) would be more appropriate.

The Commission is amending Rule 4.3(d)'s deadline for timely filing of documents. Although paper documents still must be received in the Office of the Secretary by 5:00 p.m. Eastern Time to be deemed filed that day, documents filed using the electronic filing system will be deemed timely filed as long as they are received by 11:59 p.m. Eastern Time. This change is consistent with Federal Rule of Civil Procedure 6(a)(4), which similarly provides a later deadline for electronic filing as compared to filing by other means.

The Commission is amending Rule 4.4(a) to clarify which paragraphs govern which types of documents and to allow the Commission to use electronic delivery to serve certain types of documents in part 3 proceedings. The provision that permits service upon counsel to be deemed service upon the party represented by that counsel—former Rule 4.4(a)(4)—has been moved into a new paragraph so that it is applicable to all documents in Commission proceedings, not just documents served by the Commission. See new Rule 4.4(c).

The Commission is amending Rule 4.4(b) to clarify that Rule 4.4(b) is the provision that governs service by complaint counsel, respondents, or third parties in adjudicative proceedings under part 3. The Commission is also clarifying, in new Rule 4.4(b)(1)(i), that service upon complaint counsel must be effected by serving lead complaint counsel; the Commission is eliminating the existing language that allowed service to be effected by instead serving the Assistant Director in the Bureau of Competition, the Associate Director in the Bureau of Consumer Protection, or the Director of the Regional Office of complaint counsel. In addition, Rule 4.4(b) is being revised to permit service by electronic delivery in accordance with new Rule 4.4(e).

New Rule 4.4(e) governs service by electronic delivery in part 3 proceedings. Specifically, Rule 4.4(e)(1) governs parties who have elected to be served via the Commission's electronic filing system. For such parties, the electronic filing system may be used to serve them with documents labeled “Public,” and transmission of the notice of electronic filing provided by the electronic filing system will satisfy the service obligations of the serving party. A document will be deemed served on the date that the notice of electronic filing is transmitted, unless the serving party learns that the notice of electronic filing did not reach the person to be served.

“In Camera” or “Confidential” documents may not be served through the electronic filing system. In addition, for confidentiality reasons, the electronic filing system cannot be used to serve third parties. Third parties can use the electronic filing system to file and serve documents, but third parties cannot be served through the system.

Rule 4.4(e)(2) therefore authorizes the Administrative Law Judge and the Secretary to allow other methods of service by electronic delivery, including service by email, in the following circumstances: For service of “In Camera” or “Confidential” documents, if the party to be served has not opted into service via the Commission's electronic filing system, if the document is to be served upon a third party, or if service through the electronic filing system is unavailable for technical reasons. If “In Camera” and “Confidential” documents are served by electronic delivery under Rule 4.4(e)(2), they must be encrypted prior to transit or transferred through a secure file transfer protocol.

New Rule 4.4(f) contains language that was previously found in Rule 4.4(b) and that has been moved into a new paragraph for clarity.

The Commission is amending Rule 3.14(a) to clarify that motions to intervene in Part 3 proceedings, as well as answers to such motions, must be served in accordance with Rule 4.4(b).

The Commission is deleting Rule 3.83(a)'s discussion of the date of filing for an application for an award of fees and expenses under the Equal Access to Justice Act, because Rule 4.3(d) governs the date of filing for documents filed with the Commission.

For the reasons set forth in the preamble, the Federal Trade Commission amends title 16, chapter I, subchapter A of the Code of Federal Regulations as follows:

I. General Information A. Does this action apply to me?

You may be potentially affected by this action if you are an agricultural producer, food manufacturer, or pesticide manufacturer. The following list of North American Industrial Classification System (NAICS) codes is not intended to be exhaustive, but rather provides a guide to help readers determine whether this document applies to them. Potentially affected entities may include:

• Crop production (NAICS code 111).

• Animal production (NAICS code 112).

• Food manufacturing (NAICS code 311).

• Pesticide manufacturing (NAICS code 32532).

You may access a frequently updated electronic version of 40 CFR part 180 through the Government Publishing Office's e-CFR site at http://www.ecfr.gov/cgi-bin/text-idx?&c=ecfr&tpl=/ecfrbrowse/Title40/40tab_02.tpl.

Under FFDCA section 408(g), 21 U.S.C. 346a, any person may file an objection to any aspect of this regulation and may also request a hearing on those objections. You must file your objection or request a hearing on this regulation in accordance with the instructions provided in 40 CFR part 178. To ensure proper receipt by EPA, you must identify docket ID number EPA-HQ-OPP-2014-0834 in the subject line on the first page of your submission. All objections and requests for a hearing must be in writing, and must be received by the Hearing Clerk on or before July 6, 2015. Addresses for mail and hand delivery of objections and hearing requests are provided in 40 CFR 178.25(b).

In addition to filing an objection or hearing request with the Hearing Clerk as described in 40 CFR part 178, please submit a copy of the filing (excluding any Confidential Business Information (CBI)) for inclusion in the public docket. Information not marked confidential pursuant to 40 CFR part 2 may be disclosed publicly by EPA without prior notice. Submit the non-CBI copy of your objection or hearing request, identified by docket ID number EPA-HQ-OPP-2014-0834, by one of the following methods:

• Federal eRulemaking Portal: http://www.regulations.gov. Follow the online instructions for submitting comments. Do not submit electronically any information you consider to be CBI or other information whose disclosure is restricted by statute.

• Mail: OPP Docket, Environmental Protection Agency Docket Center (EPA/DC), (28221T), 1200 Pennsylvania Ave. NW., Washington, DC 20460-0001.

• Hand Delivery: To make special arrangements for hand delivery or delivery of boxed information, please follow the instructions at http://www.epa.gov/dockets/contacts.html.

Additional instructions on commenting or visiting the docket, along with more information about dockets generally, is available at http://www.epa.gov/dockets.

In the Federal Register of January 28, 2015 (80 FR 4525) (FRL-9921-55), EPA issued a document pursuant to FFDCA section 408(d)(3), 21 U.S.C. 346a(d)(3), announcing the filing of a pesticide tolerance petition (PP 4F8289) by Southern Gardens Citrus, 1820 Country Road 833, Clewiston, FL 33440. The petition requested that 40 CFR part 174 be amended by establishing a temporary exemption from the requirement of a tolerance for residues of spinach defensin (SoD2 and SoD7) proteins in or on citrus. That document referenced a summary of the petition prepared by the petitioner Southern Gardens Citrus, which is available in the docket, http://www.regulations.gov. A comment was received on the notice of filing. EPA's response to this comment is discussed in Unit VII.C.

Section 408(c)(2)(A)(i) of FFDCA allows EPA to establish an exemption from the requirement for a tolerance (the legal limit for a pesticide chemical residue in or on a food) only if EPA determines that the exemption is “safe.” Section 408(c)(2)(A)(ii) of FFDCA defines “safe ” to mean that “there is a reasonable certainty that no harm will result from aggregate exposure to the pesticide chemical residue, including all anticipated dietary exposures and all other exposures for which there is reliable information.” This includes exposure through drinking water and in residential settings, but does not include occupational exposure. Pursuant to FFDCA section 408(c)(2)(B), in establishing or maintaining in effect an exemption from the requirement of a tolerance, EPA must take into account the factors set forth in FFDCA section 408(b)(2)(C), which require EPA to give special consideration to exposure of infants and children to the pesticide chemical residue in establishing a tolerance and to “ensure that there is a reasonable certainty that no harm will result to infants and children from aggregate exposure to the pesticide chemical residue. . . .” Additionally, FFDCA section 408(b)(2)(D) requires that the Agency consider “available information concerning the cumulative effects of a particular pesticide's residues” and “other substances that have a common mechanism of toxicity.”

EPA performs a number of analyses to determine the risks from aggregate exposure to pesticide residues. First, EPA determines the toxicity of pesticides. Second, EPA examines exposure to the pesticide through food, drinking water, and through other exposures that occur as a result of pesticide use in residential settings.

Consistent with FFDCA section 408(b)(2)(D), EPA has reviewed the available scientific data and other relevant information in support of this action and considered its validity, completeness and reliability, and the relationship of this information to human risk. EPA has also considered available information concerning the variability of the sensitivities of major identifiable subgroups of consumers, including infants and children.

Diverse defensin proteins are expressed by most eukaryotic species to combat various bacterial and fungal organisms. Homologous proteins have also diverged in evolution to provide functions related to plant stresses such as heat and drought.

There is a long history of mammalian consumption of the entire spinach plant (both raw and cooked) as food, without causing any known deleterious human health effects or any evidence of toxicity. Spinach plant leaves have long been part of the human diet and there have been no findings that indicate toxicity or allergenicity of spinach proteins. Spinach is commonly regarded as a “super food” that serves as an excellent source of vitamins, minerals, and antioxidants. Recent U.S. consumption statistics indicate that, on average, 2 lbs. of spinach are consumed per person per year in the United States. “Spinach Profile,” Agricultural Marketing Resource Center (June 2013) (http://www.agmrc.org/commodities_products/vegetables/spinach-profile/). Similarly, citrus whole fruits and juices have been an important part of the American and international diets for centuries. “History of Citrus,” All Foods Natural (2013) (available online at: http://www.allfoodnatural.com/article/history-of-citrus.html). Available studies demonstrate that spinach defensin 2 (SoD2) and spinach defensin 7 (SoD7) proteins have very low oral toxicity. In an acute oral toxicity study conducted with a single dose of 5,000 milligram/kilogram (mg/kg) of microbial-produced SoD2 protein, no evidence of toxic or adverse effects was observed. Due to the high similarity between SoD2 and SoD7, the toxicity assessment is applicable to both proteins.

In an in vitro study, microbial-produced SoD2 and SoD7 proteins were rapidly and extensively hydrolyzed in stimulated gastric and intestinal conditions in the presence of pepsin (at pH 1.2) and pancreatin, respectively. Both microbial-produced SoD2 and SoD7 proteins demonstrated half-lives of approximately five minutes when subjected to pepsin digest, and both proteins were completely proteolyzed to amino acids and small peptide fragments in less than one minute in the presence of 0.15 milligram/liter (mg/ml) pancreatin. These results indicate that both the SoD2 and SoD7 proteins are highly susceptible to degradation in conditions similar to the human digestive tract.

A literature search was performed to identify any published studies that might implicate these spinach proteins as allergens. No scientific references were found to suggest possible allergenicity associated with these spinach proteins. Sequence comparisons were made between the novel proteins from spinach, SoD2 and SoD7, against those of known and putative allergens using FASTA3 to search the AllergenOnline.org database using full-length matches, sliding window of 80 amino acids and finally 8-mer identity searches. In addition, the sequences were searched against the National Center for Biotechnology Information (NCBI) Protein database without keyword limits to identify highly related proteins and with the keyword limit of allergen, to find any high scoring identity matches to proteins annotated as allergens, as a check on the AllergenOnline.org data. No significant sequence matches were found between either SoD2 or SoD7 and any allergens. Thus there are no potential safety concerns related to allergenicity that would require further testing.

In examining aggregate exposure, FFDCA section 408 directs EPA to consider available information concerning exposures from the pesticide residue in food and all other non-occupational exposures, including drinking water from ground water or surface water and exposure through pesticide use in gardens, lawns, or buildings (residential and other indoor uses).

The Agency has considered available information on the aggregate exposure levels of consumers (and major identifiable subgroups of consumers) to the pesticide chemical residue and to other related substances. These considerations include dietary exposure under the tolerance exemption and all other tolerances or exemptions in effect for the plant-incorporated protectant chemical residue, and exposure from non-occupational sources. The Agency anticipates that there may be dietary exposure to the pesticide from the consumption of citrus products. In addition, people have a long history of consumption of spinach and will continue to be exposed to defensin proteins through consumption of spinach. Since the PIP is integrated into the plants genome, the Agency has concluded, based upon previous science reviews, that residues in drinking water will be extremely low or non-existent. Non-occupational exposure via the skin or inhalation is not likely since the plant-incorporated protectant is contained within plant cells, which essentially eliminates these exposure routes or reduces these exposure routes to negligible. In any event, there are no non-dietary non-occupational uses of SoD2 and SoD7 as it is only used in agricultural settings.

Section 408(b)(2)(D)(v) of FFDCA requires that, when considering whether to establish, modify, or revoke a tolerance, the Agency consider “available information” concerning the cumulative effects of a particular pesticide's residues and “other substances that have a common mechanism of toxicity.”

Since SoD2 and SoD7 proteins do not act through a toxic mode of action nor do the SoD2 and SoD7 proteins appear to produce a toxic metabolite produced by other substances, the proteins do not have a common mechanism of toxicity with other substances; therefore, the requirements of section 408(b)(2)(D)(v) do not apply.

FFDCA section 408(b)(2)(C) provides that, in considering the establishment of a tolerance or tolerance exemption for a pesticide chemical residue, EPA shall assess the available information about consumption patterns among infants and children, special susceptibility of infants and children to pesticide chemical residues, and the cumulative effects on infants and children of the residues and other substances with a common mechanism of toxicity. In addition, FFDCA section 408(b)(2)(C) provides that EPA shall apply an additional tenfold (10X) margin of exposure (safety) for infants and children in the case of threshold effects to account for prenatal and postnatal toxicity and the completeness of the database on toxicity and exposure unless EPA determines that a different margin of exposure (safety) will be safe for infants and children. This additional margin of exposure (safety) is commonly referred to as the Food Quality Protection Act Safety Factor (FQPA SF). In applying this provision, EPA either retains the default value of 10X or uses a different additional safety factor when reliable data available to EPA support the choice of a different factor.

Based on the information discussed in Unit III., EPA concludes that there are no threshold effects of concern to infants, children, or adults from exposure to the spinach defensin proteins SoD2 and SoD7. As a result, EPA concludes that no additional margin of exposure (safety) is necessary to protect infants and children and that not adding any additional margin of exposure (safety) will be safe for infants and children.

Therefore, based on the discussion in Units III and IV, EPA concludes that there is a reasonable certainty that no harm will result to the U.S. population, including infants and children, from aggregate exposure to the residues of spinach defensin proteins SoD2 and SoD7 in citrus, when it is used as a plant-incorporated protectant. Such exposure includes all anticipated dietary exposures and all other exposures for which there is reliable information. The Agency has arrived at this conclusion based on a lack of toxicity and allergenicity of the SoD2 and SoD7 proteins.

The pesticidal active ingredient is a protein, derived from a source that is not known to exert an influence on the endocrine system. Therefore, the Agency is not requiring information on the endocrine effects of the plant-incorporated protectant at this time.

A standard operating procedure for an enzyme-linked immunosorbent assay for the detection and quantification of spinach defensin proteins SoD2 and SoD7 in citrus plant tissue has been judged useful for its intended purpose.

EPA received one comment relevant to this petition. The comment supports this tolerance exemption and therefore warrants no response.

The Agency concludes that there is a reasonable certainty that no harm will result to the U.S. population, including infants and children, from aggregate exposure residues of spinach defensin SoD2 and SoD7 proteins in or on citrus. This includes all anticipated dietary exposures and all other exposures for which there is reliable information. The Agency has arrived at this conclusion because, as discussed previously no toxicity to mammals has been observed, nor is there any indication of allergenicity potential for the plant-incorporated protectant.

Therefore, an exemption is established for residues of spinach defensin SoD2 and SoD7 proteins in or on citrus when the protein is used as a PIP in citrus plants.

This action establishes a temporary exemption from the requirement of a tolerance under FFDCA section 408(d) in response to a petition submitted to the Agency. The Office of Management and Budget (OMB) has exempted these types of actions from review under Executive Order 12866, entitled “Regulatory Planning and Review” (58 FR 51735, October 4, 1993). Because this action has been exempted from review under Executive Order 12866, this action is not subject to Executive Order 13211, entitled “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001) or Executive Order 13045, entitled “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997). This action does not contain any information collections subject to OMB approval under the Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq.), nor does it require any special considerations under Executive Order 12898, entitled “Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations” (59 FR 7629, February 16, 1994).

Since tolerances and exemptions that are established on the basis of a petition under FFDCA section 408(d), such as the exemption in this final rule, do not require the issuance of a proposed rule, the requirements of the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.), do not apply.

This action directly regulates growers, food processors, food handlers, and food retailers, not States or tribes, nor does this action alter the relationships or distribution of power and responsibilities established by Congress in the preemption provisions of FFDCA section 408(n)(4). As such, the Agency has determined that this action will not have a substantial direct effect on States or tribal governments, on the relationship between the national government and the States or tribal governments, or on the distribution of power and responsibilities among the various levels of government or between the Federal Government and Indian tribes. Thus, the Agency has determined that Executive Order 13132, entitled “Federalism” (64 FR 43255, August 10, 1999) and Executive Order 13175, entitled “Consultation and Coordination with Indian Tribal Governments” (65 FR 67249, November 9, 2000) do not apply to this action. In addition, this action does not impose any enforceable duty or contain any unfunded mandate as described under Title II of the Unfunded Mandates Reform Act (UMRA) (2 U.S.C. 1501 et seq.).

This action does not involve any technical standards that would require Agency consideration of voluntary consensus standards pursuant to section 12(d) of the National Technology Transfer and Advancement Act (NTTAA) (15 U.S.C. 272 note).

Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the Federal Register. This action is not a “major rule” as defined by 5 U.S.C. 804(2).

Therefore, 40 CFR chapter I is amended as follows:

I. General Information A. Does this action apply to me?

You may be potentially affected by this action if you are an agricultural producer, food manufacturer, or pesticide manufacturer. The following list of North American Industrial Classification System (NAICS) codes is not intended to be exhaustive, but rather provides a guide to help readers determine whether this document applies to them. Potentially affected entities may include:

• Crop production (NAICS code 111).

• Animal production (NAICS code 112).

• Food manufacturing (NAICS code 311).

• Pesticide manufacturing (NAICS code 32532).

You may access a frequently updated electronic version of 40 CFR part 174 through the Government Publishing Office's e-CFR site at http://www.ecfr.gov/cgi-bin/text-idx?&c=ecfr&tpl=/ecfrbrowse/Title40/40tab_02.tpl.

Under FFDCA section 408(g), 21 U.S.C. 346a(g), any person may file an objection to any aspect of this regulation and may also request a hearing on those objections. You must file your objection or request a hearing on this regulation in accordance with the instructions provided in 40 CFR part 178. To ensure proper receipt by EPA, you must identify docket ID number EPA-HQ-OPP-2014-0454 in the subject line on the first page of your submission. All objections and requests for a hearing must be in writing, and must be received by the Hearing Clerk on or before July 6, 2015. Addresses for mail and hand delivery of objections and hearing requests are provided in 40 CFR 178.25(b).

In addition to filing an objection or hearing request with the Hearing Clerk as described in 40 CFR part 178, please submit a copy of the filing (excluding any Confidential Business Information (CBI)) for inclusion in the public docket. Information not marked confidential pursuant to 40 CFR part 2 may be disclosed publicly by EPA without prior notice. Submit the non-CBI copy of your objection or hearing request, identified by docket ID number EPA-HQ-OPP-2014-0454, by one of the following methods:

• Federal eRulemaking Portal: http://www.regulations.gov. Follow the online instructions for submitting comments. Do not submit electronically any information you consider to be CBI or other information whose disclosure is restricted by statute.

• Mail: OPP Docket, Environmental Protection Agency Docket Center (EPA/DC), (28221T), 1200 Pennsylvania Ave. NW., Washington, DC 20460-0001.

• Hand Delivery: To make special arrangements for hand delivery or delivery of boxed information, please follow the instructions at http://www.epa.gov/dockets/contacts.html.

Additional instructions on commenting or visiting the docket, along with more information about dockets generally, is available at http://www.epa.gov/dockets.

In the Federal Register initially on October 24, 2014 (79 FR 63596) (FRL-9916-03) and then again on December 17, 2014 (79 FR 75111) (FRL-9918-90), EPA issued a document pursuant to FFDCA section 408(d)(3), 21 U.S.C. 346a(d)(3), announcing the filing of a pesticide tolerance petition (PP 4F8275) by Monsanto Company, 800 North Lindbergh Blvd., St. Louis, MO 63167. The petition requested that 40 CFR part 174 be amended by establishing an exemption from the requirement of a tolerance for residues of the B.t. Cry1A.105 protein in or on all food commodities. That document referenced a summary of the petition prepared by the petitioner Monsanto Company, which is available in the docket, http://www.regulations.gov. A comment was received on the October 24, 2014, notice of filing. EPA's response to this comment is discussed in Unit VII.C.

Based on available data, EPA is amending the existing exemption for residues of B.t. Cry1A.105 protein to include residues in soybean rather than all food commodities as requested. The reasons for this change are discussed in Unit VII.D.

Section 408(c)(2)(A)(i) of FFDCA allows EPA to establish an exemption from the requirement for a tolerance (the legal limit for a pesticide chemical residue in or on a food) only if EPA determines that the exemption is “safe.” Section 408(c)(2)(A)(ii) of FFDCA defines “safe” to mean that “there is a reasonable certainty that no harm will result from aggregate exposure to the pesticide chemical residue, including all anticipated dietary exposures and all other exposures for which there is reliable information.” This includes exposure through drinking water and in residential settings, but does not include occupational exposure. Pursuant to FFDCA section 408(c)(2)(B), in establishing or maintaining in effect an exemption from the requirement of a tolerance, EPA must take into account the factors set forth in FFDCA section 408(b)(2)(C), which require EPA to give special consideration to exposure of infants and children to the pesticide chemical residue in establishing a tolerance and to “ensure that there is a reasonable certainty that no harm will result to infants and children from aggregate exposure to the pesticide chemical residue. . . .”

Additionally, FFDCA section 408(b)(2)(D) requires that the Agency consider “available information concerning the cumulative effects of a particular pesticide's residues” and “other substances that have a common mechanism of toxicity.”

EPA performs a number of analyses to determine the risks from aggregate exposure to pesticide residues. First, EPA determines the toxicity of pesticides. Second, EPA examines exposure to the pesticide through food, drinking water, and through other exposures that occur as a result of pesticide use in residential settings.

Consistent with FFDCA section 408(b)(2)(D), EPA has reviewed the available scientific data and other relevant information in support of this action and considered its validity, completeness and reliability, and the relationship of this information to human risk. EPA has also considered available information concerning the variability of the sensitivities of major identifiable subgroups of consumers, including infants and children.

The acute oral toxicity data demonstrates the lack of mammalian toxicity at high levels of exposure to the pure B.t. Cry1A.105 protein. Further, amino acid sequence comparisons showed no similarities between the B.t. Cry1A.105 protein and known toxic proteins in protein databases. In addition, the B.t. Cry1A.105 protein was shown to be substantially degraded by heat when examined by immunoassay. This instability to heat would also lessen the potential dietary exposure to intact B.t. Cry1A.105 protein in cooked or processed foods. These biochemical features along with the lack of adverse results in the acute oral toxicity test support the conclusion that there is a reasonable certainty no harm from toxicity will result from dietary exposure to residues of the B.t. Cry1A.105 protein in the identified soybean commodities.

Since the PIP is a protein, allergenic potential was also considered. Currently, no definitive tests for determining the allergenic potential of novel proteins exist. Therefore, EPA uses a weight-of-evidence approach where the following factors are considered: Source of the trait; amino acid sequence comparison with known allergens; and biochemical properties of the protein, including in-vitro digestibility in simulated gastric fluid (SGF) and glycosylation. This approach is consistent with the approach outlined in the Annex to the Codex Alimentarius, “Guideline for the Conduct of Food Safety Assessment of Foods Derived from Recombinant-DNA Plants.” The allergenicity assessment for the B.t. Cry1A.105 protein follows:

1. Source of the trait. Bacillus thuringiensis is not considered to be a source of allergenic proteins.

2. Amino acid sequence. A comparison of the amino acid sequence of the B.t. Cry1A.105 protein with known allergens showed no significant overall sequence similarity or identity at the level of eight contiguous amino acid residues.

3. Digestibility. The B.t. Cry1A.105 protein was rapidly digested in less than 30 seconds in simulated mammalian gastric fluid containing pepsin.

4. Glycosylation. The B.t. Cry1A.105 protein expressed in soybean was shown not to be glycosylated.

5. Conclusion. Considering all of the available information, EPA has concluded that the potential for the B.t. Cry1A.105 protein to be a food allergen is minimal.

The information on the safety of the pure B.t. Cry1A.105 protein provides adequate justification to address possible exposures in all soybean crops.

In examining aggregate exposure, FFDCA section 408 directs EPA to consider available information concerning exposures from the pesticide residue in food and all other non-occupational exposures, including drinking water from ground water or surface water and exposure through pesticide use in gardens, lawns, or buildings (residential and other indoor uses).

The Agency considered available information on the aggregate exposure levels of consumers (and major identifiable subgroups of consumers) to the pesticide chemical residue and to other related substances. These considerations include dietary exposure under the tolerance exemption and all other exemptions in effect for the B.t. Cry1A.105 protein residue, and exposure from non-occupational sources. Oral exposure may occur at very low levels from ingestion of corn and soybean products. With respect to drinking water, since the PIP is integrated into the plant genome and based upon EPA's human health and environmental assessments for B.t. Cry1A.105 protein (Refs. 1 and 2), the Agency expects residues in drinking water to be extremely low or non-existent.

Exposure via the skin or inhalation is not likely since the plant-incorporated protectant is contained within plant cells, which essentially eliminates these exposure routes or reduces exposure by these routes to negligible. Exposure to infants and children via residential or lawn use is also not expected because the use sites for the B.t. Cry1A.105 protein is agricultural.

Section 408(b)(2)(D)(v) of FFDCA requires that, when considering whether to establish, modify, or revoke a tolerance, the Agency consider “available information” concerning the cumulative effects of a particular pesticide's residues and “other substances that have a common mechanism of toxicity.”

Since the B.t. Cry1A.105 protein does not act through a toxic mode of action, nor does the B.t. Cry1A.105 protein appear to produce a toxic metabolite produced by other substances, the protein does not have a common mechanism of toxicity with other substances; therefore, the requirements of section 408(b)(2)(D)(v) do not apply.

FFDCA section 408(b)(2)(C) provides that, in considering the establishment of a tolerance or tolerance exemption for a pesticide chemical residue, EPA shall assess the available information about consumption patterns among infants and children, special susceptibility of infants and children to pesticide chemical residues, and the cumulative effects on infants and children of the residues and other substances with a common mechanism of toxicity. In addition, FFDCA section 408(b)(2)(C) provides that EPA shall apply an additional tenfold (10X) margin of exposure (safety) for infants and children in the case of threshold effects to account for prenatal and postnatal toxicity and the completeness of the database on toxicity and exposure unless EPA determines that a different margin of exposure (safety) will be safe for infants and children. This additional margin of exposure (safety) is commonly referred to as the Food Quality Protection Act Safety Factor (FQPA SF). In applying this provision, EPA either retains the default value of 10X or uses a different additional safety factor when reliable data available to EPA support the choice of a different factor.

Based on the information discussed in Unit III., EPA concludes that there are no threshold effects of concern to infants, children, or adults from exposure to the B.t. Cry1A.105 protein. As a result, EPA concludes that no additional margin of exposure (safety) is necessary to protect infants and children and that not adding any additional margin of exposure (safety) will be safe for infants and children.

Therefore, based on the discussion in Unit III. and the supporting documentation, EPA concludes that there is a reasonable certainty that no harm will result to the U.S. population, including infants and children, from aggregate exposure to the residues of the B.t. Cry1A.105 protein in soybean, when it is used as a plant-incorporated protectant. Such exposure includes all anticipated dietary exposures and all other exposures for which there is reliable information.

The pesticidal active ingredient is a protein, derived from a source that is not known to exert an influence on the endocrine system. Therefore, the Agency is not requiring information on the endocrine effects of the plant-incorporated protectant at this time.

A standard operating procedure for an enzyme-linked Immunosorbent assay for the detection and quantification of the B.t. Cry1A.105 protein in soybean tissue has been submitted.

EPA received one comment that is potentially relevant to this petition. The commenter generally opposed approval of the use of a Monsanto “B.t. pip,” but did not specify any particular PIP or any particular safety concern. As no specific basis for denying the petition was provided, the comment is not being further considered.

Monsanto's petition requested an exemption for residues of the B.t. Cry1A.105 protein in or on all food and feed commodities. However, based on the data provided, the Agency can only support a safety finding for residues in or on soybean at this time. Currently, the Agency does not have adequate information for a full range of crops for an exemption for the B.t. Cry1A.105 protein in or on all food and feed commodities.

There is a reasonable certainty that no harm will result from aggregate exposure to the U.S. population, including infants and children, to residues of the B.t. Cry1A.105 protein in all food and feed commodities of soybean. This includes all anticipated dietary exposures and all other exposures for which there is reliable information. The Agency has arrived at this conclusion because, as discussed in this unit, no toxicity to mammals has been observed, nor is there any indication of allergenicity potential for the plant-incorporated protectant.

Therefore, an exemption is established for residues of the B.t. Cry1A.105 protein in or on soybean when the protein is used as a PIP in soybean. In addition, the Agency is removing the existing paragraph (b) contained in section 174.502 because that tolerance has expired.

This action establishes an exemption from the requirement of a tolerance under FFDCA section 408(d) in response to a petition submitted to the Agency. The Office of Management and Budget (OMB) has exempted these types of actions from review under Executive Order 12866, entitled “Regulatory Planning and Review” (58 FR 51735, October 4, 1993). Because this action has been exempted from review under Executive Order 12866, this action is not subject to Executive Order 13211, entitled “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001), or Executive Order 13045, entitled “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997). This action does not contain any information collections subject to OMB approval under the Paperwork Reduction Act (PRA), 44 U.S.C. 3501 et seq., nor does it require any special considerations under Executive Order 12898, entitled “Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations” (59 FR 7629, February 16, 1994).

Since tolerances and exemptions that are established on the basis of a petition under FFDCA section 408(d), such as the exemption in this final rule, do not require the issuance of a proposed rule, the requirements of the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.), do not apply.

This action directly regulates growers, food processors, food handlers, and food retailers, not States or tribes, nor does this action alter the relationships or distribution of power and responsibilities established by Congress in the preemption provisions of FFDCA section 408(n)(4). As such, the Agency has determined that this action will not have a substantial direct effect on States or tribal governments, on the relationship between the national government and the States or tribal governments, or on the distribution of power and responsibilities among the various levels of government or between the Federal Government and Indian tribes. Thus, the Agency has determined that Executive Order 13132, entitled “Federalism” (64 FR 43255, August 10, 1999), and Executive Order 13175, entitled “Consultation and Coordination with Indian Tribal Governments” (65 FR 67249, November 9, 2000), do not apply to this action. In addition, this action does not impose any enforceable duty or contain any unfunded mandate as described under Title II of the Unfunded Mandates Reform Act (UMRA) (2 U.S.C. 1501 et seq.).

This action does not involve any technical standards that would require Agency consideration of voluntary consensus standards pursuant to section 12(d) of the National Technology Transfer and Advancement Act (NTTAA) (15 U.S.C. 272 note).

Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the Federal Register. This action is not a “major rule” as defined by 5 U.S.C. 804(2).

Therefore, 40 CFR chapter I is amended as follows:

I. General Information A. Does this action apply to me?

You may be potentially affected by this action if you are an agricultural producer, food manufacturer, or pesticide manufacturer. The following list of North American Industrial Classification System (NAICS) codes is not intended to be exhaustive, but rather provides a guide to help readers determine whether this document applies to them. Potentially affected entities may include:

• Crop production (NAICS code 111).

• Animal production (NAICS code 112).

• Food manufacturing (NAICS code 311).

• Pesticide manufacturing (NAICS code 32532).

You may access a frequently updated electronic version of 40 CFR part 180 through the Government Publishing Office's e-CFR site at http://www.ecfr.gov/cgi-bin/text-idx?&c=ecfr&tpl=/ecfrbrowse/Title40/40tab_02.tpl. To access the OCSPP test guidelines referenced in this document electronically, please go to http://www.epa.gov/ocspp and select “Test Methods and Guidelines.”

Under FFDCA section 408(g), 21 U.S.C. 346a, any person may file an objection to any aspect of this regulation and may also request a hearing on those objections. You must file your objection or request a hearing on this regulation in accordance with the instructions provided in 40 CFR part 178. To ensure proper receipt by EPA, you must identify docket ID number EPA-HQ-OPP-2014-0353 in the subject line on the first page of your submission. All objections and requests for a hearing must be in writing, and must be received by the Hearing Clerk on or before July 6, 2015. Addresses for mail and hand delivery of objections and hearing requests are provided in 40 CFR 178.25(b).

In addition to filing an objection or hearing request with the Hearing Clerk as described in 40 CFR part 178, please submit a copy of the filing (excluding any Confidential Business Information (CBI)) for inclusion in the public docket. Information not marked confidential pursuant to 40 CFR part 2 may be disclosed publicly by EPA without prior notice. Submit the non-CBI copy of your objection or hearing request, identified by docket ID number EPA-HQ-OPP-2014-0353, by one of the following methods:

• Federal eRulemaking Portal: http://www.regulations.gov. Follow the online instructions for submitting comments. Do not submit electronically any information you consider to be CBI or other information whose disclosure is restricted by statute.

• Mail: OPP Docket, Environmental Protection Agency Docket Center (EPA/DC), (28221T), 1200 Pennsylvania Ave. NW., Washington, DC 20460-0001.

• Hand Delivery: To make special arrangements for hand delivery or delivery of boxed information, please follow the instructions at http://www.epa.gov/dockets/contacts.html.

Additional instructions on commenting or visiting the docket, along with more information about dockets generally, is available at http://www.epa.gov/dockets.

In the Federal Register of August 1, 2014 (79 FR 44729) (FRL-9911-67), EPA issued a document pursuant to FFDCA section 408(d)(3), 21 U.S.C. 346a(d)(3), announcing the filing of a pesticide tolerance petition (PP 3F8195) by D-I-1-4, Inc., a division of 1,4-Group, Inc. (the Petitioner), P.O. Box 860, Meridian, ID 83360. The petition requested that 40 CFR part 180 be amended by establishing an exemption from the requirement of a tolerance for residues of 1-octanol, applied post-harvest to stored potatoes and other sprouting root and tuber crops. That document referenced a summary of the petition prepared by the Petitioner, which is available in the docket, http://www.regulations.gov. There were no comments received in response to the notice of filing.

Section 408(c)(2)(A)(i) of FFDCA allows EPA to establish an exemption from the requirement for a tolerance (the legal limit for a pesticide chemical residue in or on a food) only if EPA determines that the exemption is “safe.” Section 408(c)(2)(A)(ii) of FFDCA defines “safe” to mean that “there is a reasonable certainty that no harm will result from aggregate exposure to the pesticide chemical residue, including all anticipated dietary exposures and all other exposures for which there is reliable information.” This includes exposure through drinking water and in residential settings, but does not include occupational exposure. Pursuant to FFDCA section 408(c)(2)(B), in establishing or maintaining in effect an exemption from the requirement of a tolerance, EPA must take into account the factors set forth in FFDCA section 408(b)(2)(C), which require EPA to give special consideration to exposure of infants and children to the pesticide chemical residue in establishing a tolerance and to “ensure that there is a reasonable certainty that no harm will result to infants and children from aggregate exposure to the pesticide chemical residue. . . . ” Additionally, EPA is required to take into account the factors set forth in FFDCA section 408(b)(2)(D).

EPA performs a number of analyses to determine the risks from aggregate exposure to pesticide residues. First, EPA determines the toxicity of pesticides. Second, EPA examines exposure to the pesticide through food, drinking water, and through other exposures that occur as a result of pesticide use in residential settings.

Consistent with FFDCA section 408(b)(2)(D), EPA has reviewed the available scientific data and other relevant information in support of this action and considered its validity, completeness and reliability, and the relationship of this information to human risk. EPA has also considered available information concerning the variability of the sensitivities of major identifiable subgroups of consumers, including infants and children.

1-Octanol, or octyl alcohol, is a linear saturated aliphatic alcohol containing eight carbons. It is classified as a biochemical pesticide and functions as a plant growth regulator (PGR) by inhibiting sprout growth on stored potatoes and other sprouting root and tuber crops when applied after harvesting.

There is a significant history of human dietary exposure to 1-octanol. 1-Octanol occurs naturally in the essential oils of green tea, grapefruit, California orange, bitter orange, Turkish rose and Bulgarian rose. 1-Octanol has also been identified as a component of fried bacon, roasted filberts, raw and roasted earth almonds, mutton, chicken, pork, raw beef, frankfurters, nectarines, apple juice, common guava, Gruyere cheese and in foods processed from cassava root. The amount of 1-octanol has been quantified in some foods: Fermented soybean curds were found to contain 164.8 to 337.1 micrograms per kilogram (ug/kg) of 1-octanol, and duck meat and duck fat were found to contain 1-octanol as a volatile component at 8.88 parts per billion (ppb) and 12.69 ppb, respectively. 1-Octanol is approved by the FDA for use as a direct food additive under 21 CFR 172.230 in microcapsules for flavoring substances and under 21 CFR 172.515 as a synthetic flavoring substance and adjuvant.

EPA has already determined under the FFDCA that there is a reasonable certainty that no harm will result from aggregate exposures to 1-octanol, when 1-octanol is used as an inert ingredient (specifically as a solvent or co-solvent) in pesticide products applied to food. In addition, 1-octanol has been registered for use as an active ingredient to control tobacco sucker and as an inert ingredient for nonfood and fragrance uses.

For a summary of the data upon which EPA relied, and its human health risk assessment based on that data, please refer to the March 13, 2015 document entitled: “Federal Food, Drug, and Cosmetic Act (FFDCA) Considerations for 1-Octanol” available in the docket for this action.

All applicable mammalian toxicology data requirements supporting the petition to establish an exemption from the requirement of a tolerance for the use of 1-octanol as an active ingredient, post-harvest, on root and tuber vegetables have been fulfilled. No significant toxicological effects were observed in any of the acute toxicity studies and no toxic endpoints were established as a result of these studies. In addition, data and information submitted indicate that 1-octanol is not genotoxic. A developmental toxicity study (subchronic) revealed increased salivation (maternal) at 1,000 milligrams 1-octanol per kilogram body weight (mg/kg); however, the Agency does not consider this to be an adverse effect because the effect occurs at a very high dose, much higher dose than the level at which humans are likely to be exposed, given the half-life of this substance and the classification of the pesticide: A plant growth regulator intended for use before long-term storage. EPA concludes that 1-octanol has no subchronic toxic effects and is not a developmental toxicant. There are no known effects of 1-octanol on endocrine systems via oral, dermal, or inhalation routes of exposure.

In examining aggregate exposure, FFDCA section 408 directs EPA to consider available information concerning exposures from the pesticide residue in food and all other non-occupational exposures, including drinking water from ground water or surface water and exposure through pesticide use in gardens, lawns, or buildings (residential and other indoor uses).

The proposed use patterns may result in dietary exposure to 1-octanol, however, dietary exposure as a result of the application of 1-octanol to post-harvest potatoes and other root tubers is expected to be insignificant. 1-Octanol is volatile and is expected to degrade in the atmosphere by reaction with photochemically-produced hydroxyl radicals; its half-life is estimated to be from 3.5 minutes to 1.3 days. The typical length of time between application of the pesticide and consumption of the potatoes will exceed this half-life. Therefore, residues of 1-octanol are unlikely to occur at the time of consumption. No significant exposure via drinking water is expected from its use as an active ingredient in this pesticide as 1-octanol is applied indoors only. Some dietary exposure is expected from the use of 1-octanol as an inert ingredient in pesticide formulations.

Some dietary exposure to 1-octanol might occur through other nonpesticidal sources as a result of its natural presence in other foods or from its use as a food additive and flavoring substance. Should exposure occur, however, minimal to no risk is expected for the general population, including infants and children, due to the low toxicity of 1-octanol.

Other non-occupational exposure to 1-octanol from pesticidal use may occur in tobacco products from its use on tobacco or in or on other food and non-food commodities, as a result of its use as a pesticide inert ingredient. However, minimal to no risk is expected for the general population, including infants and children, due to the low toxicity of this chemical as demonstrated in the data submitted and evaluated by the Agency, as fully explained in the March 13, 2015 document entitled: “Federal Food, Drug, and Cosmetic Act (FFDCA) Considerations for 1-Octanol” available in the docket for this action.

Section 408(b)(2)(D)(v) of FFDCA requires that, when considering whether to establish, modify, or revoke a tolerance, the Agency consider “available information” concerning the cumulative effects of a particular pesticide's residues and “other substances that have a common mechanism of toxicity.”

EPA has not found 1-octanol to share a common mechanism of toxicity with any other substances, and 1-octanol does not appear to produce a toxic metabolite produced by other substances. For the purposes of this tolerance action, therefore, EPA has assumed that 1-octanol does not have a common mechanism of toxicity with other substances. For information regarding EPA's efforts to determine which chemicals have a common mechanism of toxicity and to evaluate the cumulative effects of such chemicals, see EPA's Web site at http://www.epa.gov/pesticides/cumulative.

FFDCA section 408(b)(2)(C) provides that, in considering the establishment of a tolerance or tolerance exemption for a pesticide chemical residue, EPA shall assess the available information about consumption patterns among infants and children, special susceptibility of infants and children to pesticide chemical residues, and the cumulative effects on infants and children of the residues and other substances with a common mechanism of toxicity. In addition, FFDCA section 408(b)(2)(C) provides that EPA shall apply an additional tenfold (10X) margin of safety for infants and children in the case of threshold effects to account for prenatal and postnatal toxicity and the completeness of the database on toxicity and exposure, unless EPA determines that a different margin of safety will be safe for infants and children. This additional margin of safety is commonly referred to as the Food Quality Protection Act Safety Factor (FQPA)(SF). In applying this provision, EPA either retains the default value of 10X, or uses a different additional or no safety factor when reliable data are available to support a different additional or no safety factor.

As part of its qualitative assessment, EPA evaluated the available toxicity and exposure data on 1-octanol and considered its validity, completeness, and reliability, as well as the relationship of this information to human risk. EPA considers the toxicity database to be complete and has identified no residual uncertainty with regard to prenatal and postnatal toxicity or exposure. No hazard was identified based on the available studies; therefore, EPA concludes that there are no threshold effects of concern to infants, children, or adults from 1-octanol. As a result, EPA concludes that no additional margin of exposure (safety) is necessary.

An analytical method is not required for enforcement purposes since the Agency is establishing an exemption from the requirement of a tolerance without any numerical limitation.

Based on its assessment of 1-octanol, EPA concludes that there is a reasonable certainty that no harm will result to the general population, or to infants and children, from aggregate exposure to 1-octanol. Therefore, an amendment to the exemption of a tolerance is established for residues of 1-octanol in or on root and tuber vegetables.

The Agency is issuing the exemption for residues on root and tuber vegetables instead of limiting this exemption to post-harvest indoor applications to root and tuber vegetables because these restrictions are not relevant to the FFDCA safety finding for 1-octanol. Those limitations are related to the use of the pesticide and regulated under FIFRA.

This final rule establishes an exemption from the requirement of a tolerance under FFDCA section 408(d) in response to a petition submitted to the Agency. The Office of Management and Budget (OMB) has exempted these types of actions from review under Executive Order 12866, entitled “Regulatory Planning and Review” (58 FR 51735, October 4, 1993). Because this final rule has been exempted from review under Executive Order 12866, this final rule is not subject to Executive Order 13211, entitled “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001) or Executive Order 13045, entitled “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997). This final rule does not contain any information collections subject to OMB approval under the Paperwork Reduction Act (PRA), 44 U.S.C. 3501 et seq., nor does it require any special considerations under Executive Order 12898, entitled “Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations” (59 FR 7629, February 16, 1994).

Since tolerances and exemptions that are established on the basis of a petition under FFDCA section 408(d), such as the exemption in this final rule, do not require the issuance of a proposed rule, the requirements of the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.), do not apply.

This final rule directly regulates growers, food processors, food handlers, and food retailers, not States or tribes, nor does this action alter the relationships or distribution of power and responsibilities established by Congress in the preemption provisions of FFDCA section 408(n)(4). As such, the Agency has determined that this action will not have a substantial direct effect on States or tribal governments, on the relationship between the national government and the States or tribal governments, or on the distribution of power and responsibilities among the various levels of government or between the Federal Government and Indian Tribes. Thus, the Agency has determined that Executive Order 13132, entitled “Federalism” (64 FR 43255, August 10, 1999) and Executive Order 13175, entitled “Consultation and Coordination with Indian Tribal Governments” (65 FR 67249, November 9, 2000) do not apply to this final rule. In addition, this final rule does not impose any enforceable duty or contain any unfunded mandate as described under Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1501 et seq.).

This action does not involve any technical standards that would require Agency consideration of voluntary consensus standards pursuant to section 12(d) of the National Technology Transfer and Advancement Act of 1995 (NTTAA) (15 U.S.C. 272 note).

Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the Federal Register. This action is not a “major rule” as defined by 5 U.S.C. 804(2).

Therefore, 40 CFR chapter I is amended as follows:

I. General Information A. Does this action apply to me?

You may be potentially affected by this action if you are an agricultural producer, food manufacturer, or pesticide manufacturer. The following list of North American Industrial Classification System (NAICS) codes is not intended to be exhaustive, but rather provides a guide to help readers determine whether this document applies to them. Potentially affected entities may include:

• Crop production (NAICS code 111).

• Animal production (NAICS code 112).

• Food manufacturing (NAICS code 311).

• Pesticide manufacturing (NAICS code 32532).

You may access a frequently updated electronic version of EPA's tolerance regulations at 40 CFR part 180 through the Government Publishing Office's e-CFR site at http://www.ecfr.gov/cgi-bin/text-idx?&c=ecfr&tpl=/ecfrbrowse/Title40/40tab_02.tpl.

Under FFDCA section 408(g), 21 U.S.C. 346a, any person may file an objection to any aspect of this regulation and may also request a hearing on those objections. You must file your objection or request a hearing on this regulation in accordance with the instructions provided in 40 CFR part 178. To ensure proper receipt by EPA, you must identify docket ID number EPA-HQ-OPP-2006-0075 in the subject line on the first page of your submission. All objections and requests for a hearing must be in writing, and must be received by the Hearing Clerk on or before July 6, 2015. Addresses for mail and hand delivery of objections and hearing requests are provided in 40 CFR 178.25(b).

In addition to filing an objection or hearing request with the Hearing Clerk as described in 40 CFR part 178, please submit a copy of the filing (excluding any Confidential Business Information (CBI)) for inclusion in the public docket. Information not marked confidential pursuant to 40 CFR part 2 may be disclosed publicly by EPA without prior notice. Submit the non-CBI copy of your objection or hearing request, identified by docket ID number EPA-HQ-OPP-2006-0075, by one of the following methods:

• Federal eRulemaking Portal: http://www.regulations.gov. Follow the online instructions for submitting comments. Do not submit electronically any information you consider to be CBI or other information whose disclosure is restricted by statute.

• Mail: OPP Docket, Environmental Protection Agency Docket Center (EPA/DC), (28221T), 1200 Pennsylvania Ave. NW., Washington, DC 20460-0001.

• Hand Delivery: To make special arrangements for hand delivery or delivery of boxed information, please follow the instructions at http://www.epa.gov/dockets/contacts.html.

Additional instructions on commenting or visiting the docket, along with more information about dockets generally, is available at http://www.epa.gov/dockets.

In the Federal Register of April 20, 2011 (76 FR 22067) (FRL-8869-7), EPA issued a document pursuant to FFDCA section 408(d)(3), 21 U.S.C. 346a(d)(3), announcing the filing of a pesticide petition (PP 1F7825) by Gowan Company, P.O. Box 5569, Yuma, AZ 85366. The petition requested that 40 CFR 180.632 be amended by establishing tolerances for residues of the insecticide fenazaquin, 4-[2-[4-(1,1-dimethylethyl)phenyl]ethoxy]quinazoline, in or on fruit, pome group at 0.35 parts per million (ppm); cucurbit group at 0.25 ppm; almond, hulls at 4.5 ppm; apple, wet pomace at 0.6 ppm; berry fruit group at 0.6 ppm; vegetable, fruiting group at 0.25 ppm; grape at 0.9 ppm; hop at 2.0 ppm; mint at 6.0 ppm; stone fruit group at 1.5 ppm; strawberry at 1.5 ppm; tree nut group at 0.02 ppm; alfalfa, forage at 4.5 ppm; alfalfa, hay at 8.0 ppm; avocado at 0.15 ppm; citrus fruit group at 0.3 ppm; citrus, oil at 2.5 ppm; cotton, seed (undelinted) at 0.5 ppm; cotton, gin byproducts at 12.0 ppm; bean, shelled dry subgroup at 0.2 ppm; bean, edible podded subgroup at 0.3 ppm; beans and pea, succulent subgroup at 0.02 ppm; corn, field, grain at 0.15 ppm; corn, field, forage at 9.0 ppm; corn, field, stover at 30 ppm; corn, field, aspirated grain fractions at 9.0 ppm; corn, field, refined oil at 0.6 ppm; corn, sweet at 0.04 ppm; and corn, sweet, forage at 9.0 ppm. That document referenced a summary of the petition prepared by Gowan Company, the registrant, which is available in the docket, http://www.regulations.gov. There were no comments received in response to the notice of filing.

Based upon EPA review of the data supporting the petition, Gowan Company, the registrant, revised their petition by limiting their request for tolerances to almond and cherry. The reason for these changes are explained in Unit IV.C.

Section 408(b)(2)(A)(i) of FFDCA allows EPA to establish a tolerance (the legal limit for a pesticide chemical residue in or on a food) only if EPA determines that the tolerance is “safe.” Section 408(b)(2)(A)(ii) of FFDCA defines “safe” to mean that “there is a reasonable certainty that no harm will result from aggregate exposure to the pesticide chemical residue, including all anticipated dietary exposures and all other exposures for which there is reliable information.” This includes exposure through drinking water and in residential settings, but does not include occupational exposure. Section 408(b)(2)(C) of FFDCA requires EPA to give special consideration to exposure of infants and children to the pesticide chemical residue in establishing a tolerance and to “ensure that there is a reasonable certainty that no harm will result to infants and children from aggregate exposure to the pesticide chemical residue. . . .”

Consistent with FFDCA section 408(b)(2)(D), and the factors specified in FFDCA section 408(b)(2)(D), EPA has reviewed the available scientific data and other relevant information in support of this action. EPA has sufficient data to assess the hazards of and to make a determination on aggregate exposure for fenazaquin including exposure resulting from the tolerances established by this action. EPA's assessment of exposures and risks associated with fenazaquin follows.

EPA has evaluated the available toxicity data and considered its validity, completeness, and reliability as well as the relationship of the results of the studies to human risk. EPA has also considered available information concerning the variability of the sensitivities of major identifiable subgroups of consumers, including infants and children. The most consistently observed effects of fenazaquin exposure across species, genders, and treatment durations were decreases in body weight, food consumption, and food efficiency. Other effects noted were mild dehydration and certain clinical signs seen at relatively high dose levels in the acute neurotoxicity study. These clinical signs, which included increased foot splay, decreased motor activity, sluggish arousal, unusual posture, abnormal gait, and altered response to auditory stimuli were seen in the absence of any neuropathological changes and were not considered to be related to neurotoxicity. In a 90-day study in hamsters, treated animals had an increased incidence of testicular hypospermatogenesis and reduced testicular and prostate weight; however, these findings were not replicated in the hamster carcinogenicity study which suggest the effects were transient or reversible.

Fenazaquin did not cause any developmental or reproductive toxicity at the doses tested in rats and rabbits. In the rat study, developmental toxicity was not observed in the presence of maternal toxicity (i.e. decreases in body weight gain, food consumption, and food efficiency). In the rabbit study, no developmental or maternal toxicity was seen. In the reproduction study, systemic toxicity manifested in parental animals as excessive salivation and decreased body weight and food intake; in offspring as decreased body weight gain; and there was no observed reproductive toxicity. Therefore, there is no developmental toxicity or reproductive susceptibility with respect to fetal and developing young animals with in utero and postnatal exposures.

Carcinogenicity was evaluated in the hamster instead of the mouse because the hamster was found to be more sensitive to the effects of fenazaquin than mice due to slower elimination kinetics for hamster. In a three-month feeding study in the mouse, it was found that 6-22x higher dose levels were required to elicit a comparable effect in mice than in the hamster. The results of the rat and hamster carcinogenicity studies demonstrated no increase in treatment-related tumor incidence. Therefore, fenazaquin was classified as “Not likely to be Carcinogenic to Humans.”

The database for fenazaquin shows no evidence of mutagenicity, genotoxicity, neurotoxicity, or immunotoxicity. Fenazaquin did not demonstrate any systemic toxicity in a 21-day dermal toxicity study in rabbits up to the limit dose (1,000 milligram/kilogram/day (mg/kg/day)).

Fenazaquin has high acute oral toxicity, low acute toxicity by dermal and inhalation routes of exposure, is not a skin irritant, is minimally irritating to the eye, and is considered to be a dermal sensitizer.

Specific information on the studies received and the nature of the adverse effects caused by fenazaquin as well as the no-observed-adverse-effect-level (NOAEL) and the lowest-observed-adverse-effect-level (LOAEL) from the toxicity studies can be found at http://www.regulations.gov in document Fenazaquin: Human Health Risk Assessment for Proposed New Uses on Almonds and Cherries on page 30 in docket ID number EPA-HQ-OPP-2006-0075.

Once a pesticide's toxicological profile is determined, EPA identifies toxicological points of departure (POD) and levels of concern to use in evaluating the risk posed by human exposure to the pesticide. For hazards that have a threshold below which there is no appreciable risk, the toxicological POD is used as the basis for derivation of reference values for risk assessment. PODs are developed based on a careful analysis of the doses in each toxicological study to determine the dose at which no adverse effects are observed (the NOAEL) and the lowest dose at which adverse effects of concern are identified (the LOAEL). Uncertainty/safety factors are used in conjunction with the POD to calculate a safe exposure level—generally referred to as a population-adjusted dose (PAD) or a reference dose (RfD)—and a safe margin of exposure (MOE). For non-threshold risks, the Agency assumes that any amount of exposure will lead to some degree of risk. Thus, the Agency estimates risk in terms of the probability of an occurrence of the adverse effect expected in a lifetime. For more information on the general principles EPA uses in risk characterization and a complete description of the risk assessment process, see http://www.epa.gov/pesticides/factsheets/riskassess.htm.

A summary of the toxicological endpoints for fenazaquin used for human risk assessment is shown in Table 1 of this unit.

1. Dietary exposure from food and feed uses. In evaluating dietary exposure to fenazaquin, EPA considered exposure under the petitioned-for tolerances as well as all existing fenazaquin tolerances in 40 CFR 180.632. EPA assessed dietary exposures from fenazaquin in food as follows:

i. Acute exposure. Quantitative acute dietary exposure and risk assessments are performed for a food-use pesticide, if a toxicological study has indicated the possibility of an effect of concern occurring as a result of a 1-day or single exposure.

Such effects were identified for fenazaquin. In estimating acute dietary exposure, EPA used food consumption information from the United States Department of Agriculture (USDA) 2003-2008 National Health and Nutrition Examination Survey, What We Eat in America (NHANS/WWEIA). As to residue levels in food, EPA included tolerance level residues for all registered and proposed crops and 100 percent crop treated (PCT). Default processing factors were used for all processed commodities.

ii. Chronic exposure. In conducting the chronic dietary exposure assessment EPA used the food consumption data from the USDA 2003-2008 National Health and Nutrition Examination Survey, What We Eat in America (NHANES/WWEIA). As to residue levels in food, EPA included tolerance level residues for all registered and proposed crops and 100 PCT. Default processing factors were used for all processed commodities.

iii. Cancer. Based on the data summarized in Unit III.A., EPA has concluded that fenazaquin does not pose a cancer risk to humans. Therefore, a dietary exposure assessment for the purpose of assessing cancer risk is unnecessary.

iv. Anticipated residue and percent crop treated (PCT) information. EPA did not use anticipated residue and/or PCT information in the dietary assessment for fenazaquin. Tolerance level residues and 100 PCT were assumed for all food commodities.

2. Dietary exposure from drinking water. The Agency used screening level water exposure models in the dietary exposure analysis and risk assessment for fenazaquin in drinking water. These simulation models take into account data on the physical, chemical, and fate/transport characteristics of fenazaquin. Further information regarding EPA drinking water models used in pesticide exposure assessment can be found at http://www.epa.gov/oppefed1/models/water/index.htm.

Based on the Tier II Pesticide Root Zone Model/Exposure Analysis Modeling System (PRZM/EXAMS) for surface water, the estimated drinking water concentrations (EDWCs) of fenazaquin for acute and chronic exposures were estimated to be 5.74 parts per billion (ppb) and 2.09 ppb, respectively, and were entered directly into the dietary exposure model. The groundwater EDWC from the screening concentration in ground water (SCI-GROW) model was estimated to be 0.704 ppb. The modeled estimates were corrected for the default percent cropped area of 0.87. The drinking water assessment was conducted using the total toxic residue (TTR) approach. The residues considered in the assessment include fenazaquin (parent), Metabolite 1, and Metabolite 29.

3. From non-dietary exposure. The term “residential exposure” is used in this document to refer to non-occupational, non-dietary exposure (e.g., for lawn and garden pest control, indoor pest control, termiticides, and flea and tick control on pets).

Fenazaquin is currently registered for the following uses that could result in residential exposures: Ornamental uses. EPA assessed residential exposure using the following assumptions: EPA assessed potential exposures for residential handlers using several application methods including handwand and backpack sprayers to treat ornamental plants. MOEs were calculated for the inhalation route of exposure only since no systemic toxicity associated with dermal exposure to fenazaquin was observed. Adult post-applications exposures were not quantitatively assessed since no dermal hazard was identified for fenazaquin and inhalation exposures are typically negligible in outdoor settings. Furthermore, the inhalation exposure assessment performed for residential handlers is representative of worst case inhalation exposures and is considered protective for post-application inhalation scenarios. Since there is no residential incidental oral exposure expected for children 1<2 years old on ornamental plants, a post-application exposure assessment was not conducted and the aggregate assessment for children will only include exposure from food and water.

Further information regarding EPA standard assumptions and generic inputs for residential exposures may be found at http://www.epa.gov/pesticides/trac/science/trac6a05.pdf.

4. Cumulative effects from substances with a common mechanism of toxicity. Section 408(b)(2)(D)(v) of FFDCA requires that, when considering whether to establish, modify, or revoke a tolerance, the Agency consider “available information” concerning the cumulative effects of a particular pesticide's residues and “other substances that have a common mechanism of toxicity.

EPA has not found fenazaquin to share a common mechanism of toxicity with any other substances, and fenazaquin does not appear to produce a toxic metabolite produced by other substances. For the purposes of this tolerance action, therefore, EPA has assumed that fenazaquin does not have a common mechanism of toxicity with other substances. For information regarding EPA's efforts to determine which chemicals have a common mechanism of toxicity and to evaluate the cumulative effects of such chemicals, see EPA's Web site at http://www.epa.gov/pesticides/cumulative.

1. In general. Section 408(b)(2)(C) of FFDCA provides that EPA shall apply an additional tenfold (10X) margin of safety for infants and children in the case of threshold effects to account for prenatal and postnatal toxicity and the completeness of the database on toxicity and exposure unless EPA determines based on reliable data that a different margin of safety will be safe for infants and children. This additional margin of safety is commonly referred to as the Food Quality Protection Act Safety Factor (FQPA SF). In applying this provision, EPA either retains the default value of 10X, or uses a different additional safety factor when reliable data available to EPA support the choice of a different factor.

2. Prenatal and postnatal sensitivity. Susceptibility/sensitivity in the developing animals was evaluated in developmental toxicity studies in rats and rabbits as well as a reproduction and fertility study in rats. The data showed no evidence of sensitivity/susceptibility in the developing or young animal. Clear NOAELs and LOAELs are available for all the parental and offspring effects. Therefore, there are no residual prenatal or postnatal concerns.

3. Conclusion. EPA has determined that reliable data show the safety of infants and children would be adequately protected if the FQPA SF were reduced to 1X. That decision is based on the following findings:

i. The toxicity database for fenazaquin is considered complete and sufficient for assessing susceptibility to infants and children.

ii. There is no indication that fenazaquin is a neurotoxic chemical and there is no need for a developmental neurotoxicity study or additional UFs to account for neurotoxicity.

iii. There is no evidence that fenazaquin results in increased susceptibility in in utero rats or rabbits in the prenatal developmental studies or in young rats in the 2-generation reproduction study.

iv. There are no residual uncertainties identified in the exposure databases. The dietary food exposure assessments were performed based on 100 PCT and tolerance-level residues. EPA made conservative (protective) assumptions in the ground and surface water modeling used to assess exposure to fenazaquin in drinking water. EPA also made conservative assumptions in the non-dietary residential exposures estimates including maximum application rates and standard values for unit exposures, amount handled. These assessments will not underestimate the exposure and risks posed by fenazaquin.

EPA determines whether acute and chronic dietary pesticide exposures are safe by comparing aggregate exposure estimates to the acute PAD (aPAD) and chronic PAD (cPAD). For linear cancer risks, EPA calculates the lifetime probability of acquiring cancer given the estimated aggregate exposure. Short-, intermediate-, and chronic-term risks are evaluated by comparing the estimated aggregate food, water, and residential exposure to the appropriate PODs to ensure that an adequate MOE exists.

1. Acute risk. Using the exposure assumptions discussed in this unit for acute exposure, the acute dietary exposure from food and water to fenazaquin will occupy 10% of the aPAD for children 1-2 years old, the population group receiving the greatest exposure.

2. Chronic risk. Using the exposure assumptions described in this unit for chronic exposure, EPA has concluded that chronic exposure to fenazaquin from food and water will utilize 10% of the cPAD for children 1-2 years old the population group receiving the greatest exposure. Based on the explanation in Unit III.C.3., regarding residential use patterns, chronic residential exposure to residues of fenazaquin is not expected.

3. Short-term risk. Short-term aggregate exposure takes into account short-term residential exposure plus chronic exposure to food and water (considered to be a background exposure level). Fenazaquin is currently registered for uses that could result in short-term residential exposure, and the Agency has determined that it is appropriate to aggregate chronic exposure through food and water with short-term residential exposures to fenazaquin.

Using the exposure assumptions described in this unit for short-term exposures, EPA has concluded the combined short-term food, water, and residential exposures result in aggregate MOEs of 5,200 for adults. Because EPA's level of concern for fenazaquin is a MOE of 100 or below, the MOE is not of concern. Since there is no residential exposure expected for children, there is no potential that a short-term aggregate risk for children could be higher than the dietary (food and drinking water) risk.

4. Intermediate-term risk. Intermediate-term aggregate exposure takes into account intermediate-term residential exposure plus chronic exposure to food and water (considered to be a background exposure level).

An intermediate-term adverse effect was identified; however, fenazaquin is not registered for any use patterns that would result in intermediate-term residential exposure.

Intermediate-term risk is assessed based on intermediate-term residential exposure plus chronic dietary exposure. Because there is no intermediate-term residential exposure and chronic dietary exposure has already been assessed under the appropriately protective cPAD (which is at least as protective as the POD used to assess intermediate-term risk), no further assessment of intermediate-term risk is necessary, and EPA relies on the chronic dietary risk assessment for evaluating intermediate-term risk for fenazaquin.

5. Aggregate cancer risk for U.S. population. Based on the lack of evidence of carcinogenicity in two adequate rodent carcinogenicity studies, fenazaquin is not expected to pose a cancer risk to humans.

6. Determination of safety. Based on these risk assessments, EPA concludes that there is a reasonable certainty that no harm will result to the general population, or to infants and children from aggregate exposure to fenazaquin residues.

Adequate enforcement methodology (high performance liquid chromatography and tandem mass spectrometry (HPLC-MS/MS)) is available to enforce the tolerance expression.

The method may be requested from: Chief, Analytical Chemistry Branch, Environmental Science Center, 701 Mapes Rd., Ft. Meade, MD 20755-5350; telephone number: (410) 305-2905; email address: [email protected].

In making its tolerance decisions, EPA seeks to harmonize U.S. tolerances with international standards whenever possible, consistent with U.S. food safety standards and agricultural practices. EPA considers the international maximum residue limits (MRLs) established by the Codex Alimentarius Commission (Codex), as required by FFDCA section 408(b)(4). The Codex Alimentarius is a joint United Nations Food and Agriculture Organization/World Health Organization food standards program, and it is recognized as an international food safety standards-setting organization in trade agreements to which the United States is a party. EPA may establish a tolerance that is different from a Codex MRL; however, FFDCA section 408(b)(4) requires that EPA explain the reasons for departing from the Codex level.

The Codex has not established a MRL for fenazaquin.

EPA's review of the data supporting the petition, showed that there was not sufficient data to support some of the tolerances originally proposed by the registrant. Gowan Company, the registrant, revised their petition by limiting their request for tolerances to almond and cherry, which are supported by the available data. The Organization of Economic Cooperation and Development (OECD) tolerance derivation procedures indicates the need for the following changes in the proposed tolerances: Cherries from 1.5 ppm to 2.0 ppm and almond hull from 0.6 ppm to 4.0 ppm. The Agency is also revising the tolerance expression to clarify that (1) as provided in FFDCA section 408(a)(3), the tolerance covers metabolites and degradates of fenazaquin not specifically mentioned and (2) compliance with the specified tolerance levels is to be determined by measuring only the specific compounds mentioned in the tolerance expression.

Therefore, tolerances are established for residues of fenazaquin, 4-[2-[4-(1,1-dimethylethyl)phenyl]ethoxy]quinazoline, in or on almond at 0.02 ppm, almond hulls at 4.0 ppm, and cherry at 2.0 ppm.

This action establishes tolerances under FFDCA section 408(d) in response to a petition submitted to the Agency. The Office of Management and Budget (OMB) has exempted these types of actions from review under Executive Order 12866, entitled “Regulatory Planning and Review” (58 FR 51735, October 4, 1993). Because this action has been exempted from review under Executive Order 12866, this action is not subject to Executive Order 13211, entitled “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001) or Executive Order 13045, entitled “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997). This action does not contain any information collections subject to OMB approval under the Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq.), nor does it require any special considerations under Executive Order 12898, entitled “Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations” (59 FR 7629, February 16, 1994).

Since tolerances and exemptions that are established on the basis of a petition under FFDCA section 408(d), such as the tolerance in this final rule, do not require the issuance of a proposed rule, the requirements of the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.), do not apply.

This action directly regulates growers, food processors, food handlers, and food retailers, not States or tribes, nor does this action alter the relationships or distribution of power and responsibilities established by Congress in the preemption provisions of FFDCA section 408(n)(4). As such, the Agency has determined that this action will not have a substantial direct effect on States or tribal governments, on the relationship between the national government and the States or tribal governments, or on the distribution of power and responsibilities among the various levels of government or between the Federal Government and Indian tribes. Thus, the Agency has determined that Executive Order 13132, entitled “Federalism” (64 FR 43255, August 10, 1999) and Executive Order 13175, entitled “Consultation and Coordination with Indian Tribal Governments” (65 FR 67249, November 9, 2000) do not apply to this action. In addition, this action does not impose any enforceable duty or contain any unfunded mandate as described under Title II of the Unfunded Mandates Reform Act (UMRA) (2 U.S.C. 1501 et seq.).

This action does not involve any technical standards that would require Agency consideration of voluntary consensus standards pursuant to section 12(d) of the National Technology Transfer and Advancement Act (NTTAA) (15 U.S.C. 272 note).

Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the Federal Register. This action is not a “major rule” as defined by 5 U.S.C. 804(2).

Therefore, 40 CFR chapter I is amended as follows:

Inspection of Public Comments: All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received: http://regulations.gov. Follow the search instructions on that Web site to view public comments.

Comments received timely will be also available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951.

Under this interim final rule with comment period (IFC), pharmacy claims and beneficiary requests for reimbursement for Medicare Part D prescriptions, written by prescribers other than physicians and eligible professionals who are permitted by state or other applicable law to prescribe medications, will not be rejected at the point of sale or denied by the plan if all other requirements are met. In addition, a plan sponsor will not reject a claim or deny a beneficiary request for reimbursement for a drug on the grounds that the prescriber has not enrolled in or opted out of Medicare without first providing provisional coverage of the drug and individualized written notice to the beneficiary. These changes are necessary to help make certain that Medicare beneficiaries continue to have access to needed Part D medications. As explained in section III. of this IFC, we believe that we have good cause to make these changes in an IFC because the ordinary notice-and-comment process would be contrary to the public interest; furthermore, we believe that notice-and-comment rulemaking for the technical changes we are making in this IFC (as described in sections II.D., II.E., and II.F. of this IFC) is unnecessary because these changes are not substantive and do not alter current policy.

There are four principal statutory authorities for the provisions in this IFC.

First, sections 1102 and 1871 of the Social Security Act (the Act) provide general authority for the Secretary to prescribe regulations for the efficient administration of the Medicare program.

Second, section 1866(j) of the Act provides specific authority with respect to the Medicare enrollment process for providers and suppliers.

Third, section 6405(c) of the Affordable Care Act gives the Secretary the authority to require that pharmacy claims and beneficiary reimbursement requests for covered Part D drugs prescribed by a physician (as defined in section 1861(r) of the Act) or eligible professional (as defined in section 1848(k)(3)(B) of the Act) are not payable unless the prescribing physician or eligible professional is enrolled in Medicare under section 1866(j) of the Act.

Fourth, section 1860D-12(b)(3)(D) of the Act authorizes the Secretary to include in a contract with a Part D sponsor such other terms and conditions that are not inconsistent with Part D as the Secretary may find necessary and appropriate.

The Medicare CMS-855 enrollment application collects information from providers and suppliers to confirm that they meet all Medicare requirements. Such data includes, but are not limited to, the provider's or supplier's licensure, tax identification number, National Provider Identifier (NPI), practice locations, final adverse action history, and owning and managing individuals and organizations. Upon receiving a CMS-855 application from a physician or eligible professional, the CMS contractor validates the information and performs various screening activities, such as reviewing the System for Award Management (SAM) to confirm that the individual is not debarred from receiving payments under any federal health program. As explained in section II. of this IFC, we have taken measures to improve the provider enrollment process to determine whether enrolling physicians and eligible professionals meet all Medicare requirements.

As noted previously, section 6405(c) of the Affordable Care Act gives the Secretary the authority to extend the requirements of sections 6405(a) and (b) of the Affordable Care Act to all other categories of items or services under title XVIII of the Act that are ordered, prescribed, or referred by a physician or eligible professional, including covered Part D drugs. Sections 6405(a) and (b) of the Affordable Care Act require physicians and eligible professionals who order or certify durable medical equipment, prosthetics, orthotics, supplies, or home health services to be enrolled in Medicare.

In accordance with section 6405(c) of the Affordable Care Act, we established new § 423.120(c)(6) as part of a May 23, 2014 final rule titled, “Medicare Program; Contract Year 2015 Policy and Technical Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs” (79 FR 29843). Our objective was to help confirm that Part D drugs are prescribed only by physicians and eligible professionals who are qualified to do so under state law and under the requirements of the Medicare program. Section 423.120(c)(6) currently contains the following provisions:

• A Part D sponsor must deny, or must require its pharmaceutical benefit manager (PBM) to deny, a pharmacy claim for a Part D drug if an active and valid physician or eligible professional National Provider Identifier (NPI) is not contained on the claim.

• A Part D sponsor must deny, or must require its PBM to deny, a pharmacy claim for a Part D drug if the physician or eligible professional—is not enrolled in the Medicare program in an approved status; and does not have a valid opt-out affidavit on file with a Part A/B Medicare Administrative Contractor (MAC).

• A Part D sponsor must deny, or must require its PBM to deny, a request for reimbursement from a Medicare beneficiary for a drug if the request is not for a Part D drug that was dispensed in accordance with a prescription written by a physician or eligible professional who is identified by his or her legal name in the request; and

++ Is enrolled in Medicare in an approved status; or

++ Has a valid opt-out affidavit on file with a Part A/B MAC.

• In order for a Part D sponsor to submit to CMS a prescription drug event record (PDE), the PDE must contain an active and valid individual prescriber NPI and must pertain to a claim for a Part D drug that was dispensed in accordance with a prescription written by a physician or eligible professional who—is enrolled in Medicare in an approved status; or has a valid opt-out affidavit on file with a Part A/B MAC.

These requirements apply as of June 1, 2015. However, on December 3, 2014, through the Health Plan Management System (HPMS), we announced an enforcement delay until December 1, 2015. We are now in this IFC making another change to make these requirements applicable on January 1, 2016. Accordingly, and as explained in section II.C. of this IFC, we are making conforming changes to the regulation text.

There are prescribers other than physicians and eligible professionals, such as pharmacists, who are legally authorized under state or other law to prescribe covered Part D drugs. For example, under a Pharmacist Collaborative Practice Agreement, pharmacists may be legally authorized to prescribe covered Part D under state or other law. However, pharmacists are not physicians under section 1861(r) of the Act or eligible professionals under section 1848(k)(3)(B) of the Act, and are therefore not eligible to enroll in or opt-out of Medicare. Under § 423.120(c)(6), as described previously in section I.D. of this IFC, beneficiaries who have been receiving necessary prescriptions from prescribers who are not Medicare-enrolled or opted-out physicians or eligible professionals will no longer be able to obtain Part D coverage for these prescriptions once the requirements of § 423.120(c)(6) are enforced. Changes to previously finalized policies regarding § 423.120(c)(6) are necessary to preserve beneficiaries' ability to obtain prescriptions for covered Part D drugs prescribed by certain practitioners ineligible to enroll in Medicare. We note that the definition of “physician” includes dentists, hence dentists are eligible to enroll in or opt-out of Medicare. Accordingly, this IFC revises § 423.120(c)(6)(ii), (iii), and (iv) such that prescriptions provided by “other authorized prescribers” (as defined in § 423.100) may be covered under Part D. In other words, Part D sponsors will not be required to reject pharmacy claims or deny beneficiary requests for reimbursement for prescriptions written by “other authorized prescribers” on the basis that the prescriber is not enrolled in or opted-out of Medicare. Therefore, Part D sponsors will continue to be able to cover pharmacy claims at the point of sale (POS) for prescriptions written by “other authorized prescribers,” provided all other existing Part D coverage requirements are met. We note, for example, that under § 423.120(c)(6)(i), an “other authorized prescriber” must have an active and valid NPI which is contained in the pharmacy claim. This change will help beneficiaries to continue to receive needed prescriptions.

In § 423.100, we are defining “other authorized prescriber” as a person other than a physician (as defined in section 1861(r) of the Act) or eligible professional (as defined in section 1848(k)(3)(B) of the Act) who is authorized under state or other applicable law to write prescriptions. This definition, which applies to § 423.120(c)(6) only, will sufficiently protect the Medicare program because “other authorized prescribers” must have prescribing authority under state or other applicable law.

We conclude that, in order to further minimize interruptions to Part D beneficiaries' access to needed medications, other changes are also needed to the May 23, 2014 final rule. This conclusion is based on our analysis of Medicare prescriber enrollment levels and trends since promulgation of the final rule and discussions with various stakeholders about their concerns regarding beneficiary access once the provisions of § 423.120(c)(6) are enforced. Thus, we are modifying the provisions of § 423.120(c)(6) to prohibit sponsors from rejecting claims or denying beneficiary requests for reimbursement for a drug on the basis of the prescriber's enrollment status, unless the sponsor has first covered a 3-month provisional supply of the drug and provided individualized written notice to the beneficiary that the drug is being covered on a provisional basis. Such provisional supply and notice will allow sufficient time for an eligible prescriber to enroll in Medicare (or submit an opt-out affidavit), so that a beneficiary can continue to receive Part D coverage for the drug if prescribed by the same prescriber, or for the beneficiary to find a prescriber who meets the Medicare requirements to write Part D prescriptions. Enrolling in Medicare to prescribe or filing an opt-out affidavit is a process that can typically be completed within 3 months. In presumably rare cases when the prescriber will not enroll in Medicare or submit an opt-out affidavit, we believe the beneficiary should have sufficient time to find a prescriber whose prescriptions are coverable by the Part D program, if the beneficiary wishes to continue to receive Part D coverage for the drug. Once the Part D sponsor has provided the written notice to the beneficiary that a drug is being covered on a provisional basis because of the prescriber's current Medicare status, and the sponsor has covered the required provisional supply of the drug, the sponsor will be required to reject future claims and deny future requests for reimbursement for the beneficiary for the same drug if the prescription is from the same prescriber (unless the prescriber has enrolled or opted out in the meantime). We will issue future guidance as necessary on how sponsors and their PBMs should operationalize the term “drug” in their adjudication systems in addition to other guidance, as needed.

The following discussion provides the rationale for adopting a same drug/same prescriber policy. First, beneficiaries may not readily know which prescribers are enrolled in or opted-out of Medicare and which are not. Therefore, our policy means that beneficiaries will receive a provisional supply and written notice about each unenrolled prescriber they see. Second, beneficiaries may need to fill multiple prescriptions from the same unenrolled prescriber, and we are particularly concerned about instances when beneficiaries need to do so in a short time period before their prescriber has been able to enroll or they have been able to find an enrolled prescriber. Therefore, our policy allows beneficiaries to receive more than one provisional supply from the same unenrolled prescriber for a different drug.

The pertinent regulation text in this IFC states that the Part D sponsor must do the following: “provide the beneficiary with . . . a 3-month provisional supply (as prescribed by the prescriber . . .).” This means that the Part D sponsor will be required to cover a full 3-month supply, if prescribed by the unenrolled practitioner, regardless of how the supply is dispensed. For example, a beneficiary may receive a provisional supply in accordance with a prescription written for a month's supply with two subsequent refills; a prescription written for a one-time 3-month's supply; or three prescriptions written for a 1-month's supply each. Conversely, an unenrolled prescriber might not prescribe a full 3-month's supply, and in such a case, the sponsor would of course not be required to provide a 3-month's provisional supply.

In addition, certain prescriptions cannot be refilled, such as Schedule II controlled substances, and continuing supplies of such drugs are dispensed only upon a new prescription. For this reason, the regulation text also states that the provisional supply must be “allowed by applicable law.”

We believe that a sponsor tracking dispensed provisional drug supplies is easier than tracking a timeframe after a dispensing event. Otherwise, in order to ensure a beneficiary receives a provisional supply of each drug prescribed by an unenrolled prescriber, Part D sponsors would have to keep track of rolling timeframes associated with the first dispensing event of each drug.

We note that providing beneficiaries with a provisional supply of a drug is consistent with other CMS requirements and Part D policies designed to provide reasonable access to needed medications. Under the Part D transition policy, for example, sponsors are generally required to cover off-formulary drugs (including drugs that are on-formulary but require prior authorization or step therapy) when a beneficiary changes prescription drug benefit plans and in other circumstances, in order to give the beneficiary and his or her prescriber time to find a suitable on-formulary drug or pursue an exception to continue taking the same drug.

The existing Part D transition policy is an example of an instance in which a beneficiary might not receive a full 3-months' supply under the provisions of this IFC, even when prescribed the full 3 months' supply, due to other existing Part D transition requirements which take precedence. If an unenrolled physician prescribes an off-formulary drug for a beneficiary that is subject to the transition requirements set forth in § 423.120(b)(3), and thus the provisional supply and notice requirements are simultaneously triggered, the beneficiary would not be able to receive more than a 30-day supply of the drug from a retail pharmacy, unless a formulary exception is approved, consistent with existing transition requirements. Conversely, if a formulary exception is approved, the beneficiary could receive the remaining provisional supply. We will issue guidance as to how sponsors should provide written notices to the beneficiary when the sponsor is required to issue a both a transition notice under § 423.120(b)(3)(iv) and a provisional supply notice under the revised requirements of § 423.120(c)(6).

Other examples when a beneficiary might not receive a full 3-month's provisional supply, or any provisional supply at all, is when the prescriber does not have an active and valid NPI. Under § 423.120(c)(6)(i), the Part D sponsor or its PBM must reject a pharmacy claim unless it contains an active and valid prescriber NPI. Thus, a sponsor or its PBM cannot cover a provisional supply when the applicable pharmacy claim does not contain an active and valid prescriber NPI. Without a prescriber NPI, the sponsor or PBM would not be able to determine whether a drug should be covered on a provisional or regular basis, because the sponsor cannot determine the prescriber's Medicare enrollment or opt out status. An additional example is when the drug prescribed is subject to approved prior authorization or step therapy requirements by the plan. Such utilization management edits will still apply to provisional supplies. For these reasons, the regulation text in this IFC states that the Part D sponsor or its PBM must provide the beneficiary with a provisional supply and written notice “subject to all other Part D rules and plan coverage requirements.”

In light of our previous discussion for provisional coverage, we have made the following changes to § 423.120(c)(6):

• Revised paragraphs (c)(6)(ii)(A) and (c)(6)(iii) to add the clause “Except as provided in paragraph (c)(6)(v) of this section.” The revised paragraphs would otherwise require Part D sponsors and their PBMs to reject pharmacy claims and deny beneficiary requests for reimbursement based on the Medicare status of the prescriber.

• Added new paragraph (c)(6)(v) to require that a Part D sponsor or its PBM not reject a pharmacy claim for a Part D drug under paragraphs (c)(6)(ii) or (c)(6)(iii) of this section unless the sponsor has provided the provisional coverage of the drug and written notice to the beneficiary required by paragraph (c)(6)(v)(B).

• Added new paragraph (c)(6)(v)(B) to require that upon receipt of a pharmacy claim or beneficiary request for reimbursement for a Part D drug that a Part D sponsor would otherwise be required to reject or deny in accordance with paragraphs (c)(6)(ii) and (iii) of this section, a Part D sponsor or its PBM must provide the beneficiary with the following two things, subject to all other Part D rules and plan coverage requirements.

• Added new paragraph (c)(6)(v)(B)(1)(i) to require a Part D sponsor to provide a 3-month provisional supply of the drug (as prescribed by the prescriber and if allowed by applicable law).

• Added new paragraph (c)(6)(v)(B)(1)(ii) to require a Part D sponsor to provide written notice within 3 business days after adjudication of the claim or request in a form and manner specified by CMS.

• Added new paragraph (c)(6)(v)(B)(2) to require that a Part D sponsor or its PBM must ensure that reasonable efforts are made to notify the prescriber of a beneficiary who was sent a notice.

The requirements of § 423.120(c)(5), which address certain NPI submission and verification activities related to pharmacy claims for Part D drugs, apply before June 1, 2015. As mentioned in section I.C. of this IFC, the requirements of § 423.120(c)(6) apply beginning June 1, 2015. On December 3, 2014, we announced an enforcement delay of § 423.120(c)(6) until December 1, 2015. We are now in this IFC making another change to make these requirements applicable on January 1, 2016. This is to help make certain that stakeholders, such as beneficiaries and plan sponsors, have sufficient time to prepare for the requirements of § 423.120(c)(6).

To prevent potential confusion over the applicability of § 423.120(c)(5) and (c)(6), we are revising the dates identified therein. The beginning of § 423.120(c)(5) will be changed from “Before June 1, 2015, the following are applicable” to “Before January 1, 2016, the following are applicable”. The beginning of § 423.120(c)(6) will be changed from “Beginning June 1, 2015, the following are applicable” to “Beginning January 1, 2016, the following are applicable”. We believe these revisions are necessary so that stakeholders will understand precisely when the requirements of § 423.120(c)(5) and (c)(6) apply to them.

This IFC also makes a technical change to § 423.120(c)(6)(i) and (ii) by replacing language that requires plan sponsors to “deny” pharmacy claims that do not meet the requirements of § 423.120(c)(6) with language requiring plan sponsors to “reject” such claims. POS claim transactions are not considered coverage determinations under Part D program rules unless the plan chooses to treat the presentation of the prescription as a request for a coverage determination. Therefore, a Part D plan sponsor is not subject to the requirements for coverage determinations in part 423, subpart M, such as the timeframe and notification rules, nor to the requirements to conduct clinical review or to provide notice of appeal rights when a prescription cannot be filled under the Part D benefit at the POS. With the requirements finalized in the May 23, 2014 final rule (79 FR 29843), we did not intend to redefine the nature of POS transactions in the Part D program specifically for claims that are not paid at the POS because the prescriber does not meet the enrollment or opt-out requirements. We believe the word “deny” in the regulation text may incorrectly be interpreted to require plans to issue a standardized denial notice with appeal rights (OMB approval 0938-0976, “Notice of Denial of Medicare Prescription Drug Coverage”, CMS-10146) for rejected claims at POS, rather than follow our existing requirements at §§ 423.128(b)(7)(iii) and 423.562(a)(3). These provisions require plans to arrange with their network pharmacies to distribute a copy of the standardized pharmacy notice (OMB approval 0938-0975, “Medicare Prescription Drug Coverage and Your Rights”, CMS-10147) to the enrollee. We believe that this technical change will make the requirements at § 423.120(c)(6)(i) and (ii) consistent with our other requirements for POS claim transactions and existing National Council for Prescription Drug Programs guidance. We are retaining use of the term “deny” at § 423.120(c)(6)(iii), because plan sponsors are required to treat an enrollee request for reimbursement as a coverage determination under subpart M.

We also made a technical change at § 423.120(c)(6)(iii) by replacing “legal name” with “name” for beneficiary reimbursement requests. Requiring that beneficiary requests for coverage include the prescriber's legal name is inconsistent with the existing standard required for coverage determination requests at § 423.568(a) and related subregulatory guidance and is overly burdensome for beneficiaries. Throughout Chapter 18 of the Medicare Prescription Drug Manual (particularly section 30.3), CMS guidance to plan sponsors includes an expectation that plan sponsors will make reasonable and diligent efforts to obtain any missing information required to process beneficiary requests when the request does not include all information needed to make a decision, such as the prescriber's legal name, if necessary to determine coverage under the prescriber enrollment requirements. Additionally, Chapter 5, section 90.2.2 contains language stating that plans can require beneficiary requests for reimbursement to include prescriber name (not “legal name”) and address or phone number or pharmacy name and phone number to assist the plan in locating the prescriber NPI necessary to submit the PDE to CMS. We recognize that the “legal name” standard was included in § 423.120(c)(6) because it was adopted for Part A/B ordering and referring claims at § 424.507(a)(2). However, given the regulations and manual guidance previously discussed, we do not believe this standard is appropriate for Part D beneficiary reimbursement requests.

In addition to the previously described revisions, we are making the following minor technical changes to § 423.120(a)(6)(i) through (iv). (These changes will not affect the requirements or substance of these paragraphs.)

• In paragraphs (c)(6)(i), (ii), and (iii), we replaced the word “if” with “unless,” and deleted the word “not.” The current versions of these paragraphs are written in the negative, which has caused confusion for some readers. We believe these changes will clarify these paragraphs.

• In paragraphs (c)(6)(i) and (iv), we replaced references to “physicians” and “eligible professionals” with the term “prescriber.” The latter word is necessary to reflect that these paragraphs also apply to prescribing individuals other than physicians and eligible professionals.

• In paragraph (c)(6)(ii), the current opening paragraph is incorporated into revised paragraph (c)(6)(ii)(A). Current paragraphs (c)(6)(ii)(A) and (B) are redesignated as new paragraphs (c)(6)(ii)(A)(1) and (2). The requirements pertaining to other authorized prescribers are addressed in revised paragraph (c)(6)(ii)(B). These organizational revisions of (c)(6)(ii) are necessary in order to incorporate the substantive and technical changes discussed in this IFC.

• In the opening paragraph of (c)(6)(iii), we changed the language “for a drug if the request is not for a Part D drug that was dispensed in accordance with a prescription written by” to “unless the request pertains to a Part D drug that was prescribed by”. This is to make the paragraph clearer and more readable. We also—

++ Changed paragraph (c)(6)(iii)(A) from “Is identified by his or her legal name in the request” to “A physician or, when permitted by applicable State law, other eligible professional (as defined in section 1848(k)(3)(B) of the Act) who is identified by name in the request; and who”.

++ Redesignated current paragraphs (c)(6)(iii)(B)(1) and (2) as new paragraphs (A)(1) and (2). The requirements pertaining to other authorized prescribers are addressed in revised paragraph (c)(6)(iii)(B).

These technical revisions to (c)(6)(iii) are needed to accommodate the substantive and technical revisions heretofore discussed in this IFC.

• In paragraph (c)(6)(iv) we are making the following changes:

++ The opening paragraph is changed from “In order for a Part D sponsor to submit to CMS a prescription drug event record (PDE), the PDE must contain an active and valid individual prescriber NPI and must pertain to a claim for a Part D drug that was dispensed in accordance with a prescription written by a physician or, when permitted by applicable State law, an eligible professional (as defined in section 1848(k)(3)(B) of the Act) who” to”A Part D plan sponsor submitting a prescription drug event (PDE) to CMS must include on the PDE the active and valid individual NPI of the prescriber of the drug, who must”. We believe the new language is more concise and straightforward.

++ We have redesignated current paragraphs (c)(6)(iv)(A) and (B) as new paragraphs (c)(6)(iv)(A)(1) and (2). The requirements pertaining to other authorized prescribers are addressed in revised paragraph (c)(6)(iv)(B).

These technical revisions to paragraph (c)(6)(iv) are needed to accommodate the substantive and technical revisions discussed in this IFC.

We ordinarily publish a notice of proposed rulemaking in the Federal Register and invite public comment on the proposed rule. The notice of proposed rulemaking includes a reference to the legal authority under which the rule is proposed and the terms and substance of the proposed rule or a description of the subjects and issues involved. However, this procedure can be waived if an agency finds good cause that a notice-and-comment procedure is impracticable, unnecessary, or contrary to the public interest and incorporates a statement of the finding and its reasons in the rule issued.

We believe we have good cause to make our previously discussed changes in this IFC. Concerning the substantive changes, we believe that notice-and-comment rulemaking is contrary to the public interest for the reasons that follow.

Several months after publication of the May 23, 2014 final rule that imposed the enrollment or opt-out requirement as of June 1, 2015, it was brought to our attention during implementation that there are prescribers who can and do prescribe Part D medications but who are also unable to enroll in Medicare to prescribe because they do not technically meet even the broad definition of “eligible health professional.” The May 23, 2014 final rule was not only complex and controversial, but with respect to the prescriber enrollment provisions themselves, we were focused on the fact that dentists can enroll and represent the largest group of unenrolled current Part D prescribers. Additionally, we did not receive any explicit comments on the pharmacist issue.

Once we became aware of the issue, we promptly considered alternatives to address it, such as directing pharmacists to opt-out, but concluded that this is not permissible under the applicable statutory language. Ultimately, we came to the conclusion that the May 23, 2014 rule must be updated. The existing rule could cause an unintended disruption in beneficiaries' access to Part D drugs because under the current regulations, as of June 1, 2015, pharmacists' (and potentially certain other prescribers') prescriptions could not be filled.

Additionally, we concluded that changes to the May 23, 2014 rule needed to include a provisional supply to prevent disruptions to beneficiaries' access to Part D drugs. This is based on our monitoring of prescriber enrollment levels and trends and meetings with stakeholders during implementation. Prescriber enrollment is a voluntary act, and while we remain confident that the Part D prescribers who need to enroll or opt-out will ultimately do so in large numbers, it will take some time. The non-dentist and non-pharmacist prescribers who need to enroll are ones who did not enroll to be able to order and certify under § 424.507. In addition, dentists are a group of providers that has not yet had a robust direct relationship with Medicare due to the fact that dentists generally do not bill Medicare for their services. Since it is in the public's interest that we make certain that beneficiary access to needed drugs will not be impaired when these important program integrity protections become applicable, we have also added the provisional supply provisions in this IFC. Without such swift action, we would be forced to either enforce the rule as written, which could cause beneficiary harm by disrupting access, or further delay enforcement, which also could cause beneficiary harm by continuing to permit unqualified individuals to prescribe Part D drugs. Both outcomes are contrary to the public interest. In addition, the provisional supply provisions include a written notice to the beneficiary. We believe that the written notices will result in beneficiaries' discussing the enrollment status issue with their prescribers, which will assist in our prescriber enrollment efforts. In addition, to resolve these problems, it is necessary to implement the provisions of this IFC prior to the Medicare Part D bid deadline for the 2016 contract year, which begins on January 1, 2016. The statutory bid deadline this year is June 1, 2015. Any changes to Part D requirements for contract year 2016 must be implemented prior to the bid deadline so that Part D sponsors may account for them in their bids; we cannot impose costly new requirements on the plans for a contract year that are not accounted for in their bids for that contract year under section 1860D-12(f)(2) of the Act. Thus, an IFC is the only means for ensuring that our requirements do not cause unintended disruption to beneficiary access to Part D drugs, while ensuring that the changes that will minimize such disruptions are incorporated into Part D sponsors' 2016 bids; the length of time involved with notice-and rulemaking would prevent us from accomplishing these objectives without further delaying enforcement of the existing regulations, which for the reasons discussed later in this section, could cause beneficiary harm. Moreover, a prompt publication is necessary to give Part D plan sponsors time to implement the operational changes needed for them to be prepared for these requirements in the 2016 contract year.

If Part D sponsors were unable to account for these new requirements in their 2016 bids, we would have to delay the applicability date of the enrollment/opt-out requirements to no sooner than January 1, 2017. We believe that such an outcome similarly is contrary to the public interest because it would unduly delay the extremely important program integrity and basic quality assurance protection for Medicare beneficiaries that we implemented in our May 23, 2014 final rule, and beneficiaries could be harmed as a result. As we explained in the May 23, 2014 final rule, we have been concerned about instances where unqualified individuals are prescribing Part D drugs. In fact, in a June 2013 report the OIG found that the Part D program inappropriately paid for drugs ordered by individuals who did not appear to have the authority to prescribe. (See “Medicare Inappropriately Paid for Drugs Ordered by Individuals Without Prescribing Authority” (OEI-02-09-00608).) There have also been reports that the prescriptions of physicians with suspended licenses have been covered by the Part D program.

The Centers for Disease Control and Prevention (CDC) has characterized prescription drug abuse as an epidemic, and found that an increase in painkiller prescribing is the key driver of the increase in prescription overdoses.1 The CDC reports that the drug overdose death rate has more than doubled from 1999 through 2013, and more than half of those deaths were related to pharmaceuticals.2 The Department of Health and Human Services has several initiatives to address prescription drug abuse; for instance, the National Institute on Drug Abuse, the National Institutes of Health, and the Substance Abuse and Mental Health Services Administration are working with public and private stakeholders to reduce opioid overdoses. CMS has also adopted an approach to reduce opioid overutilization in Medicare Part D.

The new enrollment requirements addressed in the May 23, 2014 final rule represent an important component of this effort and are a crucial program integrity and basic quality assurance protection for Medicare beneficiaries, for the requirements help us to confirm that prescribers are qualified to prescribe Part D drugs. It is important that these protections are in place as soon as possible. We have identified 68,000 prescribers that have been removed from Medicare for reasons such as licensure issues, operational status, or exclusion by the OIG, and we have a responsibility to enforce these protections to beneficiaries as soon as possible without compromising continuity of care or beneficiary access to needed medications. The CDC has recommended swift regulatory action against health care providers acting outside the limits of accepted medical practice to decrease provider behaviors that contribute to prescription painkiller abuse, diversion, and overdose.3

Thus, for all of these reasons, we find good cause to waive prior notice and comment with respect to the substantive changes being made in this IFC.

With respect to the technical changes being made in this IFC, we believe notice-and-comment rulemaking is unnecessary because these changes are not substantive and do not alter current policy.

Under the Paperwork Reduction Act of 1995, we are required to provide 60-day notice in the Federal Register and solicit public comment before a collection of information requirement is submitted to the Office of Management and Budget (OMB) for review and approval. In order to fairly evaluate whether an information collection should be approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 requires that we solicit comment on the following issues:

• The need for the information collection and its usefulness in carrying out the proper functions of our agency.

• The accuracy of our estimate of the information collection burden.

• The quality, utility, and clarity of the information to be collected.

• Recommendations to minimize the information collection burden on the affected public, including automated collection techniques.

We are soliciting public comment on the following section of this document that contains information collection requirements (ICRs).

We believe the principal information collection requirement associated with this IFC is that some Part D sponsors and PBMs will need to collect information about which NPIs are for “other authorized prescribers” in order to properly adjudicate pharmacy claims containing such prescriber NPIs in light of the revised provisions of § 423.120(c)(6) in this IFC. However, we estimate that half of the 30 Part D sponsors and PBMs with Part D adjudications systems already collect information about the prescriptive authority of prescriber NPIs in order to mitigate current potential audit risks associated with submitting PDEs to CMS for Part D drugs that were not dispensed upon a valid prescription.

In a CMS analysis of PDE data, there were just over 1.3 million prescribers writing Part D prescriptions in 2013. Approximately 17,000 of these prescribers have NPIs a taxonomy in the National Provider & Plan Enumeration System (NPPES) that would fall under the definition of “other authorized prescribers” (largely pharmacist taxonomies).

NPIs and the addresses and taxonomy codes that pertain to them are publicly available information through the CMS Web site for NPPES. We estimated that collecting information about which NPIs are for “other authorized prescribers” would take an average of 30 minutes (0.5 hours) per NPI associated with a pharmacist or 8,500 hours, and the estimated total burden for 15 sponsors/PBMs to be 17,500 hours for 2016. The estimated total annual cost for this burden is $3,343,050. This is based upon the national median hourly rate of $26.22 for insurance claim and policy processing clerk multiplied by the number of burden hours in 2016. We did not estimate any burden in 2017 and 2018 for the collection of information about “other authorized prescriber” NPIs, as the number of new pharmacist NPIs and existing pharmacist NPIs becoming inactive will be negligible in light of the fact that there are only approximately 17,000 total “other authorized prescribers” writing Part D prescriptions in 2013.

We note that since NPPES is not a provider credentialing system, but rather an enumeration system that contains self-reported credentials, Part D sponsors might not rely upon a taxonomy in NPPES as documentation that an NPI in fact belongs to a pharmacist with an active license who is permitted to prescribe. We have used data from NPPES to provide an estimate as to how many “other authorized prescribers” NPIs about which Part D sponsors and PBMs will need to collect information.

In the alternative, we understand that Part D sponsors/PBMs may purchase prescriber ID validation services from a private company that can provide them with a list of “other authorized providers.” However, we do not provide a collection estimate for all options that sponsors/PBMs may have in implementing the provisions of this IFC.

We also revised the provisions of § 423.120(c)(6) to require Part D sponsors to cover a provisional supply of a drug before they reject a claim based on a prescriber's Medicare status. These modifications will also require Part D sponsors to provide written notice to the beneficiary and take reasonable efforts to provide written notice to the prescriber. The burden associated with these modifications is the time and effort necessary for Part D adjudications systems to be programmed, model notices to be created, and such notices to be generated and disseminated to perform these tasks. We estimated that this will take 30 sponsors and PBMs with Part D adjudications systems 156,000 hours for software developers and programmers to program their systems in 2016 to comply with the modifications to § 423.120(c)(6) in this IFC. In 2017 and 2018, we estimated the total burden to be 83,000 hours for each year.

We estimated the total hours by estimating a 6-month preparation and testing period. Six months includes approximately 1,040 full-time working hours. We estimated 5 full time staff (or 10 staff working half their hours on this project). Five staff × 1,040 hours × 30 sponsors/PBMs = 156,000 total hours. We estimated an hourly rate of $64.32 for such developers and programmers, which is $10,033,920 in total burden cost.

We also estimated 212 parent organizations will create two template notices to notify beneficiaries and prescribers under the modifications of § 423.120(c)(6). We estimated this will take 3 hours per entity for a total of 636 hours. We estimated an hourly rate of $45.54 for a business operation specialist to create such notices. Thus, the total estimated burden cost for parent organizations to create two model notices is $28,963.44.

Once the templates have been developed, we estimated that these notices would take an average of 5 minutes (0.083 hours) to prepare. Thus, we estimated the annual burden hours for 2016 to be 1,743,000 hours. This is based upon the national median hourly rate of $26.22 for an insurance claim and policy processing clerk multiplied by the number of burden hours. The estimated annual burden cost for 2016 is $45,701,460.

Therefore, we estimated the total regulatory impact for these provisions in 2016 to be $55,764,343.44 ($10,033,920 + $28,963.44 + $45,701,460).

Approximately 2 million beneficiaries enter the Part D program every year. If we assume that 25 percent of these new beneficiaries will see 1 prescriber who is not enrolled or opted out, and that prescriber prescribes 2 drugs, we anticipate that parent organizations will have to send 1 million notices in 2017 and 2018 each (250,000 beneficiaries × 2 prescriptions × 2 notices each = 1,000,000). We estimate these notices would take an average of 5 minutes (0.083 hours) to prepare. Thus, we estimate the total burden to be 83,000 hours for each year, and the annual cost to be $2,176,260. This is based upon the national median hourly rate of $26.22 for insurance claim and policy processing clerk multiplied by the number of burden hours.

Table 1 outlines the projected costs of this IFC commencing 2016 through 2018:

If you comment on these information collection and recordkeeping requirements, please do either of the following:

1. Submit your comments electronically as specified in the ADDRESSES section of this interim final rule with comment period; or

2. Submit your comments to the Office of Information and Regulatory Affairs, Office of Management and Budget, Attention: CMS Desk Officer, [CMS-6107-IFC]; Fax: (202) 395-6974; or Email: [email protected].

Because of the large number of public comments we normally receive on Federal Register documents, we are not able to acknowledge or respond to them individually. We will consider all comments we receive by the date and time specified in the DATES section of this preamble, and, when we proceed with a subsequent document, we will respond to the comments in the preamble to that document.

We have examined the impacts of this rule as required by Executive Order 12866 on Regulatory Planning and Review (September 30, 1993), Executive Order 13563 on Improving Regulation and Regulatory Review (January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, section 202 of the Unfunded Mandates Reform Act of 1995 (March 22, 1995; Pub. L. 104-4) and Executive Order 13132 on Federalism (August 4, 1999).

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). A regulatory impact analysis (RIA) must be prepared for major rules with economically significant effects ($100 million or more in any 1 year). The impact of this IFC is directly associated with the information collection requirements discussed in section IV. of this IFC and will not exceed $100 million in any one year. Therefore, this is IFC is not a major rule.

The average Part D beneficiary takes 9 drugs prescribed by three prescribers annually. Based on 2013 PDE data, approximately 380,000 (28 percent) Part D prescribers were not found in the Provider Enrollment, Chain, and Ownership System (PECOS) and are associated with just under 8,000,000 unique beneficiaries. Generally, PECOS is the CMS record database of all physicians and eligible professionals who are or were enrolled in or opted out of Medicare. Thus, these prescribers write prescriptions on average for 21 beneficiaries (8,000,000/380,000 = 21). For purposes of this analysis, we assumed that on January 1, 2016, 250,000 prescribers will still need to enroll in or opt-out of Medicare to prescribe coverable Part D drugs. We also assume that these 250,000 prescribers will write prescriptions for 5.25 million beneficiaries (250,000 × 21). We further assume that no beneficiaries will switch prescribers until they receive a notice that a drug is being covered on a provisional basis. Additionally, we assumed that these prescribers will write on average two prescriptions for each of these beneficiaries. We assumed that Part D parent organizations will be able to send each prescriber a notice. Finally, we did not offset our estimation in light of our expectation that, in some cases, transition and provisional supply notices will be combined into one notice. We estimated that parent organizations will send 21 million beneficiary and prescriber notices in accordance with the modifications to § 423.120(c)(6) in 2016 (5,250,000 beneficiaries × 2 prescriptions × 2 notices each = 21,000,000), which we expect to occur as a downward trend that we do not reflect in this analysis.

Prescribers are expected to enroll on a steady basis throughout 2016 as a result of the prescriber enrollment requirements. By 2017, we expect that the majority of Part D prescribers will have enrolled in or opted out of Medicare in order for their prescriptions to be coverable by the Part D program. When a prescriber does not enroll or opt out, the beneficiary will either change to a prescriber who is enrolled or opted out, or the beneficiary will pay out of pocket for the prescriptions written by that prescriber. Nevertheless, parent organizations will have to send notices on an ongoing basis to beneficiaries who are new to the Part D program and receive a prescription from a prescriber who is not enrolled in or opted out of Medicare.

The RFA requires agencies to analyze options for regulatory relief of small businesses. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and small governmental jurisdictions. Most entities and most other providers and suppliers are small entities, either by nonprofit status or by having revenues between $7.5 million and $38.5 million in any 1 year. Individuals and states are not included in the definition of a small entity. We do not believe that this IFC would have a significant economic impact on a substantial number of small businesses, as Part D sponsors and parent organizations do not generally meet the definition of a small business.

Section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a rule may have a significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 604 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital that is located outside of a Metropolitan Statistical Area for Medicare payment regulations and has fewer than 100 beds. We are not preparing an analysis for section 1102(b) of the Act because we have determined and the Secretary certified that this IFC would not have a significant impact on the operations of a substantial number of small rural hospitals.

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also requires that agencies assess anticipated costs and benefits before issuing any rule whose mandates require spending in any 1 year of $100 million in 1995 dollars, updated annually for inflation. In 2015, this is approximately $144 million. We believe that this IFC will have no consequential effect on state, local or tribal governments or on the private sector.

Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a proposed rule (and subsequent final rule) that imposes substantial direct requirements or costs on state and local governments, preempts state law, or otherwise has federalism implications. Since this regulation does not impose any costs on state or local governments, the requirements of Executive Order 13132 are not applicable. In accordance with the provisions of Executive Order 12866, this IFC was reviewed by the Office of Management and Budget.

For the reasons stated in the preamble of this interim final rule with comment period, the Centers for Medicare & Medicaid Services amends 42 CFR part 423 as follows:

The snapper-grouper fishery of the South Atlantic includes gray triggerfish and is managed under the Fishery Management Plan for the Snapper-Grouper Fishery of the South Atlantic Region (FMP). The FMP was prepared by the South Atlantic Fishery Management Council and is implemented by NMFS under the authority of the Magnuson-Stevens Fishery Conservation and Management Act (Magnuson-Stevens Act) by regulations at 50 CFR part 622.

The commercial ACL for gray triggerfish in the South Atlantic is 272,880 lb (123,776 kg), round weight, for the current fishing year, January 1 through December 31, 2015, as specified in 50 CFR 622.193(q)(1)(i).

Under 50 CFR 622.193(q)(1)(i), NMFS is required to close the commercial sector for gray triggerfish when the commercial ACL is reached, or is projected to be reached, by filing a notification to that effect with the Office of the Federal Register. NMFS has determined that the commercial ACL for South Atlantic gray triggerfish will be reached on May 8, 2015. Accordingly, the commercial sector for South Atlantic gray triggerfish is closed effective 12:01 a.m., local time, May 8, 2015, until NMFS announces the start of the next fishing season.

The operator of a vessel with a valid commercial vessel permit for South Atlantic snapper-grouper having gray triggerfish on board must have landed and bartered, traded, or sold such gray triggerfish prior to 12:01 a.m., local time, May 8, 2015. During the closure, the bag limit specified in 50 CFR 622.187(b)(8), applies to all harvest or possession of gray triggerfish in or from the South Atlantic EEZ. During the closure, the possession limits specified in 50 CFR 622.187(c), apply to all harvest or possession of gray triggerfish in or from the South Atlantic EEZ. During the closure, the sale or purchase of gray triggerfish taken from the South Atlantic EEZ is prohibited.

For a person on board a vessel for which a Federal commercial or charter vessel/headboat permit for the South Atlantic snapper-grouper fishery has been issued, the bag and possession limits and sale and purchase provisions of the commercial closure for gray triggerfish would apply regardless of whether the fish are harvested in state or Federal waters, as specified in 50 CFR 622.193(q)(1)(i).

The Regional Administrator, Southeast Region, NMFS, has determined this temporary rule is necessary for the conservation and management of gray triggerfish and the South Atlantic snapper-grouper fishery and is consistent with the Magnuson-Stevens Act and other applicable laws.

This action is taken under 50 CFR 622.193(q)(1) and is exempt from review under Executive Order 12866.

These measures are exempt from the procedures of the Regulatory Flexibility Act because the temporary rule is issued without opportunity for prior notice and comment.

This action responds to the best scientific information available. The Assistant Administrator for Fisheries, NOAA (AA), finds that the need to immediately implement this action to close the commercial sector for gray triggerfish constitutes good cause to waive the requirements to provide prior notice and opportunity for public comment pursuant to the authority set forth in 5 U.S.C. 553(b)(B), as such procedures are unnecessary and contrary to the public interest. Such procedures are unnecessary because the rule itself has been subject to notice and comment, and all that remains is to notify the public of the closure. Such procedures are contrary to the public interest because of the need to immediately implement this action to protect gray triggerfish since the capacity of the fishing fleet allows for rapid harvest of the commercial ACL. Prior notice and opportunity for public comment would require time and would potentially result in a harvest well in excess of the established commercial ACL.

For the aforementioned reasons, the AA also finds good cause to waive the 30-day delay in the effectiveness of this action under 5 U.S.C. 553(d)(3).

NMFS manages the groundfish fishery in the GOA exclusive economic zone according to the Fishery Management Plan for Groundfish of the Gulf of Alaska (FMP) prepared by the North Pacific Fishery Management Council under authority of the Magnuson-Stevens Fishery Conservation and Management Act. Regulations governing fishing by U.S. vessels in accordance with the FMP appear at subpart H of 50 CFR part 600 and 50 CFR part 679.

The 2015 Chinook salmon prohibited species catch (PSC) limit for non-Rockfish Program catcher vessels directed fishing for groundfish, other than pollock, using trawl gear in the Western and Central Regulatory Areas of the GOA is 2,700 Chinook salmon (§ 679.21(i)(3)(i)(C)).

In accordance with § 679.21(i)(7), the Regional Administrator has determined that the 2015 Chinook salmon PSC limit established for non-Rockfish Program catcher vessels directed fishing for groundfish, other than pollock, using trawl gear in the Western and Central Regulatory Areas of the GOA has been reached. Therefore, NMFS is prohibiting directed fishing for groundfish (except for pollock) by non-Rockfish Program catcher vessels using trawl gear in the Western and Central Regulatory Areas of the GOA.

This action responds to the best available information recently obtained from the fishery. The Assistant Administrator for Fisheries, NOAA, (AA), finds good cause to waive the requirement to provide prior notice and opportunity for public comment pursuant to the authority set forth at 5 U.S.C. 553(b)(B) as such a requirement is impracticable and contrary to the public interest. This requirement is impracticable and contrary to the public interest as it would prevent NMFS from responding to the most recent fisheries data in a timely fashion and would delay closing directed fishing for groundfish, other than pollock, by non-Rockfish Program catcher vessels using trawl gear in the Western and Central Regulatory Areas of the GOA. NMFS was unable to publish a notice providing time for public comment because the most recent, relevant data only became available as of April 30, 2015.

The AA also finds good cause to waive the 30-day delay in the effective date of this action under 5 U.S.C. 553(d)(3). This finding is based upon the reasons provided above for waiver of prior notice and opportunity for public comment.

This action is required by § 679.21 and is exempt from review under Executive Order 12866.