Rules and Regulations. Approval of rail cost adjustment factor

109,496 words·~498 min read·/register/2006/12/22/06-9792

A research copy — for the controlling text, always check the official state or federal source. Not legal advice.

BILLING CODE 4910-60-P DEPARTMENT OF TRANSPORTATION Surface Transportation Board [STB Ex Parte No. 290 (Sub-No. 5) (2007-1)] Quarterly Rail Cost Adjustment Factor AGENCY: Surface Transportation Board, DOT. ACTION: Approval of rail cost adjustment factor. SUMMARY: The Board has approved the first quarter 2007 rail cost adjustment factor

(RCAF)and cost index filed by the Association of American Railroads. The first quarter 2007 RCAF (Unadjusted) is 1.208. The first quarter 2007 RCAF (Adjusted) is 0.568. The first quarter 2007 RCAF-5 is 0.540. DATES: *Effective Date:* January 1, 2007. FOR FURTHER INFORMATION CONTACT: Mac Frampton,

(202)565-1541. [Federal Information Relay Service

(FIRS)for the hearing impaired: 1-800-877-8339.] SUPPLEMENTARY INFORMATION: Additional information is contained in the Board's decision, which is available on our Web site *http://www.stb.dot.gov.* To purchase a copy of the full decision, write to, e-mail or call the Board's contractor, ASAP Document Solutions; 9332 Annapolis Rd., Suite 103, Lanham, MD 20706; e-mail *asapdc@verizon.net* ; phone

(202)306-4004. [Assistance for the hearing impaired is available through FIRS: 1-800-877-8339.] This action will not significantly affect either the quality of the human environment or energy conservation. Pursuant to 5 U.S.C. 605(b), we conclude that our action will not have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act. Decided: December 15, 2006. By the Board, Chairman Nottingham, Vice Chairman Mulvey, and Commissioner Buttrey. Vernon A. Williams, Secretary. [FR Doc. E6-21947 Filed 12-21-06; 8:45 am] BILLING CODE 4915-01-P DEPARTMENT OF TRANSPORTATION Surface Transportation Board [STB Finance Docket No. 34968] Chicago Terminal Railroad—Acquisition and Operation Exemption—Soo Line Railroad Company d/b/a Canadian Pacific Railway Chicago Terminal Railroad (CTR), a noncarrier, has filed a verified notice of exemption under 49 CFR 1150.31 to acquire and operate a line of railroad known as the C&E Line currently owned by the Soo Line Railroad Company d/b/a Canadian Pacific Railway, which consists of approximately 4.5 miles of rail line located in Chicago, Cook County, IL. 1 Iowa Pacific Holdings LLC

(IPH)will own CTR through its wholly owned subsidiary Permian Basin Railways Inc. 1 The line does not have any mileposts. The transaction is related to STB Finance Docket No. 34967, *Iowa Pacific Holdings LLC and Permian Basin Railways, Inc.—Continuance in Control Exemption—Chicago Terminal Railroad,* wherein IPH and Permian have concurrently filed a verified notice of exemption to continue in control of CTR upon its becoming a Class III rail carrier. CTR certifies that the projected annual revenues as a result of this transaction will not result in the creation of a Class II or Class I rail carrier, and further certifies that its projected annual revenues will not exceed $5 million. The transaction is scheduled to be consummated on or after December 21, 2006. If the notice contains false or misleading information, the exemption is void *ab initio.* Petitions to revoke the exemption under 49 U.S.C. 10502(d) may be filed at any time. The filing of a petition to revoke will not automatically stay the transaction. An original and 10 copies of all pleadings, referring to STB Finance Docket No. 34968, must be filed with the Surface Transportation Board, 1925 K Street, NW., Washington, DC 20423-0001. In addition, one copy of each pleading must be served on John D. Heffner, 1920 N Street, NW., Suite 800, Washington, DC 20036. Board decisions and notices are available on our Web site at *http://www.stb.dot.gov.* Decided: December 14, 2006. By the Board, David M. Konschnik, Director, Office of Proceedings. Vernon A. Williams, Secretary. [FR Doc. E6-21898 Filed 12-21-06; 8:45 am] BILLING CODE 4915-01-P DEPARTMENT OF TRANSPORTATION Surface Transportation Board [STB Finance Docket No. 34942] Iowa Interstate Railroad, Ltd.—Acquisition of Control Exemption—Lincoln & Southern Railroad Company AGENCY: Surface Transportation Board, DOT. ACTION: Notice of exemption. SUMMARY: Under 49 U.S.C. 10502, the Board is granting a petition for exemption from the prior approval requirements of 49 U.S.C. 11323 *et seq.* , for Iowa Interstate Railroad, Ltd., a Class II carrier, to acquire control by stock purchase of Lincoln & Southern Railroad Company, a Class III carrier. DATES: This exemption will be effective on December 30, 2006. Petitions to stay must be filed by December 26, 2006. Petitions to reopen must be filed by January 11, 2007. ADDRESSES: An original and 10 copies of all pleadings referring to STB Finance Docket No. 34942 must be filed with the Surface Transportation Board, 1925 K Street, NW., Washington, DC 20423-0001. In addition, one copy of all pleadings must be served on petitioner's representative: Edward J. Krug, 401 First Street SE, Suite 330, P.O. Box 186, Cedar Rapids, IA 52406-0186. FOR FURTHER INFORMATION CONTACT: Joseph H. Dettmar,

(202)565-1600. [Assistance for the hearing impaired is available through the Federal Information Relay Service

(FIRS)at 1-800-877-8339.] SUPPLEMENTARY INFORMATION: Additional information is contained in the Board's decision. To purchase a copy of the full decision, write to, e-mail, or call: ASAP Document Solutions, 9332 Annapolis Rd., Suite 103, Lanham, MD 20706; e-mail: *asapdc@verizon.net* ; telephone:

(202)306-4004. [Assistance for the hearing impaired is available through FIRS at 1-800-877-8339.] Board decisions and notices are available on our Web site at *http://www.stb.dot.gov.* Decided: December 15, 2006. By the Board, Chairman Nottingham, Vice Chairman Mulvey, and Commissioner Buttrey. Vernon A. Williams, Secretary. [FR Doc. E6-21948 Filed 12-21-06; 8:45 am] BILLING CODE 4915-01-P DEPARTMENT OF TRANSPORTATION Surface Transportation Board [STB Finance Docket No. 34967] Iowa Pacific Holdings, LLC and Permian Basin Railways, Inc.—Continuance in Control Exemption—Chicago Terminal Railroad Iowa Pacific Holdings, LLC

(IPH)and its subsidiary Permian Basin Railways, Inc. (Permian), both noncarriers, have filed a verified notice of exemption to continue in control of Chicago Terminal Railroad (CTR), upon CTR's becoming a Class III rail carrier. IPH owns 100 percent of the common stock of Permian. IPH presently controls four other Class III short line railroads through Permian: the West Texas and Lubbock Railway Company, Inc., the Austin & Northwestern Railroad Company, Inc., d/b/a Texas New Mexico Railroad, the Arizona Eastern Railway Company, Inc., and the San Luis & Rio Grande Railroad Company, Inc. Otherwise, IPH does not directly or indirectly own any other railroad properties subject to Board jurisdiction. The transaction is scheduled to be consummated on or after December 21, 2006. This transaction is related to the concurrently filed verified notice of exemption in STB Finance Docket No. 34968, *Chicago Terminal Railroad—Acquisition and Operation Exemption—Soo Line Railroad Company d/b/a Canadian Pacific Railway,* wherein noncarrier CTR seeks to purchase and operate a 4.5-mile line of railroad in Chicago, Cook County, IL, known as the C&E Line currently owned by the Soo Line Railroad Company d/b/a Canadian Pacific Railway. Applicant states that:

(1)The railroads do not connect with each other or any railroad in their corporate family;

(2)the continuance in control is not part of a series of anticipated transactions that would connect the railroads with each other or any railroad in their corporate family; and

(3)the transaction does not involve a Class I carrier. Therefore, the transaction is exempt from the prior approval requirements of 49 U.S.C. 11323. *See* 49 CFR 1180.2(d)(2). Under 49 U.S.C. 10502(g), the Board may not use its exemption authority to relieve a rail carrier of its statutory obligation to protect the interest of its employees. Section 11326(c), however, does not provide for labor protection for transactions under section 11324 and 11325 that involve only Class III rail carriers. Accordingly, the Board may not impose labor protective conditions here, because all of the carriers involved are Class III carriers. If the verified notice contains false or misleading information, the exemption is void *ab initio* . Petitions to revoke the exemption under 49 U.S.C. 10502(d) may be filed at any time. The filing of a petition to revoke will not automatically stay the transaction. An original and 10 copies of all pleadings, referring to STB Finance Docket No. 34967, must be filed with the Surface Transportation Board, 1925 K Street, NW., Washington, DC 20423-0001. In addition, one copy of each pleading must be served on John D. Heffner, 1920 N Street, NW., Suite 800, Washington, DC 20036. Board decisions and notices are available on our Web site at *http://www.stb.dot.gov* . Decided: December 14, 2006. By the Board, David M. Konschnik, Director, Office of Proceedings. Vernon A. Williams, Secretary. [FR Doc. E6-21900 Filed 12-21-06; 8:45 am] BILLING CODE 4915-01-P DEPARTMENT OF TRANSPORTATION Surface Transportation Board [STB Docket No. AB-192 (Sub-No. 2X)] Birmingham Southern Railroad Company—Abandonment Exemption—in Jefferson County, AL Birmingham Southern Railroad Company

(BSRC)has filed a verified notice of exemption under 49 CFR 1152 Subpart F— *Exempt Abandonments* to abandon a 0.18-mile line of railroad known as the Old Port Branch, extending from Survey Station 936+04.07 of Turnout P-63 A, over Trestle 17.9, to a connection with Ergon Terminaling, Inc.'s (Ergon) rail line at Survey Station 945+52.55 in Jefferson County, AL. The line traverses United States Postal Service Zip Code 35118. 1 1 BSRC intends to convey to Ergon its interest in the line, including Trestle 17.9 and all the rails and ties associated therewith, for a distance of 423.59 feet extending from Survey Station 936+04.07, which will provide Ergon with the potential for a future rail connection should the need arise. If the trestle is not conveyed to Ergon, it will be conveyed to the State of Alabama or dismantled. BSRC has certified that:

(1)No local traffic has moved over the line for at least 2 years;

(2)there is no overhead traffic on the line;

(3)no formal complaint filed by a user of rail service on the line (or by a State or local government entity acting on behalf of such user) regarding cessation of service over the line either is pending with the Surface Transportation Board or with any U.S. District Court or has been decided in favor of complainant within the 2-year period; and

(4)the requirements at 49 CFR 1105.7 (environmental reports), 49 CFR 1105.8 (historic reports), 49 CFR 1105.11 (transmittal letter), 49 CFR 1105.12 (newspaper publication), and 49 CFR 1152.50(d)(1) (notice to governmental agencies) have been met. As a condition to this exemption, any employee adversely affected by the abandonment shall be protected under *Oregon Short Line R. Co.—Abandonment—Goshen* , 360 I.C.C. 91 (1979). To address whether this condition adequately protects affected employees, a petition for partial revocation under 49 U.S.C. 10502(d) must be filed. Provided no formal expression of intent to file an offer of financial assistance

(OFA)has been received, this exemption will be effective on January 23, 2007, unless stayed pending reconsideration. Petitions to stay that do not involve environmental issues, 2 formal expressions of intent to file an OFA under 49 CFR 1152.27(c)(2), 3 and trail use/rail banking requests under 49 CFR 1152.29 must be filed by January 2, 2007. Petitions to reopen or requests for public use conditions under 49 CFR 1152.28 must be filed by January 11, 2007, with the Surface Transportation Board, 1925 K Street, NW., Washington, DC 20423-0001. 2 The Board will grant a stay if an informed decision on environmental issues (whether raised by a party or by the Board's Section of Environmental Analysis

(SEA)in its independent investigation) cannot be made before the exemption's effective date. *See Exemption of Out-of-Service Rail Lines,* 5 I.C.C.2d 377 (1989). Any request for a stay should be filed as soon as possible so that the Board may take appropriate action before the exemption's effective date. 3 Each OFA must be accompanied by the filing fee, which currently is set at $1,300. *See* 49 CFR 1002.2(f)(25). A copy of any petition filed with the Board should be sent to BSRC's representative: Michael M. Partain, Esq., United States Steel Corporation, 6200 E. J. Oliver Boulevard, Suite 192, Fairfield, AL 35064. If the verified notice contains false or misleading information, the exemption is void *ab initio* . BSRC has filed environmental and historic reports which address the effects, if any, of the abandonment on the environment and historic resources. SEA will issue an environmental assessment

(EA)by December 29, 2006. Interested persons may obtain a copy of the EA by writing to SEA (Room 500, Surface Transportation Board, Washington, DC 20423-0001) or by calling SEA, at

(202)565-1539. [Assistance for the hearing impaired is available through the Federal Information Relay Service

(FIRS)at 1-800-877-8339.] Comments on environmental and historic preservation matters must be filed within 15 days after the EA becomes available to the public. Environmental, historic preservation, public use, or trail use/rail banking conditions will be imposed, where appropriate, in a subsequent decision. Pursuant to the provisions of 49 CFR 1152.29(e)(2), BSRC shall file a notice of consummation with the Board to signify that it has exercised the authority granted and fully abandoned the line. If consummation has not been effected by BSRC's filing of a notice of consummation by December 22, 2007, and there are no legal or regulatory barriers to consummation, the authority to abandon will automatically expire. Board decisions and notices are available on our Web site at *http://www.stb.dot.gov* . Decided: December 14, 2006. By the Board, David M. Konschnik, Director, Office of Proceedings. Vernon A. Williams, Secretary. [FR Doc. E6-21763 Filed 12-21-06; 8:45 am] BILLING CODE 4915-01-P DEPARTMENT OF VETERANS AFFAIRS Reasonable Charges for Medical Care or Services; 2007 Calendar Year Update AGENCY: Department of Veterans Affairs. ACTION: Notice. SUMMARY: Section 17.101 of Title 38 of the Code of Federal Regulations sets forth the Department of Veterans Affairs

(VA)medical regulations concerning “reasonable charges” for medical care or services provided or furnished by VA to a veteran: —For a nonservice-connected disability for which the veteran is eligible for care (or the payment of expenses of care) under a health plan contract; —For a nonservice-connected disability incurred incident to the veteran's employment and covered under a worker's compensation law or plan that provides reimbursement or indemnification for such care and services; or —For a nonservice-connected disability incurred as a result of a motor vehicle accident in a State that requires automobile accident reparations insurance. The regulations include methodologies for establishing billed amounts for the following types of charges: acute inpatient facility charges; skilled nursing facility/sub-acute inpatient facility charges; partial hospitalization facility charges; outpatient facility charges; physician and other professional charges, including professional charges for anesthesia services and dental services; pathology and laboratory charges; observation care facility charges; ambulance and other emergency transportation charges; and charges for durable medical equipment, drugs, injectables, and other medical services, items, and supplies identified by Healthcare Common Procedure Coding System (HCPCS) Level II codes. The regulations also provide that data for calculating actual charge amounts at individual VA facilities based on these methodologies will be posted on the Internet site of the Veterans Health Administration Chief Business Office, currently at *http://www.va.gov/cbo* , under “Charge Data.” Some of these charges are hereby updated as described in the SUPPLEMENTARY INFORMATION section of this notice. These changes are effective January 1, 2007. When charges for medical care or services provided or furnished at VA expense by either VA or non-VA providers have not been established under other provisions of the regulations, the method for determining VA's charges is set forth at 38 CFR 17.101(a)(8). FOR FURTHER INFORMATION CONTACT: Romona Greene, Chief Business Office (168), Veterans Health Administration, Department of Veterans Affairs, 810 Vermont Avenue, NW., Washington, DC 20420,

(202)254-0361. (This is not a toll free number.) SUPPLEMENTARY INFORMATION: Of the charge types listed in the Summary section of this notice, acute inpatient facility charges and skilled nursing facility/sub-acute inpatient facility charges are not being changed. Acute inpatient facility charges remain the same as set forth in a notice published in the **Federal Register** on September 28, 2006 (71 FR 57028). Skilled nursing facility/sub-acute inpatient facility charges remain the same as set forth in a notice published in the **Federal Register** on September 28, 2006 (71 FR 57028). Based on the methodologies set forth in 38 CFR 17.101, this document provides an update to charges for 2007 HCPCS Level II and Current Procedural Technology

(CPT)codes. Charges are also being updated based on more recent versions of data sources for the following charge types: partial hospitalization facility charges; outpatient facility charges; physician and other professional charges, including professional charges for anesthesia services and dental services; pathology and laboratory charges; observation care facility charges; ambulance and other emergency transportation charges; and charges for durable medical equipment, drugs, injectables, and other medical services, items, and supplies identified by HCPCS Level II codes. These updated charges are effective January 1, 2007. In this update, we are retaining the table designations used in the notice posted on the Internet site of the Veterans Health Administration Chief Business Office currently at * http:// www1.va.gov/cbo * , under “Charge Data.” The effective date of this change was August 25, 2006 and the notice can also be found in the **Federal Register** (71 FR 50504). Accordingly, the tables identified as being updated by this notice correspond to the applicable tables posted on the internet with the notice, beginning with Table C. We have updated the list of data sources, presented in Supplementary Table 1, that were used to establish the updated charges described in this notice. As a reminder, in Supplementary Table 3 published in the **Federal Register** dated September 28, 2006, we set forth the list of VA medical facility locations, which includes their three-digit Zip Codes and provider based/non-provider based designations. In accordance with the final rule, subsequent updates to Supplementary Table 3 will be posted on the Internet site of the Veterans Health Administration Chief Business Office. Consistent with the regulations, the updated data tables and supplementary tables containing the changes described in this notice will be made available during January 2007, on the internet site of the Veterans Health Administration Chief Business Office, currently at *http://www1.va.gov/cbo* , under “Charge Data (Rates)”. The updated data tables and supplementary tables containing the changes described will be effective until changed by a subsequent **Federal Register** notice. Approved: December 6, 2006. Gordon H. Mansfield, Deputy Secretary of Veterans Affairs. [FR Doc. E6-22000 Filed 12-21-06; 8:45 am] BILLING CODE 8320-01-P 71 246 Friday, December 22, 2006 CORRECTIONS Ben DEPARTMENT OF JUSTICE Antitrust Division Notice Pursuant to the National Cooperative Research and Production Act of 1993—Power Tool Institute Table Saw Guarding Joint Venture Project Correction In notice document 06-9644 beginning on page 74559 in the issue of Tuesday, December 12, 2006, make the following corrections: 1. On page 74559, in the third column, in the last paragraph, in the second line, “november 2” should read “November 2”. 2. On the same page, in the same column, in the last paragraph, in the last line, “national Cooperative” should read “National Cooperative”. 3, On page 74560, in the first column, in the first full paragraph, in the sixth line, “mount Prospect” should read “Mount Prospect”. [FR Doc. C6-9644 Filed 12-21-06; 8:45 am] BILLING CODE 1505-01-D !!!Don!!! SOCIAL SECURITY ADMINISTRATION 20 CFR Part 404 [Docket No. SSA-2006-0098] RIN 0960-AF34 Revised Medical Criteria for Evaluating Visual Disorders Correction In rule document 06-9236 beginning on page 67037 in the issue of Monday, November 20, 2006 make the following correction: Appendix 1 to Subpart P of Part 404 [Corrected] On page 67054, in Appendix 1 to Subpart P of Part 404, in the first column, in the first line “efers” should read “refers”. [FR Doc. C6-9236 Filed 12-21-06; 8:45 am] BILLING CODE 1505-01-D !!!Lois Davis!!! DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2006-24696; Directorate Indentifier 2006-NM-038-AD] RIN 2120-AA64 Airworthiness Directives; Empresa Brasileira de Aeronautica S.A. (EMBRAER) Model EMB-145, -145ER, -145MR, -145LR, -145XR, -145MP, and -145EP Airplanes; and Model EMB-135BJ, -135ER, -135KE, -135KL, and -135LR Airplanes Correction Proposed Rule document E6-20629 was inadvertently published in the Rules and Regulations section in the issue of Wednesday, December 6, 2006, beginning on page 70648. It should have appeared in the Proposed Rules section. [FR Doc. Z6-20629 Filed 12-21-06; 8:45 am] BILLING CODE 1505-01-D 71 246 Friday, December 22, 2006 Proposed Rules Part II Environmental Protection Agency 40 CFR Parts 60, 62, 72, and 78 Revisions of Standards of Performance for New and Existing Stationary Sources; Electric Utility Steam Generating Units; Federal Plan Requirements for Clean Air Mercury Rule; and Revisions of Acid Rain Program Rules; Proposed Rule ENVIRONMENTAL PROTECTION AGENCY 40 CFR Parts 60, 62, 72, and 78 [EPA-HQ-OAR-2006-0905; FRL-8255-1] RIN 2060-AN98 Revisions of Standards of Performance for New and Existing Stationary Sources; Electric Utility Steam Generating Units; Federal Plan Requirements for Clean Air Mercury Rule; and Revisions of Acid Rain Program Rules AGENCY: Environmental Protection Agency (EPA). ACTION: Proposed rule. SUMMARY: In this action, EPA proposes a Federal Plan to implement Clean Air Act

(CAA)section 111 mercury

(Hg)standards of performance for new and existing coal-fired electric utility steam generating units (Utility Unit or EGU) located in States or Indian Country covered by the Clean Air Mercury Rule

(CAMR)which do not have EPA approved and currently effective State plans. The EPA will not take final action on the proposed Federal Plan until EPA either finds that a State has failed to timely submit a plan or disapproves a submitted plan. Any final Federal Plan is expected to serve primarily to temporarily fill a regulatory gap in circumstances where either a State fails to timely submit a plan or EPA disapproves a submitted plan as, in either case, States will be free to submit an approvable plan after promulgation of the Federal Plan and upon approval of the State Plan by EPA, the Federal Plan will no longer apply to coal-fired Utility Units covered by the State Plan. This action also proposes certain revisions to both the CAMR State Plan model cap-and-trade rule (in order to make it compatible with the Federal Plan cap-and-trade rule and to make technical corrections) and the Acid Rain Program regulations (in order to simplify the provision concerning alternate designated representatives and to make the administrative appeals process applicable to the decisions of the Administrator under the State Plan and Federal Plan cap-and-trade rules). DATES: *Comments.* Comments on this proposal must be received on or before February 20, 2007. A public hearing will be held in Washington, DC prior to the end of the public comment period. EPA will publish a separate **Federal Register** notice announcing the date, location, and time for the public hearing. Please refer to SUPPLEMENTARY INFORMATION for additional information on the public hearing. ADDRESSES: Submit your comments, identified by Docket ID Number EPA-HQ-OAR-2006-0905, by one of the following methods: A. *Federal Rulemaking Portal:* *http://www.regulations.gov* . Follow the on-line instructions for submitting comments. *B. E-mail:* *A-AND-R-Docket@epa.gov* . C. *Mail:* Air Docket, ATTN: Docket Number EPA-HQ-OAR-2006-0905, Environmental Protection Agency, Mail Code: 6102T, 1200 Pennsylvania Ave., NW., Washington, DC 20460. D. *Hand Delivery:* EPA Docket Center, 1301 Constitution Avenue, NW., Room 3334, Washington, DC. Such deliveries are only accepted during the Docket's normal hours of operation, and special arrangements should be made for deliveries of boxed information. *Instructions:* Direct your comments to Docket ID No. EPA Docket Number EPA-HQ-OAR-2006-0905. EPA's policy is that all comments received will be included in the public docket without change and may be made available online at *http://www.regulations.gov* , including any personal information provided, unless the comment includes information claimed to be Confidential Business Information

(CBI)or other information whose disclosure is restricted by statute. Do not submit information that you consider to be CBI or otherwise protected through www.regulations.gov or e-mail. The www.regulations.gov Web site is an “anonymous access” system, which means EPA will not know your identity or contact information unless you provide it in the body of your comment. If you send an e-mail comment directly to EPA without going through www.regulations.gov your e-mail address will be automatically captured and included as part of the comment that is placed in the public docket and made available on the Internet. If you submit an electronic comment, EPA recommends that you include your name and other contact information in the body of your comment and with any disk or CD-ROM you submit. If EPA cannot read your comment due to technical difficulties and cannot contact you for clarification, EPA may not be able to consider your comment. Electronic files should avoid the use of special characters, any form of encryption, and be free of any defects or viruses. *Docket:* All documents in the docket are listed in the www.regulations.gov index. Although listed in the index, some information is not publicly available, *i.e.* , CBI or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material, is not placed on the Internet and will be publicly available only in hard copy form. Publicly available docket materials are available either electronically in www.regulations.gov or in hard copy at the EPA Docket Center, EPA West, Room 3334, 1301 Constitution Avenue, NW., Washington, DC. The Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The telephone number for the Public Reading Room is

(202)566-1744, and the telephone number for the Air Docket is

(202)566-1742. FOR FURTHER INFORMATION CONTACT: For information concerning this proposed CAMR Federal Plan as well as Integrated Planning Model

(IPM)analyses performed in developing the final CAMR, contact Meg Victor, Program Development Branch, Clean Air Markets Division (MC 6204J), EPA, Washington, DC 20460; telephone number

(202)343-9193; fax number

(202)343-2359; electronic mail address: *victor.meg@epa.gov* . For information concerning all other analyses performed in developing the final CAMR, contact Mr. William Maxwell, Energy Strategies Group, Sector Policies and Programs Division (Mail Code D243-01), EPA, Research Triangle Park, North Carolina 27711; telephone number

(919)541-5430; fax number

(919)541-5450; electronic mail address: *maxwell.bill@epa.gov* . SUPPLEMENTARY INFORMATION: *Regulated Entities.* Categories and entities potentially regulated by this action include the following: Category NAICS code 1 Examples of potentially regulated entities Industry 221112 Fossil fuel-fired electric utility steam generating units. Federal Government 2 221122 Fossil fuel-fired electric utility steam generating units owned by the Federal government. State/local/Tribal government 2 221122 Fossil fuel-fired electric utility steam generating units owned by municipalities. 921150 Fossil fuel-fired electric utility steam generating units in Indian country. 1 North American Industry Classification System. 2 Federal, State, or local government-owned and operated establishments are classified according to the activity in which they are engaged. This table is not intended to be exhaustive, but rather provides a guide for readers regarding entities likely to be regulated by this action. This table lists examples of the types of entities EPA is now aware could potentially be regulated by this action. Other types of entities not listed could also be affected. To determine whether your facility, company, business, organization, etc., is regulated by this action, you should examine the applicability criteria in 40 CFR 60.45Da of the final new source performance standards

(NSPS)amendments and 40 CFR 60.24(h) of the final CAMR. If you have questions regarding the applicability of this action to a particular entity, consult your State or local agency (or EPA Regional Office). *World Wide Web.* In addition to being available in the docket, an electronic copy of this action will also be available on the World Wide Web through EPA's Office of Air and Radiation. Following signature by the Administrator, a copy of this action will be posted on the CAMR page at *http://www.epa.gov/camr* . *Public Hearing.* A public hearing will be held in Washington, DC prior to the end of the public comment period. EPA will publish a future **Federal Register** notice announcing the details of the public hearing including the time, date, and location, and will announce the public hearing on EPA's Web site for this rulemaking at *http://www.epa.gov/CAMR* . Because the hearing will be held at a U.S. Government facility, everyone planning to attend should be prepared to show valid picture identification to the security staff in order to gain access to the meeting room. Oral testimony will be limited to 5 minutes per commenter. The EPA encourages commenters to provide written versions of their oral testimonies either electronically (on computer disk or CD-ROM) or in paper copy. Verbatim transcripts and written statements will be included in the rulemaking docket. The public hearing will provide interested parties the opportunity to present data, views, or arguments concerning the proposed rule. The EPA may ask clarifying questions during the oral presentations, but will not respond to the presentations or comments at that time. Written statements and supporting information submitted during the comment period will be considered with the same weight as any oral comments and supporting information presented at a public hearing. *Outline.* The information presented in this preamble is organized as follows: I. Background A. Summary of This Action B. Regulatory Background of CAMR C. State Plan Requirements II. Federal Plan Process A. Legal Authority for Federal Plan B. Implementation of Federal Plan C. Timing of Federal Plan Action D. Federal Plan Control Measures E. National Mercury Budget and Compliance Dates F. State and Indian Country Emission Budgets III. Federal Hg Cap-and-Trade Program A. Overall Structure of the Federal Hg Cap-and-Trade Program B. Sources Affected Under the Federal Cap-and-Trade Rule C. Allocation of Emission Allowances D. Allowance Banking E. Source-Level Emissions Monitoring and Reporting Requirements F. Compliance and Penalties G. Elements of the Federal Hg Trading Program That Differ From the State Model Hg Trading Program IV. Proposed Revisions of the CAMR State Model Cap-and-Trade Program Rule V. Proposed Revisions of the Acid Rain Program Regulations VI. Units Subject to the CAMR Federal Plan and New Source Performance Standards VII. Statutory and Executive Order Reviews A. Executive Order 12866: Regulatory Planning and Review B. Paperwork Reduction Act C. Regulatory Flexibility Act D. Unfunded Mandates Reform Act E. Executive Order 13132: Federalism F. Executive Order 13175: Consultation and Coordination With Indian Tribal Governments G. Executive Order 13045: Protection of Children From Environmental Health and Safety Risks H. Executive Order 13211: Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use I. National Technology Transfer and Advancement Act J. Executive Order 12898: Federal Actions To Address Environmental Justice in Minority Populations and Low-Income Populations I. Background A. Summary of This Action On May 18, 2005, EPA finalized CAMR and established standards of performance for Hg for new and existing coal-fired electric utility steam generating units (Utility Units or EGUs). (The standards of performance for existing Utility Units are in the form of emission guidelines which do not apply to individual sources until they are implemented through an EPA approved State plan or a promulgated Federal plan.) ( *See* 70 FR 28606.) CAMR established a mechanism by which Hg emissions from new and existing coal-fired Utility Units are capped at specified, nation-wide levels. A first phase cap of 38 tpy becomes effective in 2010, and a second phase cap of 15 tpy becomes effective in 2018. EPA then set State level emission caps that States must meet and developed an emissions cap-and-trade program States can use to meet these caps. State plans to implement and enforce these standards of performance were due to EPA by November 17, 2006. 1 Under 40 CFR 60.27(b), the Administrator must approve or disapprove State Plans within 4 months of the November 17, 2006 submission deadline. 1 In a separate **Federal Register** notice entitled “Notice of Finding that Certain States Did Not Submit Clean Air Mercury Rule

(CAMR)State Plans for New and Existing Electric Utility Steam Generating Units and Status of Submission of Such Plans.”) 2 Under the TAR (40 CFR part 49), which implements CAA section 301(d), Tribes may elect to be treated in the same manner as a State in implementing sections of the CAA. However, EPA determined in the TAR that it was inappropriate to treat Tribes in a manner similar to a State with regard to specific plan submittal and implementation deadlines. B. Regulatory Background of CAMR 1. Relevant Federal Register Actions On December 20, 2000, EPA issued a finding pursuant to CAA section 112(n)(1)(A) that it was appropriate and necessary to regulate coal- and oil-fired Utility Units under CAA section 112. In making this finding, EPA considered the results of the study mandated by CAA section 112(n)(1)(A) (the Utility Study), which was completed and submitted to Congress in February 1998. In December 2000, EPA concluded that the positive appropriate and necessary determination under CAA section 112(n)(1)(A) constituted a decision to list coal- and oil-fired Utility Units on the CAA section 112(c) source category list. Relying on CAA section 112(e)(4), EPA explained in its December 2000 finding that neither the appropriate and necessary finding under CAA section 112(n)(1)(A) nor the associated listing were subject to judicial review at that time. EPA did not add natural-gas fired units to the CAA section 112(c) list in December 2000, because it did not make a positive appropriate and necessary finding for such units. On January 30, 2004, EPA published in the **Federal Register** a notice of proposed rulemaking

(NPR)entitled “Proposed National Emissions Standards for Hazardous Air Pollutants; and, in the Alternative, Proposed Standards of Performance for New and Existing Stationary Sources: Electric Utility Steam Generating Units.” ( *See* 69 FR 4652.) In that NPR, EPA proposed three alternative regulatory approaches. First, EPA proposed to retain the December 2000 Finding and associated listing of coal- and oil-fired Utility Units and to issue maximum achievable control technology-based

(MACT)national emission standards for hazardous air pollutants (NESHAP) for such units under CAA section 112. Second, EPA alternatively proposed revising the Agency's December 2000 Finding, removing coal- and oil-fired Utility Units from the CAA section 112(c) list, 3 and issuing final standards of performance under CAA section 111 using emissions cap-and-trade for new and existing coal-fired units that emit Hg and new and existing oil-fired units that emit nickel (Ni). Finally, as a third possible alternative, EPA took comment on retaining the December 2000 finding and regulating Hg emissions from Utility Units under CAA section 112(n)(1)(A) using a cap-and-trade approach. 3 We did not propose revising the December 2000 finding for gas-fired Utility Units because EPA continues to believe that regulation of such units under CAA section 112 is not appropriate and necessary. We, therefore, take no action today with regard to gas-fired Utility Units. On March 16, 2004, EPA published in the **Federal Register** a supplemental notice of proposed rulemaking

(SNPR)entitled “Supplemental Notice for the Proposed National Emission Standards for Hazardous Air Pollutants; and, in the Alternative, Proposed Standards of Performance for New and Existing Stationary Sources: Electric Utility Steam Generating Units.” ( *See* 69 FR 12398.) In the SNPR, EPA proposed certain additional regulatory text that largely addressed the proposed CAA section 111 standards of performance for Hg, which included a cap-and-trade program. The SNPR also proposed State Plan approvability criteria and a model cap-and-trade rule for Hg emissions from coal-fired Utility Units. On December 1, 2004, EPA published in the **Federal Register** a notice of data availability

(NODA)entitled “Proposed National Emission Standards for Hazardous Air Pollutants; and, in the Alternative, Proposed Standards of Performance for New and Existing Stationary Sources, Electric Utility Steam Generating Units: Notice of Data Availability.” ( *See* 69 FR 69864.) EPA issued this NODA:

(1)To seek additional input on certain new data and information concerning Hg that the Agency received in response to the January 30, 2004 NPR and March 16, 2004 SNPR; and

(2)to seek input on a revised proposed benefits methodology for assessing the benefits of regulating Hg. On March 29, 2005 (70 FR 15994), EPA revised the December 2000 appropriate and necessary finding and concluded that it is not appropriate and necessary to regulate coal- and oil-fired Utility Units under CAA section 112. We took this action because we now believe that the December 2000 finding lacked foundation and because recent information demonstrates that it is not appropriate or necessary to regulate coal- and oil-fired Utility Units under CAA section 112. Based solely on the revised finding, we removed coal- and oil-fired Utility Units from the CAA section 112(c) list and instead established standards of performance for Hg for new and existing coal-fired Utility Units under CAA section 111 on May 18, 2005 (70 FR 28606). The regulations promulgated pursuant to EPA's authority under CAA section 111 established a mechanism by which Hg emissions from new and existing coal-fired Utility Units are capped at specified, nation-wide levels. A first phase cap of 38 tons per year becomes effective in 2010, and a second phase cap of 15 tons per year becomes effective in 2018. The final CAMR included State Plan approvability criteria and a model cap-and-trade rule for Hg emissions from coal-fired Utility Units. 2. CAA Section 111 Authority CAA section 111 creates a program for the establishment of “standards of performance.” A “standard of performance” is “a standard for emissions of air pollutants which reflects the degree of emission limitation achievable through the application of the best system of emission reduction, which (taking into account the cost of achieving such reduction, any non-air quality health and environmental impacts and energy requirements), the Administrator determines has been adequately demonstrated.” (42 U.S.C. 7411(a)(1).) For new sources, EPA must first establish a list of stationary source categories, which the Administrator has determined “causes, or contributes significantly to, air pollution which may reasonably be anticipated to endanger public health or welfare.” (42 U.S.C. 7410(b)(1)(A).) EPA must then set Federal standards of performance for new sources within each listed source category. (42 U.S.C. 7411(b)(1)(B).) The standards for new sources under CAA section 111(b) apply nationally and are applicable to sources on which construction, reconstruction or modification is commenced after the date of proposal of the standards. ( *See id.* ) Existing sources are addressed under CAA section 111(d). EPA must issue a standard of performance for existing sources in a source category for a pollutant if it has established a standard of performance for new sources covering an air pollutant for which air quality criteria have not been issued or which is not included on a list published under CAA section 108(a), even where those pollutants are subject to the standard for new sources. ( *See* 42 U.S.C. 7411(d)(1)). CAA section 111(d) authorizes EPA to promulgate standards of performance that States must adopt through a SIP-like process, which requires State rulemaking action followed by review and approval of State Plans by EPA. If a State fails to submit a satisfactory plan, EPA has the authority to prescribe a plan for the State. ( *See* 42 U.S.C. 7411(d)(2)(A).) The final CAMR (70 FR 28606; May 18, 2005) discusses in more detail

(i)The applicable standards of performance for Hg from new coal-fired Utility Units under CAA section 111(b),

(ii)the legal authority under CAA section 111(d) to regulate Hg from existing coal-fired Utility Units, and

(iii)the legal authority to implement a cap-and-trade program for existing and new Utility Units. C. State Plan Requirements 1. Summary of State Plan Requirements As finalized under CAMR (70 FR 28632), each State is required to submit a State Plan that assures compliance with the State's assigned Statewide Hg emission budget for coal-fired Utility Units. CAMR is described here primarily for the convenience of the reader, and EPA is only requesting comments on CAMR with regard to revisions to the CAMR State model trading rule that are proposed in this notice. *See* Section IV of this preamble. Because the State must meet a coal-fired EGU Hg emission budget, all emission reductions must necessarily come from coal-fired Utility Units. Each State Plan should include fully-adopted State rules for the EGU Hg reduction strategy with compliance dates providing for controls by 2010 and 2018 that will achieve the State EGU Hg emissions budgets. The State Plans were due by November 17, 2006. As a required element of a State Plan, a State must demonstrate that it has the legal authority to adopt and implement the emission requirements and compliance schedules in the State Plan. The State also must identify the enforceable State mechanism for implementing the emission guidelines ( *e.g.* , a State rule or other State enforcement mechanism). Following receipt of a State Plan, EPA has up to 4 months to approve or disapprove the plan. ( *See* 40 CFR 60.27(b).) The emission reduction requirement in CAMR applies to all coal-fired Utility Units located in all 50 States of the U.S., the District of Columbia, as well as those located in Indian country. (As used herein, the term “Indian country” generally refers to all areas within Indian reservations, dependent Indian communities, and Indian allotments.) CAMR includes mercury emission budgets for coal-fired Utility Units located in Indian country; the emission budgets cover both existing and new units. EPA generally will implement the emission trading rule for coal-fired Utility Units located in Indian country unless a Tribe seeks and obtains Treatment-as-a-State

(TAS)status and submits a Tribal Plan to implement the allocated Hg emissions budget. Eligible Tribes which choose to do so will be responsible for submitting a Tribal Plan analogous to the State Plans discussed throughout this preamble, and, like States, can choose to adopt the model trading rule. 2. Performance Standard Approvability Criteria As discussed in CAMR (70 FR 28616), CAA sections 111(a) and (d)(1) authorize EPA to promulgate a “standard of performance” that States must apply to existing EGU sources through a State Plan, and EPA interpreted the term “standard of performance,” as applied to existing EGU sources, to include a cap-and-trade program. The State EGU Hg budgets are not an independently enforceable requirement. Rather, each State must impose control requirements that the State demonstrates will limit Statewide Hg emissions from affected new and existing EGU sources to no more than the amount of the EGU Hg budget. Under CAMR, EPA finalized that States may meet their Statewide EGU Hg emission budgets by allowing their EGU sources to participate in a national cap-and-trade program. That is, a State may authorize its affected EGU sources to buy and sell Hg allowances allocated in or outside of the State, so that any difference between the State's EGU Hg budget and the total amount of Statewide EGU Hg emissions will be offset in another State (or other States). Regardless of State participation in the national cap-and-trade program, EPA believes that the best way to assure this emission limitation is for the State to limit total EGU Hg emissions for new and existing units in the State to the amount of the State EGU Hg budget. In addition, EPA finalized that sources will be required to comply with the 40 CFR part 75 requirements. EPA believes that compliance with these requirements is necessary to demonstrate compliance with a mass emissions limit. II. Federal Plan Process A. Legal Authority for Federal Plan CAA section 111(d) and 40 CFR 60.24(h) require States to develop and implement State Plans for coal-fired Utility Units designed to implement and enforce the promulgated Hg emission guidelines. The State Plans were due by November 17, 2006. Following receipt of a State Plan, EPA has up to 4 months to approve or disapprove the plan. (CAA section 111(d)(2)(A) provides EPA the same authority to prescribe a plan for a State in cases where the State fails to submit a satisfactory plan as the Agency would have under CAA section 110(c) in the case of a failure to submit an implementation plan.) EPA is proposing a CAMR Federal Plan that will fulfill the Agency's obligation under the CAA to establish emission limits and other requirements for coal-fired Utility Units located in States that have not timely submitted approvable plans or for which EPA has disapproved a submitted plan. EPA is proposing the Federal Plan under the legal authority of CAA sections 111(d)(2) and 301(a). The Federal Plan is intended, upon promulgation, to implement the emission guidelines adopted as part of CAMR. Any final Federal Plan is expected to serve primarily to temporarily fill a regulatory gap in circumstances where either a State fails to timely submit a plan or EPA disapproves a submitted plan as, in either case, States will be free to submit an approvable plan after promulgation of the Federal Plan and upon approval of the State Plan by EPA, the Federal Plan will no longer apply to coal-fired Utility Units covered by the State Plan. B. Implementation of Federal Plan Congress has determined that the primary responsibility for air pollution control rests with State and local agencies. *See* 42 U.S.C. 1401(a)(3). It is also intended under CAA section 111 that the States take the primary responsibility for ensuring that emission reduction targets are met. ( *See* , 42 U.S.C. 7411(d)(1).) Accordingly, EPA has designed the proposed CAMR Federal Plan to readily facilitate the transfer of authority for implementing and enforcing the emission guidelines from EPA to State and local agencies. For this action, EPA is identifying two mechanisms for transferring implementation responsibility to State and local agencies:

(1)If EPA approves a State Plan submitted to EPA after the Federal Plan is promulgated and is effective in that State, the approved State Plan will supersede the Federal Plan. (In approving the State Plan, EPA may impose conditions it determines necessary to ensure that the transition from the Federal Plan to the approved State Plan will be minimally disruptive.); or

(2)if EPA approves a State allocation methodology that addresses only allowance allocations and meets certain requirements for such allocations, EPA would implement the Federal Plan except for the allocation provisions that the State would implement under the approved State allocation methodology. 4 4 The proposed option for States to implement allowance allocations under a CAMR Federal Plan is similar to the option with respect to Clean Air Interstate Rule

(CAIR)implementation wherein a State can submit an abbreviated CAIR SIP revision to make implementation decisions about certain elements of the CAIR FIP trading programs (71 FR 25345). The proposed CAMR option is limited to allowance allocations. 1. State Submits a State Plan After Becoming Subject to the Federal Plan—Full Transfer of Authority Through State Plan Approval Even after coal-fired Utility Units in a particular State become subject to the Federal Plan, the State or a local agency may still adopt and submit to EPA for approval a State Plan. The EPA will determine if the State Plan is at least as protective as the CAMR emission guidelines. If EPA determines that the State Plan is at least as protective as the emission guidelines, EPA will approve the State Plan. Upon the approval and effectiveness of the State Plan, the Federal Plan will no longer apply and the State will implement and enforce the State Plan in lieu of the Federal Plan. Making the State Plan effective as soon as possible after approval expedites a State's assumption of responsibility for implementing the CAMR emission guidelines through the State Plan mechanism as intended by Congress. (EPA recognizes, however, that there may be circumstances in which it will be necessary to delay the effective date of an approved State Plan, or impose other conditions in approving the State Plan, in order to minimize the impacts of any disruption resulting from the transition from the Federal Plan to an approved State Plan.) If EPA determines that the State Plan is not at least as protective as the guidelines, EPA cannot approve the State Plan. 2. State Implements Allowance Allocations Under the Federal Plan The State may implement allowance allocations even if there is not a State Plan in effect. EPA believes that, to the extent authorized by State law, States may want to undertake implementation of Hg allocations under a Federal Plan cap-and-trade program. A State could choose to submit a State allocation methodology, rather than submitting a State Plan addressing all elements of the Hg model trading rule ( *see* Section III.C of this preamble for discussion of allocations). In this way, the State could choose to allocate Hg allowances to its EGU sources as it deems most appropriate, while leaving other elements of CAMR implementation to the Federal Plan. C. Timing of Federal Plan Action As described in CAMR and summarized in section I.C of this notice, EPA required States to develop, adopt and submit their State Plans by November 17, 2006. Proposing a CAMR Federal Plan today is necessary in order for EPA to promulgate a Federal Plan in accordance with 40 CFR 60.27 for States without timely submitted, approvable plans. EPA intends to expedite the Federal Plan promulgation to help assure emission reductions occur expeditiously. In a separate **Federal Register** notice entitled “Notice of Finding that Certain States Did Not Submit Clean Air Mercury Rule

(CAMR)State Plans for New and Existing Electric Utility Steam Generating Units and Status of Submission of Such Plans,” EPA made findings that certain States did not submit CAMR State Plans by the November 17, 2006 deadline and otherwise provided notice of the status of State Plan submissions. EPA intends to promulgate a Federal Plan for any State that fails to timely submit an approvable plan. EPA intends to approve expeditiously State Plans that meet the CAMR requirements. In order to meet the requirements of CAA section 111(d), this notice proposes a Federal Plan for all States covered by CAMR (50 States, District of Columbia, and Indian country). The proposed Federal Plan requirements for each State are identical. Final rulemaking on the proposed Federal Plan may address only one State or may address several States, depending on how the individual States respond to the provisions of the final CAMR. The Agency is proposing this action to provide a Federal backstop for CAMR in circumstances where not all States submit timely, approvable State Plans. In no way should the proposed Federal Plan for CAMR be viewed as a sign of any concern about States ultimately making the emission reductions required under CAMR. Rather, the Agency intends the Federal Plan to represent an additional option for achieving the emission reductions specified in CAMR. States which would otherwise adopt the model trading program in CAMR as their State Plan can accept the Federal Plan and significantly reduce the State resources needed to establish a program to implement CAMR. The Agency proposes to provide States that are subject to these proposed Federal requirements with the option to submit a State allocation methodology without submitting a State Plan to meet the requirements of CAMR. By proposing to accept a State allocation methodology, the Agency intends to increase the options available for States to comply with CAMR. As there are no sanctions associated with the proposed Federal Plan, EPA anticipates that some States may prefer to avoid spending the time and resources necessary to adopt and submit a State Plan. Upon approval of any State allocation methodology, EPA anticipates that the corresponding portions of the CAMR Federal Plan for that State would be replaced or their application to affected sources would be modified. In offering a framework for submission of a State allocation methodology, the Agency anticipates that some States will wish to retain control over the allocation of allowances to their EGU sources even in circumstances where the Federal Plan otherwise governs. EPA requests comment on the proposed option for States to submit a State allocation methodology under the Federal Plan trading program. A more complete discussion of the proposed State allocation methodology provisions is found in Section III, below. Although the deadline for States to develop, adopt, and submit State Plans that meet the requirements of CAMR was November 17, 2006, EPA remains ready to work with the States to develop fully-approvable State Plans. The Federal Plan will only be effective in a State where EPA has found that a State has not timely submitted an approvable State Plan. In addition, EPA will withdraw the Federal Plan for any affected State after EPA approves a State Plan that meets the CAMR requirements in that State. EPA's goal is to have approvable programs in place that meet the requirements of CAMR whether they are in the form of a State Plan or a Federal Plan. By finalizing a Federal Plan, EPA would in no way preclude a State from developing its own State Plan that either adopts the Hg model trading rule with any discretionary elements allowed by CAMR or meets the State's EGU Hg emissions budget through different measures of the State's choosing. EPA will carefully consider the timing of the Federal Plan adoption process, and the transition from a finalized Federal Plan to an approved State Plan, to make sure to preserve each State's freedom to develop and implement a State Plan. In this way, EPA will enhance each State's options for complying with the requirements of CAMR while ensuring that all the Hg emissions reductions and environmental benefits of CAMR are realized. D. Federal Plan Control Measures In contrast to the State Plan process—where selection and implementation of control measures is the primary responsibility of the State—in the case of a Federal Plan, it is EPA's responsibility to select the Hg control measures for each coal-fired EGU and assure compliance with those measures. (See, 40 CFR 60.27(e).) Thus, the Federal Plan would be designed by EPA to achieve the same total Statewide EGU Hg emission budgets as those described in CAMR and discussed below. The specific emission reductions assigned in the Federal Plan could be different from what a State might choose. In selecting the specific Hg emission reductions for the CAMR Federal Plan, EPA is proposing to adopt as the Federal Plan the CAMR State model cap-and-trade program rule, modified slightly to allow for Federal instead of State implementation. EPA believes it is essential that compliance with the Hg control strategy be verified. Tracking emissions is the principal mechanism to ensure compliance with the Hg emissions budget. The Hg emissions control requirements for coal-fired Utility Units proposed in the CAMR Federal Plan include requirements that the affected EGU sources directly report emissions data to EPA that can be used to determine compliance with the Hg emissions decreases required by the proposed Federal Plan. The specifics of the Hg cap-and-trade program for the Federal Plan are discussed below in Section III. The Federal Plan includes the proposed methodology for allocating Hg allowances that EPA would use to allocate allowances to units but does not include the allocations themselves. EPA will provide the allocations for individual units in later regulatory actions; the allocations will meet the State Hg budgets that are established in CAMR for coal-fired Utility Units. E. National Mercury Budget and Compliance Dates In this action, the Agency is proposing a Federally-administered program to meet the CAMR Hg emission reduction requirements in accordance with the caps and timeline under CAMR. This action does not establish those emission reduction requirements or schedule, which were established by the CAMR rulemaking. Thus, the Agency is not requesting comment on the emission reduction requirements or the schedule for implementing these reductions. For CAMR, EPA determined that there was authority under CAA section 111(d) for a Hg cap-and-trade program. Thus, EPA interpreted the term “standard of performance,” as applied to existing EGU sources, to include a cap-and-trade program. EPA also determined that a cap-and-trade program based on Hg control technology available in the relevant timeframe is the best demonstrated system for reducing Hg emissions from existing coal-fired Utility Units. CAMR adds Hg to the list of pollutants covered under 40 CFR part 60, subpart Da, by establishing emission limits for new sources and emission guidelines for existing EGU sources. CAMR established a mechanism by which Hg emissions from new and existing Hg Budget units are capped at specified, nation-wide levels. A first phase cap of 38 tons per year becomes effective in 2010, and a second phase cap of 15 tons per year becomes effective in 2018. Facilities must demonstrate compliance with the standard by holding one “allowance” for each ounce of Hg emitted in any given year. Allowances are readily transferable among all regulated facilities. The added benefit of the cap-and-trade approach is that it dovetails well with the sulfur dioxide (SO 2 ) and nitrogen oxides (NO X ) emission caps under CAIR ( *see* 70 FR 25162, May 12, 2005). CAIR establishes a broadly-applicable cap-and-trade program that significantly limits SO 2 and NO X emissions from the power sector. The advantage of regulating Hg at the same time and using the same basic regulatory mechanism as for SO 2 and NO X is that significant Hg emissions reductions, especially reductions of oxidized Hg, can and will be achieved by the air pollution controls designed and installed to reduce SO 2 and NO X emissions. Because significant Hg emissions reductions can be obtained as a “co-benefit” of controlling emissions of SO 2 and NO X , the coordinated regulation of Hg, SO 2 , and NO X allows Hg reductions to be achieved in a timely and cost-effective manner. As discussed in CAMR, a Phase I cap based on “co-benefits” fulfills EPA's obligation to set a standard of performance based on the best demonstrated system of emissions reduction. The Phase I Hg cap is supported by current information on the availability of control technologies, incremental cost-effectiveness of Hg emissions reductions beyond co-benefits, and analysis of engineering, financial, and other factors needed to install controls. The Phase I Hg emissions cap of 38 tons reflects the co-benefits level and is established as a fixed cap in CAMR. In CAMR, EPA established a Phase II Hg emissions cap based on the reductions in Hg emissions resulting from the CAIR program together with reductions that can be reasonably obtained through the use of Hg-specific controls. This Hg cap of 15 tons is effective in 2018. As discussed in CAMR, EPA concluded that the 2018 cap is warranted because Hg-specific air pollution control technologies such as activated carbon injection

(ACI)will be available for general use sufficiently before 2018, thereby allowing for their deployment to comply with the Phase II cap in 2018. The 15-ton cap in 2018 is also supported by cost considerations, because the cap level will not have significant impacts on energy supply and the cost of energy to the consumer. F. State and Indian Country Emission Budgets In CAMR, EPA outlined a method for apportioning the nation-wide budget to coal-fired Utility Units located in individual States and in Indian country. EPA maintains that the Hg emissions budget provides an efficient method for achieving necessary reductions in Hg emissions, while providing substantial flexibility in implementing the program. The methodology for determining State budgets is described in CAMR ( *see* 70 FR 28606). The 2010 State budgets were revised slightly as a result of the reconsideration process ( *see* Notice of Final Action on Reconsideration, 71 FR 33388, June 9, 2006). EPA is not inviting comment on the CAMR State and Indian country Hg budgets in connection with this proposed rule. In CAMR, EPA finalized a formula for determining the Hg budget for coal-fired Utility Units located in a State or Indian country for 2010 and 2018. Under that formula, the EGU Hg budget for the State or Indian Country equals the sum of the weighted shares for each existing affected EGU in the State or Indian country of total baseline heat input, where a unit's baseline heat input and the total baseline heat input are adjusted to reflect the ranks of coal combusted by the unit during the baseline period, to total heat input of all affected units. As discussed in CAMR, EPA finalized adjustment factors of 1 for bituminous, 1.25 for subbituminous, and 3 for lignite coals ( *see* also “Technical Support Document for the Clean Air Mercury Rule Notice of Final Rulemaking, State, and Indian Country Emissions Budgets,” EPA, March 2005; EPA-HQ-OAR-2002-0056-6154). Each of the 50 States and the District of Columbia covered by the final CAMR has been assigned a State Hg emissions budget for coal-fired Utility Units. An EGU Hg emissions budget has also been assigned for existing coal-fired Utility Units located in Indian country. States have the flexibility to meet these State budgets by participating in a trading program or establishing another methodology for Hg emissions reductions from coal-fired Utility Units, as discussed elsewhere in this action. States have the ability to require Hg reductions beyond those required by the State budget determined by EPA. Tribes that choose to seek and obtain TAS status for that purpose have the same flexibility in developing an appropriate Tribal Plan. The State EGU Hg emission budgets are a permanent cap regardless of growth in the electric sector and, therefore, States have the responsibility of incorporating new coal-fired units in their EGU Hg emission budgets. Similarly, the Hg emission budgets for coal-fired Utility Units located in Indian country act as a permanent cap, and EPA, or a Tribe that has obtained TAS status and is implementing an approved Tribal Plan, has responsibility for incorporating new units into the EGU Hg emission budget. The final State, Indian country, and District of Columbia EGU Hg emission budgets are presented in Table II-1 of this preamble. In CAMR (as revised in the CAMR Notice of Final Action on Reconsideration, 71 FR 33388), EPA established budgets for the 50 States, the District of Columbia, the Navajo Nation and the Ute Indian Tribe. In CAMR, for areas of Indian country that do not currently have any coal-fired electricity generation, EPA noted its intent to address any future planned construction of coal-fired Utility Units in those areas on a case-by-case basis, by working with the relevant Tribal government to regulate the Utility Units through either a Tribal Plan, if an eligible Tribe chooses to submit one, or a Federal Plan. The Agency further explained that “EPA does not believe that there is sufficient information to design allocation provisions for new generation which locates in Indian country at this time. Therefore, rather than create a Federal allowance set-aside for Tribes, the EPA will work with Tribes and potentially affected States to address concerns regarding the equity of allowance allocations on a case-by-case basis as the need arises. The EPA may choose to revisit this issue through a separate rulemaking in the future.” (See 70 FR 28606). In this action, EPA is proposing to address the issue of how new generation in areas of Indian country without an emissions budget will be treated under CAMR and the CAMR Federal Plan. Since CAMR was finalized, EPA has become aware of potential development of new generation in Indian country, and the need to provide such generation with certainty related to compliance costs. After detailed consideration of this issue, EPA proposes to treat new generation in areas of Indian country without an emissions budget in the same way it treats new generation in States without emissions budgets. New units in areas of Indian country without an emissions budget and participating in the CAMR trading program would not receive an allowance allocation, though these units, like new units in States without emissions budgets, would be required to hold allowances equal to emissions. For the two Tribes that have existing generation and, thus, an emissions budget, they can provide new sources with allowances through a new unit set-aside if they choose to seek, and ultimately are granted, treatment as State

(TAS)status for that purpose and then submit a tribal implementation plan

(TIP)which incorporates the CAMR trading program. EPA does not believe that there is a strong argument for treating new units locating in areas of Indian country without Hg emissions budgets differently from new units locating in States without emissions budgets. Further, EPA analysis suggests that the cost of allowance purchase will be a very small share of the total annual cost associated with a new unit, on the order of 1 percent of total annualized costs in 2010. (See TSD and spreadsheet titled “Cost Analysis of Potential New Subbituminous Coal Plant” available in the docket.) EPA is also taking comment on the alternative of creating a set-aside budget for new unit generation locating in areas of Indian country that do not have an emissions budget. A potential option is that EPA could create a 300-pound

(lb)annual set-aside budget (approximately the annual Hg emissions for 10 new 300 MW coal-fired units with 90 percent Hg control) for new unit generation in such areas. This would require additional revisions to the CAMR State budgets. The set-aside budget would be created by reducing each State's EGU Hg emission budget by about 0.4 percent for years 2012-2017 and by 1.0 percent for 2018 and thereafter, to maintain nationwide annual budgets of 38 tons and 15 tons, respectively. Such a set-aside budget would not be created until 2012, in order to allow States time to adjust their budgets and planned control strategies. Considering the lead-time required to develop new coal-fired generation, a new unit set-aside budget commencing in 2012 would likely be well-timed to coincide with the earliest that new generation might come on-line. EPA would distribute this set-aside budget to new sources based on a source's emissions from the previous year, consistent with the approach that is used to determine the distribution of the new source set-aside discussed in section III.C. If this budget were over-subscribed for a given year, EPA would distribute the budget on a pro-rata basis. However, if this budget were undersubscribed for a given year, EPA would not redistribute the remaining portion of the budget because of the further changes to State Plans that doing so would require. EPA requests comment on the creation of such a budget, the appropriate size and start date, as well as whether the set-aside should be available to new generation in States that do not have an Hg emission budget, in addition to new generation in areas of Indian country with no Hg emission budget. As discussed in CAMR, EPA finalized Hg emission budgets of zero tons for three States (Idaho, Rhode Island, and Vermont) and the District of Columbia. New coal-fired Utility Units locating in these areas will, nevertheless, be required to hold allowances equal to their Hg emissions. As participants in the cap-and-trade program, these sources could buy Hg allowances and meet their requirements. This is similar to the situation that new units face under the existing Acid Rain Program. Table II-1.—State Annual EGU Hg Emission Budgets State Budget

(tons)2010-2017 2018 and thereafter Alaska 0.010 0.004 Alabama 1.289 0.509 Arkansas 0.516 0.204 Arizona 0.454 0.179 California 0.041 0.016 Colorado 0.706 0.279 Connecticut 0.053 0.021 Delaware 0.072 0.028 District of Columbia 0 0 Florida 1.232 0.487 Georgia 1.227 0.484 Hawaii 0.024 0.009 Idaho 0 0 Iowa 0.727 0.287 Illinois 1.594 0.629 Indiana 2.097 0.828 Kansas 0.723 0.285 Kentucky 1.525 0.602 Louisiana 0.601 0.237 Massachusetts 0.172 0.068 Maryland 0.49 0.193 Maine 0.001 0.001 Michigan 1.303 0.514 Minnesota 0.695 0.274 Missouri 1.393 0.550 Mississippi 0.291 0.115 Montana 0.377 0.149 Navajo Nation Indian Country 0.600 0.237 North Carolina 1.133 0.447 North Dakota 1.564 0.617 Nebraska 0.421 0.166 New Hampshire 0.063 0.025 New Jersey 0.153 0.060 New Mexico 0.299 0.118 Nevada 0.285 0.112 New York 0.393 0.155 Ohio 2.057 0.812 Oklahoma 0.721 0.285 Oregon 0.076 0.030 Pennsylvania 1.779 0.702 Rhode Island 0 0 South Carolina 0.58 0.229 South Dakota 0.072 0.029 Tennessee 0.944 0.373 Texas 4.656 1.838 Utah 0.506 0.200 Ute Indian Tribe Reservation Indian Country 0.060 0.024 Virginia 0.592 0.234 Vermont 0 0 Washington 0.198 0.078 Wisconsin 0.89 0.351 West Virginia 1.394 0.550 Wyoming 0.952 0.376 III. Federal Hg Cap-and-Trade Program A. Overall Structure of the Federal Hg Cap-and-Trade Program In this action, EPA proposes to regulate coal-fired Utility Units using a market-based, cap-and-trade program with a declining cap. As discussed in CAMR (70 FR 28617), this type of program is a proven method for achieving highly cost-effective emissions reductions while providing sources compliance flexibility and certainty. In 40 CFR part 62, subpart LLL, EPA proposes a Federal Hg cap-and-trade program as a means of controlling Hg mass emissions from coal-fired Utility Units (the proposed rules use the term “electric generating unit” or “EGU”) in a State for which this Federal Plan is promulgated. Participation in the Hg Budget Trading Program would be mandatory for all Utility Units covered by the final Federal Plan resulting from this proposal. Mercury allowances—each allowance representing a limited authorization to emit one ounce of Hg—would be the currency used in the trading program. A total number of Hg allowances would be allocated to coal-fired Utility Units in a State equal to the amount of the State's EGU Hg trading program budget under the Federal Plan. Utility Units participating in either the Federal Hg cap-and-trade program or the CAMR State Hg cap-and-trade program would be able to trade Hg allowances with each other, and use, for compliance, Hg allowances issued under either type of program. Under 40 CFR part 62, subpart LLL, as proposed, EPA would be responsible for all aspects of program implementation, with the exception of permitting. Permitting responsibility will lie with State and local air permitting authorities with title V permit programs found by EPA to meet the requirements of title V and its implementing regulations, or in appropriate circumstances, with tribal authorities implementing a delegated 40 CFR part 71 permit program. Mercury Budget sources that currently have title V permits will be required to obtain an amended permit which includes the Hg Budget Trading Program requirements. Any Utility Unit that does not currently have a title V permit will be required to obtain one which includes the necessary Hg Budget Trading Program requirements. While they must be included in a Hg Budget source's title V permit, the requirements of the Federal Hg Budget Trading Program rule are Federally enforceable independent of that permit. As explained further in Section II of this preamble, the Agency is proposing to provide an additional option under which States could choose to submit a State allocation methodology, rather than a complete State Plan addressing all elements of the CAMR Hg trading program. In this way, the State could choose the methodology for allocating Hg allowances to its EGU sources which it deems most appropriate, while leaving other elements of CAMR implementation to a Federal Plan. Under 40 CFR part 62, subpart LLL, as proposed, sources in the Federal Hg Budget Trading Program would be required to monitor and report their emissions in accordance with relevant portions of 40 CFR part 75. Under CAMR, EPA promulgated revisions to 40 CFR part 75 that establish Hg mass monitoring requirements and provide some flexibility to regulated sources. Consistent and accurate monitoring of emissions is necessary for accountability regarding compliance with the requirement to hold Hg allowances and to ensure that an ounce of Hg emissions attributed to one source in one State is equivalent to an ounce attributed to another source in the same or another State. EPA intends that if States choose to meet their Hg emission reduction obligations under CAMR by adopting the State Plan model cap-and-trade rule and participating in the EPA-administered trading program, the EPA-administered State Plan trading program will be fully integrated with the Federal Hg trading program that EPA may promulgate in a final Federal Plan. Integration is possible because CAMR and the corresponding Federal Plan both seek to achieve the same level of Hg emission reductions from the same sources ( *i.e.* , coal-fired Utility Units), and the State Hg model trading rule and the Federal Hg trading rule contain essentially the same provisions. In particular, EPA believes that, in order to be eligible to participate in an effective Hg emissions cap and trade program, a source must meet two principal criteria. The first criterion is that each source must be able to account accurately and consistently for all of its emissions to ensure the trading program goal of maintaining emissions within a cap. Emissions monitoring must be accurate and consistent among all sources so that each allowance represents the same amount of emissions. The second criterion for participation in a trading program is that each source must identify a responsible party who would be accountable for demonstrating and ensuring compliance with program requirements. EPA believes that this action—like the State Hg model trading rule—imposes requirements that meet those criteria. The Agency also believes that, because this action contains the same program elements as are in the State Plan model trading program and is designed to meet the same environmental goals and cap the same sources at the same levels as that model trading program, it is appropriate to design a CAMR Federal Plan that is integrated with the CAMR State Plan trading program. Under this scenario of an integrated trading program, EGU sources subject to the Federal Hg trading program under the Federal Plan and EGU sources in States choosing to participate in the EPA-administered CAMR State Plan trading program could trade Hg allowances with one another under common emissions caps across participating States. Integration of the trading programs reduces the possibility of inconsistent or conflicting deadlines or requirements, increases the potential cost savings for sources, and streamlines program administration. Unnecessary inconsistencies between the two types of trading programs could hamper sources' ability to plan and achieve the needed reductions as cost effectively as possible and could complicate program administration. In addition the integration of the programs means that, if a State would submit a State Plan including the EPA-administered Hg emissions trading program after EPA had established a Federal Hg trading program under a Federal Plan, disruptions to sources that would shift from regulation under a Federal Plan to regulation under a State Plan would be minimized. 1. Road Map of Federal Hg Cap-and-Trade Rule The following is a brief “road map” to the proposed Federal Hg cap-and-trade program and is provided as a convenience to the reader. Please refer to the detailed provisions of the proposed rule for further information. a. *State Participation.* States may be granted the authority to implement Hg allowance allocations through a State allocation methodology submitted under the Federal Plan. In this submission, a State could adopt its own methodology or adopt this proposed Federal allocation methodology and allocate Hg allowances. State and local agencies would be the permitting authorities for the majority of Hg Budget sources, with title V permits that would include, in the Hg-Budget-permit portion, Hg Budget Trading Program requirements. b. *Allocation of Allowances to Sources.* Mercury allowances would be allocated by the Administrator based on the methodology proposed in this Federal Plan preamble and described in the proposed regulatory text, unless a State allocation methodology is approved. c. *Emission Monitoring and Reporting by Sources.* Utility Units would monitor and report their Hg mass emissions using 40 CFR part 75. Source information management, emissions data reporting, and allowance trading will be conducted through on-line systems similar to those currently used for the Acid Rain SO 2 and NO X Budget Trading programs. d. *Compliance and Penalties.* For the Federal Hg cap-and-trade program, any Utility Unit found to have excess emissions would have to surrender allowances from the next control period equal to three times the ounces of excess emissions. B. Sources Affected Under the Federal Hg Cap-and-Trade Rule As discussed above, EPA is proposing a Federal Hg cap-and-trade program as a means of controlling Hg emissions from coal-fired Utility Units in each State and Indian country for which a Federal Plan is promulgated. For the reasons discussed in CAMR (70 FR 28625) and the CAMR Notice of Final Action on Reconsideration (71 FR 33388), EPA is proposing to use the same applicability provisions for the Federal Plan in 40 CFR part 62, subpart LLL, and the State Plan in 40 CFR part 60, subpart HHHH. As discussed in detail below, certain coal-fired units, in a State or Indian country for which a Federal Plan is promulgated, will be Hg Budget units ( *i.e.* , units subject to the Federal Hg Budget Trading Program), and any source that includes one or more such units will be an Hg Budget source, subject to the requirements of 40 CFR part 62, subpart LLL. With certain clarifications and exemptions, the provisions of 40 CFR part 62, subpart LLL (and 40 CFR part 60, subpart HHHH), generally apply to Utility Units (boilers or combustion turbines serving on or after November 15, 1990 a generator with a nameplate capacity greater than 25 megawatts electrical

(MWe)and producing electricity for sale) that are coal-fired ( *i.e.* , units where any amount of coal or coal-derived fuel is used at any time). The definition of “coal-fired” is similar to the definition that is used in the Acid Rain Program. In the CAMR Notice of Final Action on Reconsideration (71 FR 33388), EPA finalized revisions to the applicability provisions in the CAMR State Plan model trading rule ( *see* Section IV below). The applicability provisions in this proposed Federal Hg trading program are identical to the revised applicability provisions for the CAMR model State trading rule. First, in the Notice of Final Action on Reconsideration, EPA clarified the applicability provisions in the State Plan Hg model trading rule (40 CFR 60.4104) to specifically exclude from the trading program certain solid waste incineration units (municipal waste combustors (MWC)) subject to an applicable NSPS, an EPA-approved State Plan, or certain Federal Plans. In this action, EPA is proposing to include this same exemption in the Federal Hg trading rule. Second, in the Notice of Final Action on Reconsideration, EPA discussed the potential inclusion of certain industrial boilers in both CAMR and the CAA section 112 Industrial Commercial Institutional Steam Generating Unit MACT standards (the Boiler MACT, 70 FR 55217, 40 CFR part 63, subpart DDDDD). EPA addressed this potential overlap in two ways. First, EPA issued language amending 40 CFR part 63, subpart DDDDD ( *see* National Emission Standards for Hazardous Air Pollutants for Industrial, Commercial, and Institutional Boilers and Process Heaters: Reconsideration of Emissions Averaging Provision and Technical Corrections) in response to a petition for reconsideration for the Boiler MACT. The amended language specifically excludes units subject to CAMR from regulation under the Boiler MACT. Second, EPA revised the applicability provisions in the State Plan Hg model trading rule (40 CFR 60.4104) to include only stationary, coal-fired boilers or stationary, coal-fired combustion turbines serving, at any time on or after November 15, 1990, a generator with a nameplate capacity of more than 25 MWe producing electricity for sale. This date would be consistent with the dates used in the Acid Rain Program and CAIR. EPA is proposing the same language in the applicability provisions of this Federal Hg trading rule. Finally, as discussed in the Notice of Final Action on Reconsideration, EPA made certain other clarifying changes to applicability provisions in 40 CFR 60.4104 with regard to cogeneration units in order to ensure that the regulatory text unambiguously reflects EPA's intent, as expressed in the CAMR preamble ( *see* 70 FR 28612, 28625-26) regarding cogeneration units. EPA is proposing today to include the same language in the applicability provisions of the Federal Hg trading rule. In particular, certain cogeneration units would be exempt from the proposed Federal Hg cap-and-trade program. Cogeneration units are units having equipment used to produce electricity and useful thermal energy for industrial, commercial, heating, or cooling purposes through sequential use of energy which also meet certain operating and efficiency standards. The program would have different applicability provisions for non-cogeneration units and cogeneration units. Any cogeneration unit, serving (since the later of November 15, 1990 or the start-up of the unit), a generator with a nameplate capacity of greater than 25 MWe supplying more than 1/3 of its potential electric output capacity and more than 219,000 MW-hr annually to any utility power distribution system for sale, would be subject to the requirements of the proposed Federal CAMR trading rule. Otherwise, the unit would qualify for an exemption under the proposed Federal rule. In summary, EPA is proposing that, except for a unit that qualifies as a cogeneration unit and meets certain other requirements or an MWC that is subject to an applicable NSPS, an EPA- approved State Plan, or certain Federal Plans, a Hg Budget unit is any stationary, coal-fired boiler or stationary, coal-fired combustion turbine serving at any time, since the later of November 15, 1990 or the start-up of the unit's combustion chamber, a generator with nameplate capacity of more than 25 MWe producing electricity for sale. C. Allocation of Emission Allowances For States that choose under CAMR to participate in the EPA-administered State Plan Hg cap-and-trade program, EPA provided an example methodology for allocating Hg allowances to individual units in the Hg model trading rule. For this proposed Federal Plan, the Agency is proposing to use an Hg allocation methodology that is the same as the example methodology in the model trading rule. Within each affected State, the Agency would allocate to existing and new units a total amount of allowances that equals the tonnage in the State's Hg budget. The Agency's proposed timeline for allocating and recording Hg allowance allocations and proposed Hg allowance allocation methodology are described below. 1. Timing for Initial Allocation Distributions The Agency proposes that, for all but the first 3 years of Hg allocations, EPA will record unit-by-unit allocations of allowances for existing units for a given year in the source compliance accounts no less than 3 years before January 1 of that year ( *i.e.* , the first year for which the allowance can be used to meet the allowance-holding requirement). This approach provides sources sufficient lead time to facilitate their participation in the allowance market ( *e.g.* , by buying or selling allowances or allowance futures). For the first set of Hg allocations under the Federal Plan (covering control periods 2010-2014), the Agency proposes to record unit-by-unit allocations in source accounts as follows: by December 1, 2007, for allocations for 2010; by December 1, 2008, for allocations for 2011; by December 1, 2009, for allocations for 2012-2013; and by December 1, 2010 for allocations for 2014. As explained in CAMR, States had until November 17, 2006 to submit State Plans to the Agency, at which time a State that chooses to participate in the EPA-administered Hg cap-and-trade program would submit its Hg trading rule (including Hg allocation methodology) and first set of allocations. As mentioned above, the Agency is proposing to provide an additional option under which a State could choose to submit only a State allocation methodology, rather than a complete Hg trading rule. In this way, the State could choose to allocate Hg allowances to its EGU sources in the manner it deems most appropriate, while leaving other elements of the trading program to be governed by the Federal Plan. Under this option, the Agency proposes that States would have until May 30, 2007 to submit the State allocation methodology. The Agency intends to work with the States to assure (consistent with timing requirements for allowance recordation) that, for any State that chooses to allocate Hg allocations (either under an approved State Plan or an approved State allocation methodology), the State's allocations, rather than EPA-determined Federal Plan allocations, would be recorded in EGU source accounts. As discussed in CAMR, allowance allocation decisions in a cap-and-trade program raise primarily distributional issues, as economic forces are expected to result in economically least-cost and environmentally similar outcomes regardless of the manner in which allowances are initially distributed. Consequently, in a State allocation methodology submitted in the context of a Federal Plan (like in a State Plan under CAMR), States are given latitude in developing their Hg allocation approach. Specifically, States will have flexibility concerning whether allowances are distributed to sources for free and concerning the frequency of Hg allocations, the basis for distributing the Hg allowances, and the use and size of Hg allowance set-asides. The final CAMR preamble provides a further discussion of Hg allocation approaches. ( *See* 70 FR 28627). For the reasons discussed in Section II.C above, EPA intends to finalize a CAMR Federal Plan. By finalizing a Federal Plan, the EPA would in no way preclude a State from developing and submitting for approval its own State Plan for Utility Units that either adopts the Hg model trading rule (with the flexibility allowed by CAMR concerning allocation of Hg allowances) or meets the CAMR Hg emission reduction requirements for Utility Units through different measures of the State's choosing. The Agency's preference is for States participating in the EPA-administered cap-and-trade program to make decisions about Hg allocations for their EGU sources. EPA intends to determine Federal Plan unit-by-unit Hg allocations (with opportunity for public objections). However, we intend to only record those EPA-determined allocations in allowance accounts for EGU sources located in a State without a timely, approved CAMR State Plan or a timely, approved State allocation methodology. In considering when to record Federal Plan Hg allocations in EGU source accounts, the Agency seeks to balance the following two goals:

(1)To provide certainty to sources regarding their CAMR Hg allocations and time for EGU sources to make compliance decisions, and

(2)to provide States choosing to allocate CAMR Hg allowances with time to do so and EPA with time to approve State Plans that include State-determined allocations. Taking into consideration the submission deadlines for a State Plan or a State allocation methodology, the amount of time needed by the Agency to approve a State Plan or State allocation methodology, and the amount of time remaining before the initial CAMR control period, EPA developed a proposed schedule (summarized above and in Table III-1) for recording Hg allocations in source accounts for the Federal Hg trading program. EPA seeks comment on this proposed schedule. The Agency will endeavor to work with States to ensure that we can approve State Plans or State allocation methodologies and timely record State Hg allocations in EGU source accounts. EPA intends to act in such a way that, once EPA-determined Federal Plan Hg allocations are recorded for a particular control period (which would only occur in the absence of a timely, approved State Plan or a timely, approved State allocation methodology), we would not approve overlapping State allocations for that same control period. 5 Rather, EPA will work with the States to approve State Plans, or State allocation methodologies, providing State Hg allocations for control periods that begin upon the expiration of the last control period for which EPA-determined allocations have been recorded in EGU source accounts. It would be highly disruptive to the allowance market if EPA-determined Hg allowances that had already been recorded and then traded in the market could subsequently be rendered invalid due to approval of overlapping State-determined allocations for the same control period. 5 As discussed in CAMR, each State has flexibility in the State Plan to allocate its allowances however it chooses (within its State budget) so long as certain timing requirements are met. A State would have the same flexibility in developing a State allocation methodology in the context of the Federal Plan. The discussion in this section is focused on the timing for recordation of EPA-determined Hg allocations in coordination with approval of State Plans or State allocation methodologies and recordation of State allocations, assuming States choose to participate in the EPA-administered CAMR trading program. The Agency would also carefully consider the timing of a transition from Federal- to State-implemented programs for any State choosing to use a method other than the EPA-administered State Plan model trading program to meet CAMR obligations. As discussed further below, EPA intends to record EPA-determined Federal Plan Hg allocations for 2010 and 2011 one year at a time. In this manner, even if a State does not have an approved State Plan in time for the Agency to record State allocations for the first or second control period, it would be possible to record State allocations for subsequent control periods. The Agency strongly urges States to submit State Plans or State allocation methodologies to the Agency in a timely manner. We intend to work with States and ensure that there will not be overlapping Hg allocations for any control period. The State Plan Hg model trading rule, revised somewhat in the Notice of Final Action on Reconsideration (71 FR 33388), and 40 CFR 60.24(h), require States to submit their State Plans by November 17, 2006. For a State that chooses to participate in the EPA-administered Hg model trading program, this State Plan submittal would be required to comprise a full trading program including the State's Hg allocation methodology. The EPA anticipates that it may require about 6 months to approve a State Plan submission. As discussed above, the Agency is proposing that States may choose to submit only a State allocation methodology, which would allocate Hg allowances to individual Utility Units in the State in the context of the Federal Plan. In this way, a State could choose to allocate Hg allowances to its Utility Unit sources in the manner it deems most appropriate while letting the Federal Plan control all other aspects of the trading program. Through submission of a State allocation methodology, a State can also ensure that its Hg allocations will apply even in circumstances where its State Plan is still undergoing EPA review. The Agency proposes that States would have until May 30, 2007 to submit their State allocation methodologies. The EPA proposes to allow States to submit State allocation methodologies later than State Plans because we anticipate that we will be able to complete the approval process more quickly for State allocation methodologies due to their narrower scope. The Agency proposes that the State would have until October 31, 2007 to submit the first set of Hg allocations pursuant to an approved State allocation methodology submission. Assuming that States submit State allocation methodologies by the May 2007 deadline and that EPA can approve these submissions in about 6 months and assuming that some additional time may be required for coordination between States and EPA before State allocations can be recorded in EGU source accounts, it is reasonable to assume that EPA will be able to record such allocations by December 1, 2007. Therefore, EPA proposes to record Hg allocations in EGU source accounts for the 2010 control period by December 1, 2007. If a State's timely Hg allocations are approved, then the Agency would record State Hg allocations for the 2010 control period. However, for any State for which a State Plan or State allocation methodology is not approved by December 1, 2007, the EPA would record EPA-determined Hg allocations for 2010. Recording Hg allocations by December 1, 2007 for the 2010 control period would provide affected EGU sources with certainty of their allocations just over 2 years in advance of the beginning of the control period. The Agency proposes to record EPA-determined Hg allocations in source accounts 1 year at a time for the 2010 and 2011 control periods in order to provide flexibility to States. If EPA records EPA-determined allocations for the 2010 control period and subsequently approves a State's timely State Plan or timely State allocation methodology, the Agency would record the State's allocations for future years. The Agency does not intend to approve State Hg allocations for any control period that would overlap with EPA-determined allocations already recorded in source accounts. EPA proposes to record EPA-determined Hg allocations in source accounts by December 1, 2008 for the 2011 control period. If a State's Hg allocations are approved by then, the Agency may record State allocations for the 2011 control period. However, for any State for which a State Plan or State allocation methodology is not approved by December 1, 2008, EPA would record EPA-determined Hg allocations for 2011. Therefore, if a State obtained State Plan or State allocation methodology approval after December 1, 2007 but before December 1, 2008, the State's Hg allocations may be recorded in source accounts for the 2011 control period. The Agency proposes to record Hg allocations in source accounts by December 1, 2009 for the 2012 and 2013 control periods. Therefore, if a State obtained State Plan or State allocation methodology approval after December 1, 2008 but before December 1, 2009, the State's Hg allocations may be recorded in source accounts for the 2012 and 2013 control periods. However, for any State for which a State Plan or State allocation methodology is not approved by December 1, 2009, the EPA would record EPA-determined Hg allocations for 2012 and 2013. Beginning in 2010 and each year thereafter, EPA proposes to record EPA-determined Hg allocations for the Federal Hg trading program in source accounts by December 1 for the control period in the fourth year after the recordation year, thereby providing allowances about 3 years in advance for sources to plan their compliance strategies. For example, EPA would record allocations for the 2014 control period by December 1, 2010. Table III-1, below, summarizes the Agency's proposed timing for recording Hg allocations in EGU source accounts for the Federal Hg trading program. The table shows the timing through the 2016 control period. Timing for subsequent control periods would follow the same pattern as is shown for 2013-2016 ( *i.e.* , allocations would be recorded by 3 years in advance of the control period). Table III-1.—Proposed Recordation Deadlines for Hg Allocations for the Federal Hg Trading Program 6 CAMR control period Deadline by which Hg allocations are recorded for Federal Hg trading program (EPA-determined allocations or State-determined allocations) Time between recordation date and beginning of control period 2010 December 1, 2007 About 2 years. 2011 December 1, 2008 About 2 years. 2012 December 1, 2009 About 2 years. 2013 December 1, 2009 About 3 years. 2014 December 1, 2010 About 3 years. 2015 December 1, 2011 About 3 years. 2016 December 1, 2012 About 3 years. The Agency 6 intends to publish its determination of Hg allocations for 2010-2014 in a single NODA with opportunity for submission of objections to the determination. Starting in 2011, the Agency would publish its determination of Hg allocations with opportunity for submission of objections prior to July 31 of each year for the control period 4 years from the year of publication. For example, we would publish EPA-determined Hg allocations for the 2015 control period by July 31, 2011. 6 The Agency does not intend to wait until December 1, 2007 to record State Hg allocations for the 2010 control period but, rather, would record approved State Hg allocations as soon as feasible. EPA proposes that we would not record EPA-determined Hg allocations for any State until December 1, 2007 for the 2010 control period in order to provide the opportunity for State allocations to be submitted and approved. The Agency proposes the same process for future years as well (e.g., we would record State allocations for the 2011 control period as soon as is feasible, but would wait until December 1, 2008 to record EPA-determined allocations for 2011 in order to provide opportunity for States to allocate). For States choosing to submit a State Plan for CAMR, the Agency suggests they could consider designating Hg allocation provisions as being submitted both as part of a State Plan and as a State allocation methodology submission in the context of the Federal Plan. Because the Agency anticipates that we would be able to approve State allocation methodologies more quickly than State Plans, a State could, by designating its Hg allocation provisions as a State allocation methodology (as well as being part of a State Plan), potentially allow for the allocation provisions to be approved more quickly. This might have benefit, for example, in a situation in which it was not feasible to approve a State's State Plan before December 1, 2007. If the Hg allocation provisions could be approved by December 1, 2007, then the State's Hg allocations may be recorded in source accounts in the context of the Federal Plan. Until the State Plan was subsequently approved, the other elements of the trading program would be controlled by the Federal Plan. Provisions for withdrawal of the Federal Plan for a State are discussed elsewhere in this preamble. 2. Hg Allowance Allocation Methodology In this action, the Agency is proposing its Hg allocation methodology for the Federal Hg cap and trade program. In CAMR, EPA included an example allocation methodology for States (offered for informational guidance only). This methodology distributes allocations to existing coal-fired Utility Units based on historic baseline heat input and reflects adjustments based on coal type. Allocations are calculated annually to take into account new units on a modified-output basis, where output would be converted into heat input using specified conversion factors. This methodology also utilizes a new unit set-aside for new coal-fired Utility Units that have not yet established baseline data to be used for updating or are otherwise not yet included in the updating. In this action, for the reasons discussed in CAMR (70 FR 28627), EPA is proposing the same methodology for the Federal Plan. For existing units, the proposed Hg allocation methodology uses input-based allocations, adjusting baseline heat input for each year of data by factors based on coal type, as discussed below. As in the example allocation methodology in the CAMR model rule, for existing units, the Agency proposes to calculate baseline heat input as the average of the 3 highest amounts of a unit's adjusted heat input for 5 years (2000-2004). EPA believes that this approach provides baseline heat input data that reasonably represents normal operating conditions. Relevant data for these years is currently available. EPA also asks for comment on two modifications to this approach:

(1)Using heat input based on 3 or 4 years of data rather than 5 years; or

(2)using heat input data from 2001 through 2005 rather than 2000 through 2004. For new units that have established 5 years of baseline data, EPA proposes that allocations will be based on generation using a modified output approach (described below) to convert output to heat input, and allocations to existing units would be updated to take into account new generation, because these new units would receive allocations from the pool of allowances shared with existing sources. New units that have not yet established baseline data or that are otherwise not yet included in the updating would receive allowances from a new unit set-aside. Under the proposed method, allocations are made from the given State's EGU Hg budget covered by a Federal Plan for the first five control periods (2010 through 2014) of the Federal Hg cap-and-trade program for existing EGU sources on the basis of historic baseline heat input. Consistent with CAMR, EPA is proposing January 1, 2001 as the cut-off on-line date for considering Utility Units as existing units, so that there are at least 5 years of operating data, *i.e.,* data for 2000 through 2004 (the Agency also seeks comment on, if data for 2001 through 2005 were used instead, the use of January 1, 2002 as the cut-off on-line date). The allowances for 2015 and later will be determined from the State's EGU Hg budget annually, 4 years in advance, taking into account output data from new units with established baselines (modified by the specified conversion factors to yield heat input numbers). As new coal-fired Utility Units enter into service and establish baselines, they are allocated Hg allowances in proportion to their share of the total calculated heat input (which is existing units' adjusted heat input plus new units' modified output). Once a baseline heat input is established for a new or existing EGU, this baseline heat input does not change. Allowances allocated to existing Utility Units slowly decline as their share of total calculated heat input decreases with the entry of new Utility Units. New coal-fired Utility Units that have entered service in States or areas of Indian country that have an Hg emissions budget, but have not yet started receiving Hg allowances through the update, would receive allowances each year after the first year of commercial operation from a new unit set-aside. Consistent with CAMR, the new unit set-aside would be equal to 5 percent of a State's Hg emission budget for the years 2010-2014 and 3 percent of a State's Hg emission budget for the subsequent years. New Utility Units would begin receiving Hg allowances from the set-aside for the control period immediately following the control period in which the new Utility Unit commences commercial operation, based on the Utility Unit's Hg emissions from the preceding control period (a new Utility Unit would not be allocated allowances for the control period in which it commences operation). For instance, a source might be required to hold Hg allowances during its start-up year, but would not receive an allocation for that year. Under the proposed CAMR Federal Plan, EPA would allocate Hg allowances from the set-aside to all new Utility Units in any given year as a group. If there are more Hg allowances requested than in the set-aside, allowances would be distributed on a pro-rata basis. Allowance allocations for a given new Utility Unit in following years will continue to be based on the prior year's Hg emissions until the new Utility Unit establishes a baseline, is treated as an existing Utility Unit, and is allocated Hg allowances through the updating process. Under the proposed Federal Plan, after 5 years of operation, a new EGU would have an adequate operating baseline of output data to be incorporated into the calculations for Hg allocations to all affected Utility Units. The average of the highest 3 years from these 5 years would be converted to a modified output value that would be used as the unit's baseline heat input for determining the new Utility Unit's Hg allowance allocation. The new unit's modified output would be calculated by multiplying its gross output (expressed in kWh) by a heat rate conversion factor of 7,900 British thermal units per kilowatt-hour (Btu/kWh). The 7,900 Btu/kWh value for the conversion factor is an average of heat-rates for new pulverized coal plants and new integrated gasification combined cycle

(IGCC)coal plants (based upon assumptions in the Energy Information Administration's (EIA's) Annual Energy Outlook

(AEO)2004). ( *See* EIA, “Annual Energy Outlook 2004, with Projections to 2025,” January 2004 and *http://www.eia.doe.gov/oiaf/archive/aeo04/assumption/tbl38.html.* ) As discussed in CAMR, a single conversion rate would create consistent and level incentives for efficient generation, rather than favoring new Utility Units with higher heat rates. New units would update their heat input numbers only once—for the initial 5-year baseline period after they start operating. As in the CAMR State Plan example methodology, existing units as a group would not update their heat input. This eliminates the potential for a generation subsidy because current or future operating behavior would not impact the units' allocations. Retired Utility Units would continue to receive Hg allowances indefinitely, thereby creating an incentive to retire less efficient Utility Units instead of continuing to operate them in order to maintain the Hg allowance allocations. a. *Adjustments to Heat Input Data by Coal Adjustment Factors.* For the reasons discussed in CAMR, EPA is proposing the use of heat input adjustment factors, differentiated by coal type, for the Hg allocation process. Consistent with the methodology used to establish the State Hg budgets in CAMR, EPA is proposing that these adjustment factors primarily reflect the relative abilities of bituminous, subbituminous, and lignite coals to be controlled for Hg through the use of NO X and SO 2 controls. Consistent with CAMR, EPA is proposing to use the coal adjustment factors of 1.0 for bituminous coals, 1.25 for subbituminous coals, and 3.0 for lignite coals for adjusting baseline heat input. During the CAMR reconsideration process, EPA performed an analysis comparing the allocation approach of the model rule with allocations based on pure (unadjusted) heat input ( *see* 71 FR 33388). In comparing these two allocation approaches, EPA used the same methodology that was used to compare EPA's chosen allocations approach for NO X and SO 2 with alternative approaches for the CAIR Notice of Final Action on Reconsideration (see 70 FR 25328). This analysis compares the extent to which State budgets reflect projected emissions under CAIR as well as under CAIR and CAMR. EPA followed the approach presented in the CAIR Statewide NO X Budgets Calculations technical support document

(TSD)( *http://www.epa.gov/cair/pdfs/0053-2228.pdf* ) which states “To quantitatively evaluate whether the fuel factor approach is providing States with annual NO X budgets that more closely reflected their projected emissions, EPA calculated the arithmetic mean of the (absolute) difference between a State's coverage ratio and 1.0 ( *i.e.,* the value representing a State's projected emissions matching the State's CAIR NO X budget). In other words, EPA calculated how far off the State's coverage ratio was from 1.0, and then averaged these values for each approach.” Under this approach, the closer this mean value is to zero, the more the allowance allocation approach minimizes disparities between State budgets and emissions. For Hg, EPA compared the State budgets to projected emissions for CAIR, which is the appropriate baseline for evaluating the CAMR State budgets (rather than the 1999 ICR data), as well as projected emissions under CAMR. Using projected CAIR emissions for 2010, the resulting average absolute differences were 0.57 for the coal-adjustment factor approach under CAMR, and 0.63 for the pure heat input approach. Using projected CAMR emissions for 2010, the resulting average absolute differences were 0.59 for the coal-adjustment approach under CAMR and 0.68 for the pure heat input approach. Likewise, for 2020, using projected CAIR emissions, the resulting average absolute differences were 0.26 for the coal-adjustment approach under CAMR and 0.30 for the pure heat input approach. Using projected CAMR emissions for 2020, the resulting average absolute differences were 0.32 for the coal-adjustment approach, and 0.36 for the pure heat input approach. This analysis suggests that while the two allocation methods yield results that are similar, the adjusted heat input approach used by EPA in the final CAMR minimizes the discrepancies between State budgets and State emissions more effectively than a pure heat input approach. This analysis is explained in the TSD and spreadsheet titled “CAMR Hg Allowance Allocation Approach Analysis,” available in the docket. EPA recognizes that units may have been blending coals or may have switched coals during the baseline period. For this reason, EPA is proposing to adjust baseline heat input data separately for each year in order to reflect the coal burned during that year. If a unit was blending coal during any year, a weighted average coal adjustment factor would be used. This approach is consistent with the example allocation approach included in the CAMR model rule. In CAMR, EPA adjusted coal type for the calculation of State budgets using coal use data from the 1999 ICR. EPA does not routinely collect coal type and use data, and, therefore, proposes to adjust baseline heat input data using EIA plant-level data for the years that comprise the baseline. Because the EIA data are reported at the plant level, EPA proposes to apply the same coal-adjustment factor to all affected units at a given plant. EPA is not proposing adjustments by coal type with the modified output approach because we do not want the allocation process to favor the use of any particular rank of coal for new coal units. In other words, EPA does not want to provide an incentive for new units to burn a certain type of coal in order to increase the number of allowances they receive. b. *New Cogeneration Units.* For new cogeneration Utility Units, their shares of the Hg allowances would be calculated by converting the available thermal output

(Btu)of useable steam from a boiler to an equivalent heat input by dividing the total thermal output

(Btu)by a general boiler/heat exchanger efficiency of 80 percent. For new cogeneration units that are combustion turbines, electrical output would be converted to heat input, the heat energy of steam from the heat recovery steam generator would be converted to heat input, and the units' shares of the Hg allowances would be based on the sum of these heat inputs. Steam output, like electrical output, is a useable form of energy that can be utilized to power other processes. Because it would be nearly impossible to adequately define the efficiency in converting steam energy into the final product for all of the various processes, this approach focuses on the efficiency of a cogeneration unit in capturing energy in the form of steam from the fuel input. c. *Sources of Data for Hg Allocations.* The Agency proposes for the Federal Plan Hg allocations to use heat input and fuel type data reported to EPA's Electronic Data Reporting

(EDR)system, where available, and to use best available heat input and fuel type data ( *e.g.,* data from the EIA) where EDR data are not available. D. Allowance Banking EPA proposes to include banking as a feature in the Federal Hg Budget Trading Program for the reasons set forth in CAMR. Proposed 40 CFR part 62, subpart LLL, sets forth the same provisions for banking and the management of banked allowances as specified in 40 CFR part 60, subpart HHHH. In accordance with these provisions, Hg allowances held, and not used for compliance in the year for which they are issued, may be banked for future use. Banking is the retention of unused allowances from one calendar year for use in a later calendar year. Banking allows sources to make reductions beyond required levels and “bank” the unused allowances for use later. Generally, banking has several advantages. First, banking results in early reductions as companies over-control their units' emissions; it is very unlikely that significant levels of early reductions would occur without banking. Second, banked allowances can be used at any time, so they provide flexibility for companies to respond to growth and changing marketplace conditions over time as well as any unforeseen Hg control technology difficulties. Although banking can result in emissions below the cap on allowances allocated in early years of the program and emissions above the cap level in the later years of the compliance period, the permanency of the cap in each phase of the program ensures that banking does not result in an increase in *cumulative* emissions. This is an important trade-off for getting early reductions. Therefore, like in subpart HHHH (the State Plan model cap-and-trade rule), EPA is proposing that banking would be allowed without restriction after the start of the Federal Hg cap-and-trade program in 2010. E. Source-Level Emissions Monitoring and Reporting Requirements CAMR added subpart I to 40 CFR part 75. (Although EPA is requesting comment on the monitoring, reporting, and recordkeeping requirements in the proposed Federal trading rule, EPA is not requesting comments on 40 CFR part 75, which is described here only for the convenience of the reader.) 40 CFR part 75, subpart I, specifies the basic emission monitoring, reporting, and recordkeeping requirements necessary to administer an Hg trading program for new and existing Hg Budget units. CAMR also revised the regulatory language at several places in 40 CFR parts 72 and 75 to include specific Hg monitoring definitions and provisions, in support of 40 CFR part 75, subpart I. Mercury Budget units would be required to comply with these Hg monitoring provisions as part of a Federal Hg cap-and-trade program. The changes to 40 CFR part 75 are discussed in greater detail in CAMR (70 FR 28633). Monitoring and reporting of an affected source's emissions are integral parts of any cap-and-trade program. Consistent and accurate measurement of Hg emissions ensures that each Hg allowance actually represents one ounce of emissions and that one ounce of reported emissions from one source is equivalent to one ounce of reported emissions from another source. This establishes the integrity of each allowance and instills confidence in the market mechanisms that are designed to provide sources with flexibility in achieving compliance. In addition, those flexibilities result in substantial cost savings to the industry and to the public consumer of electricity. Given the variability in the unit type, manner of operation, and fuel mix among coal-fired Utility Units, EPA believes that Hg emissions must generally be monitored continuously in order to ensure the precision, reliability, accuracy, and timeliness of Hg emissions data necessary to support the cap-and-trade program. For application in both the Federal and State trading programs, CAMR allows two methodologies for continuously monitoring Hg emissions:

(1)Hg continuous emission monitors (CEMS); and

(2)sorbent trap monitoring systems. EPA believes it is reasonable to expect that both technologies will be well-developed and commercially available by the time CAMR monitoring requirements take effect in 2009. As provided in CAMR, for affected sources with Hg emissions at or below a specified threshold value, 40 CFR 75.81(b) provides additional regulatory flexibility by allowing default Hg concentrations obtained from periodic Hg emission testing to be used to quantify Hg mass emissions, instead of continuously monitoring the Hg concentration. The use of this low mass emitter option is restricted to sources that emit no more than 29 lb (464 ounces) of Hg per year. The rationale for this threshold is provided in CAMR (70 FR 28633-28635). The amendments to 40 CFR part 75 set forth the specific monitoring and reporting requirements for Hg mass emissions necessary for a cap-and-trade program. The provisions of 40 CFR part 75 are used in both the Acid Rain and the NO X Budget Trading programs, and most sources affected by CAMR are already meeting the requirements of 40 CFR part 75 to monitor SO 2 and/or NO X for one or both of those programs. In order to ensure program integrity, the proposed Federal trading rule requires year-round 40 CFR part 75 monitoring and reporting for Hg emissions for all Hg Budget units. Deadlines for monitor certification and other details are specified in the proposed Federal trading rule. EPA believes that if these provisions are implemented, emissions will be accurately and consistently monitored and reported from unit-to-unit and from State-to-State, ensuring the overall integrity of the Hg trading program. As is required for SO 2 and NO X emissions data in the Acid Rain Program and the NO X Budget Trading Program, Hg emissions data will be provided to EPA on a quarterly basis in a format specified by the Agency and submitted to EPA electronically using EPA-provided software. We found this centralized reporting requirement necessary to ensure consistent review, checking, and posting of the emissions and monitoring data from all affected sources, which contributes to the integrity and efficiency of the trading program. Finally, consistent with the current requirements in 40 CFR part 75 for the Acid Rain Program and the NO X Budget Trading Program, CAMR allows sources to petition for an alternative to any of the specified monitoring, reporting, or recordkeeping requirements in the final rule. This provision also provides sources with the flexibility to petition to use an alternative monitoring system under 40 CFR part 75, subpart E, as long as the requirements of 40 CFR 75.66 are met. F. Compliance and Penalties Penalty provisions for excess emissions under the CAMR State model trading rule are described in CAMR (70 FR 28624). The Agency intends the penalty provisions for excess emissions in the Federal Plan trading rule to be identical to the provisions in CAMR. Under CAMR, for the Hg cap-and-trade program, any source found to have excess emissions must surrender allowances from the next control period equal to three times the excess emissions. This includes a one-for-one offset of, and an additional two-for-one surrender for, each ounce of excess emissions. G. Elements of the Federal Hg Trading Program That Differ From the State Model Hg Trading Program EPA proposes to make the Federal and State Hg Budget Trading Programs as similar as possible. Although EPA has modeled proposed 40 CFR part 62, subpart LLL, largely after 40 CFR part 60, subpart HHHH, finalized under CAMR, EPA also proposes some revisions to 40 CFR part 60, subpart HHHH, that would integrate the two trading programs and would generally also be reflected in proposed 40 CFR part 62, subpart LLL. EPA notes that discussion of the evolution of the Hg Budget Trading Program is set forth in the SNPR at 69 FR 12403 and in CAMR at 70 FR 28624. The following provides a discussion of the sections in 40 CFR part 62, subpart LLL, that incorporate certain differences from the corresponding sections in subpart 40 CFR part 60, HHHH, to provide for Federal implementation of the Hg Budget Trading Program. The general provisions explain that proposed 40 CFR part 62, subpart LLL, sets forth the provisions for the Federal Hg Budget Trading Program. For 40 CFR part 62, subpart LLL, EPA is proposing to use essentially the same definitions as those for 40 CFR part 60, subpart HHHH, revised as proposed in this action. With regard to the Hg allowance allocations under 40 CFR part 62, subpart LLL, these provisions are the same as the example allocation methodology provisions in 40 CFR part 60, subpart HHHH, except that the Administrator, rather than the State permitting authority, would allocate Hg allowances under the Federal Hg Budget Trading Program. This reflects the fact that the Federal Hg Budget Trading Program would be Federally implemented, rather than implemented by the State as under CAMR. A detailed discussion of the allocation of emission allowances under the Federal Plan is provided in Section III.C, above. 40 CFR part 62, subpart LLL, also addresses monitoring and reporting requirements including, among other things, general requirements, initial certification and recertification procedures, out of control periods, notifications, recordkeeping and reporting, and petitions. These provisions are essentially the same as the monitoring-related provisions of 40 CFR part 60, subpart HHHH. The differences between the provisions reflect the fact that administration of the monitoring requirements is overseen by the Administrator, rather than by the Administrator and the permitting authority as in the State Plan Hg model trading program. As a result, for example, monitoring certification applications are submitted to the appropriate EPA Regional Office and the Administrator, not the permitting authority, will act on the applications. Further, the Administrator handles all audit decertifications and all petitions for alternatives to the monitoring requirements. EPA is proposing these monitoring provisions under 40 CFR part 62, subpart LLL, for the reasons set forth both in CAMR and in order to minimize differences between the Federal and State Hg Budget Trading Programs. In particular, for the reasons set forth in CAMR, EPA proposes that Hg budget units be required to meet the monitoring, reporting, and recordkeeping requirements for Hg monitoring in 40 CFR part 75, subpart I (70 FR 28633). IV. Proposed Revisions of the CAMR State Model Cap-and-Trade Program Rule EPA is proposing several revisions of the CAMR State model cap-and-trade program. Some of the proposed revisions are necessary to integrate the State model Hg trading program and the proposed Federal Hg trading program, while other proposed revisions reflect needed technical and clarifying changes and are consistent with the analogous provisions of the proposed Federal Hg trading program. In particular, several of the definitions of terms are proposed to be revised. For example, the definitions of “Hg designated representative” and “alternate Hg designated representative” would be modified to require that the respective individuals designated for these positions be the same individuals as designated, for a given source, as the designated representative and alternate designated representative under all applicable CAIR trading programs. (In order to implement this change, new definitions for “CAIR NO X source”, “CAIR NO X Ozone Season source”, and CAIR SO 2 source” would be added.) This would greatly simplify the administration of the allowance tracking systems for the trading programs and obviate the need for the requirement (which would be eliminated from the recordkeeping and reporting provisions) that quarterly emissions reports, which include emissions data for all trading programs applicable to the unit involved, be signed by more than one individual. As a further example, certain new definitions would be added (“municipal waste,” “replacement,” and “solid waste incineration unit”) and certain definitions would be modified (“cogeneration unit,” “commence commercial operation,” and “commence operation”) to reflect the revised applicability provisions for the Hg trading program and to clarify and streamline the language in the definitions. In the CAMR Notice of Final Action on Reconsideration (71 FR 33388), EPA revised the definition of “electric generating unit or EGU” in 40 CFR 60.24(h) and the applicability provisions of the State model trading rule (40 CFR 60.4104) to:

(1)Exempt certain solid waste incineration units from CAMR;

(2)limit applicability to coal-fired units serving, as of November 15, 1990 or any time later, a generator with a greater than 25 MWe nameplate capacity producing electricity for sale; and

(3)clarify the language concerning cogeneration units. In 40 CFR 60.24(h), EPA also added definitions for “municipal solid waste” and “solid waste incineration unit.” The new and revised definitions, in the State Plan Hg model trading rule, related to applicability would be consistent with the definitions in 40 CFR 60.24(h) and the applicability provisions in 40 CFR 60.4104. In addition, the definitions of “allocate,” “Hg allowance,” and “Hg Budget Trading Program” would be modified to provide for integrated operation of the State Hg trading programs administered by EPA and Federal Hg trading program. Mercury allowances issued under either type of program would be an “Hg allowance” usable for meeting the allowance-holding requirement under the State model trading program (or Federal Hg trading program) regulations. In addition, the definition of “maximum design heat input” would be simplified, and the definition of “nameplate capacity” would be clarified. Further, the retired unit exemption provisions would be revised to clarify that the appeal procedures generally applicable to final actions of the Administrator would be applicable to final actions of the Administrator with regard to retired units. The rule text concerning the appeal procedures themselves would be revised simply to reference part 78 of the Acid Rain Program regulations, and part 78 would, in turn, be revised to refer specifically, where appropriate, to the Hg trading programs in the same way as part 78 currently refers specifically, where appropriate, to the CAIR trading programs. In addition, the provisions listing the content of a certificate of representation are revised to clarify that the identification of each unit covered by the certificate of representation includes identification and nameplate capacity of each generator served by the unit. EPA believes that the current rule language requiring “identification” of each unit subject to the trading program is already broad enough to encompass such information concerning each generator served by the unit, particularly since only a unit serving a generator with a nameplate capacity greater than 25 MWe can be subject to the Hg trading programs. However, EPA is proposing the revised language to make it clear that generator information is required in the certificate of representation. EPA also proposes technical revisions to the provisions concerning the reflection in certificates of representation of the owners and operators of the source and units involved. The changes would make it clear that all owners and operators must be listed and that those that should be, but are not, listed are still bound by the certificate of representation and the CAMR designated representative. Further, new provisions concerning designated representatives and authorized account representatives would be added to clarify that such individuals may use agents in order to make electronic submissions. The existing State model trading program regulations provide for certain submissions ( *i.e.* , certificates of representation, applications for general account, allowance transfers, and quarterly emissions reports) required to be “in a format prescribed” or “in a format specified” by the Administrator. (The terms “prescribed” and “specified” have the identical meaning in these contexts.) These submissions may be made, or in the case of quarterly emissions reports must be made, electronically. Although the formats for the Hg Budget Trading Program have not yet been developed, other EPA-administered trading programs ( *i.e.* , the Acid Rain Program and the NO X Budget Trading Program) have analogous language concerning submission formats and have existing, prescribed formats for submissions. The electronic formats prescribed by the Administrator for the Acid Rain Program and the NO X Budget Trading Program allow the designated representative or authorized account representative, as appropriate, to designate other individuals (“agents”) who may make the electronic submissions for the designated representative or authorized account representative, who is fully bound by the agent's actions. EPA maintains that the references in the Acid Rain Program and NO X Budget Trading Program regulations to “prescribed” (or “specified”) formats, coupled with the existing electronic formats, provide the legal authority necessary for designated representatives and authorized account representatives to use agents to make electronic submissions in the applicable trading programs. EPA plans to adopt electronic formats for the Hg Budget Trading Program that, similarly, allow for the use of agents. EPA believes that the existing references in the CAMR State model trading program regulations to “format[s] prescribed” or “specified” by the Administrator, when coupled with the appropriate electronic formats, will similarly provide the legal authority necessary for the use of agents. However, in order to remove any uncertainty about such legal authority, EPA proposes to add provisions to the State Hg model trading program regulations (and to include a provision in the Federal Hg trading program regulations) that explicitly authorize the use of agents for electronic submissions. In addition, in the permitting provisions, EPA proposes to revise the deadline for submission of Hg Budget permit applications to run from the later of January 1, 2010 or the date on which the unit commences commercial operation, rather than the date on which the unit simply commences operation. A unit's date of commencement of commercial operation is not likely to range from more than a few days to a few months later than the unit's date of commencement of operation since owners and operators of electric generating units generally prefer to minimize using fuel without producing electricity. Moreover, running the permit application deadline from the commencement of commercial operation avoids the need for a complex definition of “commence operation” to account for units that are not subject to the Hg Budget Trading Program when they first combust fuel and that subsequently become Hg Budget units. Further, EPA proposes certain technical corrections in the Hg allowance allocation provisions. In particular, the current provisions concerning timing of submission of unit allocations by the permitting authority to the Administrator provide that if the unit allocations are not submitted on time, the Administrator will assume that the allocations are the same as in the prior year. If the year for which allocations are submitted late is 2018 (the beginning of phase II of the CAMR Hg Budget trading program), the Administrator will assume that the allocations equal the allocations for the control period in 2017, multiplied by the amount of ounces ( *i.e.* , tons multiplied by 32,000 ounces/ton) of Hg emissions in the applicable State trading budget under § 60.4140 for 2018 and thereafter and divided by such amount of ounces of Hg emissions for 2010 through 2017. EPA is removing these provisions both for existing and new units because they seem unlikely to be used and are unduly complicated. There are no comparable provisions in the proposed Federal Hg trading program regulations. EPA is also proposing to revise the current provisions for new unit allocations that provide that a new unit is eligible for allocations from the new unit set-aside until that unit has operated long enough to develop a baseline heat input using the 3 highest figures for converted control period heat input out of such figures for the first 5 years of operation. At that point, the unit is supposed to be allocated allowances from the pool of allowances allocated to all units that have a baseline heat input. However, allowances for units with baselines are allocated a number of years in advance of the first year for which such allowances may be used to meet the allowance-holding requirement. Consequently, it is possible for a new unit to have a baseline as of a given year but find that no more allowances are available for that year for units with baselines because the allowances for that year were allocated before the time when the new unit's baseline was developed. A new unit could find that, for some years, it was both ineligible for the new unit set-aside and unable to obtain an allocation from the pool for units with baselines. EPA intended that new units move seamlessly from new-unit-set-aside eligibility to units-with-baselines allocations and not to fall in between the two types of allocation procedures. EPA proposes to revise the allocation provisions to clarify that a new unit continues to be eligible for the new unit set-aside so long as the unit is not allocated allowances from the pool for units with baselines allocations either because the new unit does not yet have a baseline or because all the allowances for units with baselines have already been allocated for the year involved. EPA also proposes technical changes that make it clear that a separate request for new-unit-set-aside allowances must be submitted for each control period for which they are sought and must be submitted by May 1 of that control period. This approach will reasonably put the burden on owners and operators to inform the State permitting authority each year. This will ensure that the State permitting authority can keep track, for each control period in the future, of which units are seeking new-unit-set-aside allowances for that control period. These submission deadlines will give the State permitting authorities more time to process (which may include, when appropriate, opportunity for public comment) the requests in time to submit the allocations to the Administrator for recordation by December 1. In addition, EPA proposes to adopt technical changes to the provisions for recordation of allowance allocations. For example, the current provisions require the Administrator to record the initial allocations for 2010-2014 by December 1, 2006. Because State Plans were not due until November 17, 2006, EPA cannot review and approve all State plans in time to record allowance allocations in those plans by December 1, 2006, which date EPA proposes to change to December 1, 2007. Further, the current provisions also require the recordation of allocations for subsequent years to occur only after completion of the end-of-year compliance determination process for a previous year. Because of the need to finalize emissions data for a year before the compliance determination process for that year can be completed, the current provisions may delay recordation for a number of months. However, as a matter of logic, there is no necessary connection between one year's compliance determination and the future year's allocation recordation. Consequently, EPA proposes to remove the connection made in the current provisions and is setting an independent deadline (December 1) for allocation recordation, which will result in recordation several months earlier than under the current provisions. Further, EPA proposes technical changes to the provisions referring to when an allowance transfer by the owner of an allowance to another allowance tracking system account is “correctly submitted.” The changes would clarify that a “correctly submitted” allowance transfer is one that references allowances that both: Were in the owner's allowance tracking system account when the allowance transfer form was submitted to the Administrator; and continue to be in such account when the allowance transfer form is processed by the Administrator. In addition, EPA proposes to revise the provisions for deducting allowances to determine compliance with the allowance-holding requirement under the trading programs. The proposed revisions would not change the requirements that an allowance usable for compliance: Be allocated for the year, or a year before the year, for which compliance is being determined; and be in or covered by a proper request for transfer into the source's compliance account by the allowance transfer deadline. However, the statement indicating that the allowance must also not be necessary to account for excess emissions for a prior year would be removed because it is confusing and inconsistent with the compliance procedures that EPA has been using in its ongoing cap-and-trade programs ( *i.e.* , the Acid Rain Program and the NO X Budget Trading Program). In addition, EPA proposes to revise certain provisions concerning the use of substitute data when the owner or operator of a unit adds a new stack or flue and fails to meet the deadline for monitoring certification. EPA proposes to remove procedures that would seem to allow for substitute data other than data reflecting maximum potential emissions. This is proposed because EPA believes that the removed provisions would actually still result in the use of data reflecting maximum potential emissions. Further, EPA proposes to remove a provision that separately requires units to monitor heat input. The provision is unnecessary because heat input monitoring is already explicitly required in the monitoring provisions in § 60.4170. A few changes are proposed for some other provisions ( *e.g.* , revising the definitions of “CAIR NO X Trading Program,” “CAIR NO X Ozone Season Trading Program,” and “CAIR SO 2 Trading Program” to be consistent with the definitions of these terms in the CAIR trading rules) of the State model trading rule. These other changes are similarly technical or clarifying in nature. All of the above-proposed changes are consistent with the analogous provisions in the proposed Federal Hg trading program. V. Proposed Revisions of the Acid Rain Program Regulations A few changes are proposed for the Acid Rain Program regulations. EPA proposes to revise the provisions concerning alternate designated representatives in order to simplify the provisions. Specifically, EPA proposes to remove 40 CFR 72.22(e), which allows in certain limited circumstances the appointment of two alternate designated representatives, rather than the customary one alternate designated representative, for an affected source under the Acid Rain Program. This option has rarely been used: Out of the approximately 1,500 affected plants currently in the program, only 17 currently have two alternate designated representatives. As discussed above in Section IV of this preamble, the Acid Rain Program regulations already allow a designated representative or alternate designated representative to use agents to perform online many of the same tasks that a second alternate designated representative can perform under the existing § 72.22(e). Since § 72.22(e) seems to be unnecessary and is rarely used, EPA proposes to remove it in order to simplify the provisions applicable to alternate designated representatives. Further, as discussed above in Section IV of this preamble, EPA proposes to revise the appeal provisions of 40 CFR part 78 to apply to the appeals procedures to final actions of the Administrator under the State Hg trading program and the Federal Hg trading program, just as these provisions already apply to final Administrator actions under the CAIR trading programs. 40 CFR part 78 would be revised to refer specifically, where appropriate, to the Hg trading programs in the same way as 40 CFR part 78 currently refers specifically, where appropriate, to the CAIR trading programs. VI. Units Subject to the CAMR Federal Plan and New Source Performance Standards This section describes the relationship between the Federal Plan and the NSPS finalized under CAMR in terms of applicability and Hg emission limits. As discussed above and in CAMR, CAMR added Hg to the list of pollutants covered under 40 CFR part 60, subpart Da, by establishing emission limits for new sources and guidelines for existing sources. CAMR finalized NSPS for new coal-fired Utility Units, subcategorized by coal type and, in some cases, unit type. In addition to complying with these standards, new Utility Units, along with existing coal-fired Utility Units, subject to the Federal Plan, will be subject to the cap-and-trade provisions finalized in CAMR and being proposed in this Federal Plan. The State Hg emission budgets are a permanent cap regardless of growth in the electric sector and, therefore, States, in the case of State Plans, and EPA, in the case of Federal Plan, have the responsibility of incorporating new Utility Units in their Hg emissions budgets. VII. Statutory and Executive Order Reviews A. Executive Order 12866: Regulatory Planning and Review Under Executive Order

(EO)12866 (58 FR 51735, October 4, 1993), this action is an economically “significant regulatory action.” This determination is made in view of this action's important policy implications and potential effect on the economy of over $100 million. Accordingly, EPA submitted this action to the Office of Management and Budget

(OMB)for review under EO 12866 and any changes made in response to OMB recommendations have been documented in the docket for this action. This Federal Plan proposal represents a Federal mandate to implement CAMR (70 FR 28606) covering the same Hg emissions reductions in the event that States fail to implement CAMR. For this reason, EPA is relying on the economic analysis conducted for CAMR entitled “Regulatory Impact Analysis of the Final Clean Air Mercury Rule.” B. Paperwork Reduction Act This action does not impose an information collection burden under the provisions for the Paperwork Reduction Act (PRA), 44 U.S.C. 3501 *et seq.* The PRA requirements of this rule are satisfied through the Information Collection Request

(ICR)submitted to OMB for review and approval as part of CAMR. The burden of this proposed rule is essentially the same as the burden estimated for CAMR. There is a modest transfer of burden from the States to EPA if the Federal plan is implemented rather than the CAMR State Plan. The overall total burden is essentially unchanged. The Office of Management and Budget

(OMB)previously approved the information collection requirements contained in the final CAMR regulations (40 CFR 60.40Da—60.52Da; 40 CFR 60.4100—60.4199) under the provisions of the PRA, and has assigned OMB control number 2060-0567 and EPA ICR number 2137.02. A copy of the OMB approved ICR may be obtained from Susan Auby, Collection Strategies Division; U.S. Environmental Protection Agency (2822T); 1200 Pennsylvania Ave., NW., Washington DC 20460, or by calling

(202)566-1672. Burden means the total time, effort, or financial resources expended by persons to generate, maintain, retain, or disclose or provide information to or for a Federal agency. This includes the time needed to review instructions; develop, acquire, install, and utilize technology and systems for the purposes of collecting, validating, and verifying information, processing and maintaining information, and disclosing and providing information; adjust the existing ways to comply with any previously applicable instructions and requirements; train personnel to be able to respond to a collection of information; search data sources; complete and review the collection of information; and transmit or otherwise disclose the information. An agency may not conduct or sponsor, and a person is not required to respond to a collection of information unless it displays a currently valid OMB control number. The OMB control numbers for EPA's regulations in 40 CFR, after appearing in the preamble of the final rule, are listed in 40 CFR part 9. C. Regulatory Flexibility Act The Regulatory Flexibility Act

(RFA)generally requires an agency to prepare a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements under the Administrative Procedure Act or any other statute unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. Small entities include small businesses, small organizations, and small governmental jurisdictions. For purposes of assessing the impacts of today's rule on small entities, small entity is defined as:

(1)A small business as defined by the Small Business Administration's

(SBA)regulations at 13 CFR 121.201; a small governmental jurisdiction that is a government of a city, county, town, school district or special district with a population of less than 50,000; and

(3)a small organization that is any not-for-profit enterprise which is independently owned and operated and is not dominant in its field. After considering the economic impacts of today's proposed rule on small entities, I certify that this action will not have a significant economic impact on a substantial number of small entities. As was discussed in the final CAMR, EPA determined that it was not necessary to prepare a regulatory flexibility analysis in conjunction with this rulemaking. Although not required by the RFA, the Agency conducted an additional analysis of the effects of CAMR on small entities in order to provide additional information to States and affected sources. This analysis is detailed in both the final CAMR and the “Regulatory Impact Analysis of the Final Clean Air Mercury Rule.” This analysis found that CAMR would not have a significant direct impact on a substantial number of small entities. This analysis is applicable to this proposed rule. We continue to be interested in the potential impacts of the proposed rule on small entities and welcome comments on issues related to such impacts. D. Unfunded Mandates Reform Act Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4) (UMRA), establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and Tribal governments and the private sector. Under UMRA section 202, 2 U.S.C. 1532, EPA generally must prepare a written statement, including a cost-benefit analysis, for any proposed or final rule that “includes any Federal mandate that may result in the expenditure by State, local, and Tribal governments, in the aggregate, or by the private sector, of $100,000,000 or more * * * in any one year.” A “Federal mandate” is defined under UMRA section 421(6), 2 U.S.C. 658(6), to include a “Federal intergovernmental mandate” and a “Federal private sector mandate.” A “Federal intergovernmental mandate,” in turn, is defined to include a regulation that “would impose an enforceable duty upon State, local, or Tribal governments,” UMRA section 421(5)(A)(i), 2 U.S.C. 658(5)(A)(i), except for, among other things, a duty that is “a condition of Federal assistance,” UMRA section 421(5)(A)(i)(I). A “Federal private sector mandate” includes a regulation that “would impose an enforceable duty upon the private sector,” with certain exceptions, UMRA section 421(7)(A), 2 U.S.C. 658(7)(A). Before promulgating an EPA rule for which a written statement is needed under UMRA section 202, UMRA section 205, 2 U.S.C. 1535, generally requires EPA to identify and consider a reasonable number of regulatory alternatives and adopt the least costly, most cost-effective, or least burdensome alternative that achieves the objectives of the rule. EPA has determined that this rule contains a Federal mandate that may result in expenditures of $100 million or more for State, local, and tribal governments, in the aggregate, or the private sector in any one year. Accordingly, EPA prepared a written statement for the final CAMR consistent with the requirements of UMRA section 202. Furthermore, as EPA stated in the rule, EPA is not directly establishing any regulatory requirements that may significantly or uniquely affect small governments, including Tribal governments. Thus, EPA is not obligated to develop under UMRA section 203 a small government agency plan. Furthermore, in a manner consistent with the intergovernmental consultation provisions of UMRA section 204, EPA carried out consultations with the governmental entities affected by this rule. For the final CAMR, EPA conducted an analysis of the potential economic impacts anticipated of CAMR on government-owned entities. The results support EPA's assertion in the NPR that the proposed rule would not have a disproportionate budgetary impact on government entities. This analysis is detailed in both the final CAMR and the “Regulatory Impact Analysis of the Final Clean Air Mercury Rule.” This analysis is applicable to this proposed rule. E. Executive Order 13132: Federalism Executive Order 13132, entitled “Federalism” (64 FR 43255, August 10, 1999), requires EPA to develop an accountable process to ensure “meaningful and timely input by State and local officials in the development of regulatory policies that have federalism implications.” “Policies that have federalism implications” is defined in the EO to include regulations that have “substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.” This proposed rule does not have Federalism implications. It will not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government, as specified in EO 13132. These effects would not occur from the final rule itself because it is the provisions of the CAA that require EPA, after a State has failed to submit a State Plan or a complete State Plan, to make a finding to that effect and then promulgate a Federal Plan. Although EPA would be exercising discretion to promulgate the Federal Plan at an early date, EPA would rescind the Federal Plan for each State that submits a State Plan that EPA approves. Moreover, as emphasized throughout the preamble, States are not required to adopt the Federal Plan provisions, or any particular portion thereof, in order for EPA to approve their State Plans. Thus, EO 13132 does not apply to this proposed rule. Even so, in the spirit of EO 13132, and consistent with EPA policy to promote communications between EPA and State and local governments, EPA consulted with State and local officials early in the process of developing the proposed regulation to permit them to have meaningful and timely input into its development. EPA is including a number of provisions for States in the proposed rule so as not to constrain States' abilities to complete approvable State Plans, such as the ability to submit State allocation methodologies, and intends to withdraw the Federal Plan upon approval of State Plans. F. Executive Order 13175: Consultation and Coordination With Indian Tribal Governments Executive Order 13175, entitled “Consultation and Coordination with Indian Tribal Governments” (65 FR 67249, November 9, 2000), requires EPA to develop an accountable process to ensure “meaningful and timely input by Tribal officials in the development of regulatory policies that have Tribal implications.” This proposal does not have “Tribal implications” as specified in EO 13175. This proposal addresses pollution composed of Hg and mercuric compounds. The final CAMR required annual Hg reductions for the power sector in 50 States, the District of Columbia, and in Indian country, through a cap-and-trade system that States and eligible Tribes have the option of adopting. The CAA provides for States and eligible Tribes to develop plans to regulate emissions of air pollutants within their areas. The regulations clarify the statutory obligations of States and eligible Tribes that develop plans to implement this rule. The TAR (40 CFR 49.1-49.119) gives eligible Tribes the opportunity to develop and implement CAA programs, but it leaves to the discretion of the Tribe whether to develop these programs and which programs, or appropriate elements of a program, the Tribe will adopt. As noted earlier, the EPA will implement the emission trading rule for coal-fired Utility Units located in Indian country in accordance with the TAR unless the relevant Tribe for the land on which a particular coal-fired Utility Unit is located seeks and obtains TAS status and submits a TIP to implement the allocated Hg emissions budget. Tribes which choose to do so will be responsible for submitting a TIP analogous to the State Plans discussed throughout this preamble, and, like States, can choose to adopt the Model Cap-and-Trade Rule described elsewhere in this action. This proposal does not have Tribal implications as defined by EO 13175. It does not have a substantial direct effect on one or more Indian Tribes, because no Tribe has implemented a Federally enforceable air quality management program under the CAA at this time. Furthermore, this proposal does not affect the relationship or distribution of power and responsibilities between the Federal government and Indian Tribes. The CAA and the TAR establish the relationship of the Federal government and Tribes in developing plans to attain the national ambient air quality standards (NAAQS), and this proposal does nothing to modify that relationship. EPA has complied with the provisions of EO 13175. EPA notes that in the event a Tribe does implement a TIP in the future, this proposal could have implications for that Tribe, but it would not impose substantial direct costs upon the Tribe, nor preempt Tribal law. EPA has estimated that the total annual private costs for the rule for Hg as implemented by State, local, and eligible Tribal governments (or EPA in the absence of any Tribe seeking TAS status) is approximately $160 million in 2010, $100 million in 2015, and $750 million in 2020 (1999$). There are currently three coal-fired Utility Units located in Indian country that will be affected by this rule and the percentage of Indian country that will be impacted is very small. For eligible Tribes that choose to regulate sources in Indian country, the costs would be attributed to inspecting regulated facilities and enforcing adopted regulations. EPA consulted with Tribal officials in developing the final CAMR and this proposal. The EPA encouraged Tribal input at an early stage. A Tribal representative from the Navajo Nation was a member of the official workgroup and was provided with all workgroup materials. EPA has provided two briefings for Tribal representatives and the newly formed National Tribal Air Association (NTAA), and other national Tribal forums such as the National Tribal Environmental Council

(NTEC)and the National Tribal Forum during the period prior to issuance of the CAMR NPR. Another briefing for Tribal representatives, NTAA, and NTEC was provided post-proposal to provide opportunity for additional input. In addition, Tribal representatives participated in EPA's regional implementation workshops for CAMR in the summer of 2005. EPA conducted additional informal outreach for Tribes during the CAMR reconsideration process. First, EPA prepared an update on the reconsideration and CAMR Federal Plan development for the EPA Tribal Newsletter in January 2006. Second, EPA, through both Headquarters and Regional Offices, has worked to address Tribes' specific questions or concerns regarding implementation of CAMR. Finally, EPA has met with representatives from one Tribe that is concerned with the implications of CAMR for the development of new tribal electricity generation. G. Executive Order 13045: Protection of Children From Environmental Health and Safety Risks Executive Order 13045, “Protection of Children from Environmental Health and Safety Risks” (62 FR 19885, April 23, 1997) applies to any rule that

(1)Is determined to be “economically significant” as defined under EO 12866, and

(2)concerns an environmental health or safety risk that EPA has reason to believe may have a disproportionate effect on children. If the regulatory action meets both criteria, Section 5-501 of the EO directs the Agency to evaluate the environmental health or safety effects of the planned rule on children, and explain why the planned regulation is preferable to other potentially effective and reasonably feasible alternatives considered by the Agency. We believe that the environmental health or safety risk addressed by this action may have a disproportionate effect on children. Accordingly, we have evaluated the environmental health or safety effects of this rule on children. The results of this evaluation are discussed in the final CAMR and in the “Regulatory Impact Analysis for the Final Clean Air Mercury Rule.” EPA concluded that CAMR will further improve air quality and will further improve children's health. H. Executive Order 13211: Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use Executive Order 13211 (66 FR 28355, May 22, 2001) provides that agencies shall prepare and submit to the Administrator of the Office of Regulatory Affairs, OMB, a Statement of Energy Effects for certain actions identified as “significant energy actions.” Section 4(b) of EO 13211 defines “significant energy actions” as “any action by an agency (normally published in the **Federal Register** ) that promulgates or is expected to lead to the promulgation of a final rule or regulation, including notices of inquiry, advance notices of final rulemaking, and notices of final rulemaking: (1)(i) That is a significant regulatory action under EO 12866 or any successor order, and

(ii)is likely to have a significant adverse effect on the supply, distribution, or use of energy; or

(2)that is designated by the Administrator of the Office of Information and Regulatory Affairs as a “significant energy action.” Although this proposal is a significant regulatory action under EO 12866, this rule likely will not have a significant adverse effect on the supply, distribution, or use of energy. EPA concluded that the impact of the final CAMR is not significant because the final rule did not have a greater than 1 percent impact on the cost of electricity production and because it does not result in the retirement of greater than 500 MW of coal-fired generation. EPA's analysis of the energy impacts of the final CAMR can be found in the “Regulatory Impact Analysis for the Final Clean Air Mercury Rule.” I. National Technology Transfer and Advancement Act As noted in the CAMR final rule, section 12(d) of the National Technology Transfer and Advancement Act (NTTAA) of 1995 (Pub. L. 104-113; 15 U.S.C. 272 note) directs EPA to use voluntary consensus standards in their regulatory and procurement activities unless to do so would be inconsistent with applicable law or otherwise impracticable. Voluntary consensus standards are technical standards ( *e.g.* , material specifications, test methods, sampling procedures, business practices) developed or adopted by one or more voluntary consensus bodies. The NTTAA requires EPA to provide Congress, through OMB, with explanations when EPA decides not to use available and applicable voluntary consensus standards. During the development of the final CAMR, EPA searched for voluntary consensus standards that might be applicable. The search identified three voluntary consensus standards that were considered practical alternatives to the specified EPA test methods. An assessment of these and other voluntary consensus standards is presented in the preamble to the final CAMR (70 FR 28647; May 18, 2005). This proposed action does not propose the use of any additional technical standards beyond those cited in the final CAMR. Therefore, EPA is not considering the use of any additional voluntary consensus standards for this action. J. Executive Order 12898: Federal Actions To Address Environmental Justice in Minority Populations and Low-Income Populations Executive Order 12898, “Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations,” requires Federal agencies to consider the impact of programs, policies, and activities on minority populations and low-income populations. According to EPA guidance, 7 agencies are to assess whether minority or low-income populations face risks or a rate of exposure to hazards that are significant and that “appreciably exceed or is likely to appreciably exceed the risk or rate to the general population or to the appropriate comparison group.” (EPA, 1998) 7 U.S. Environmental Protection Agency, 1998. Guidance for Incorporating Environmental Justice Concerns in EPA's NEPA Compliance Analyses. Office of Federal Activities, Washington, DC, April 1998. In accordance with EO 12898, the Agency has considered whether this proposal may have disproportionate negative impacts on minority or low income populations. The Agency expects this proposal to lead to beneficial reductions in air pollution and exposures generally with a small negative impact through increased utility bills. The increase in the price for electric power is estimated to be 0.2 percent of retail electricity prices when it is shared among all members of society equally. The price increase is not considered to be a disproportionate impact on minority populations and low-income populations. For this reason, negative impacts to these sub-populations that appreciably exceed similar impacts to the general population are not expected. There will be beneficial outcomes to these populations as the result of this action. In the absence of CAMR, there are health effects that are likely to affect certain populations in the U.S., including subsistence anglers, Native Americans, and Asian Americans. These populations may include low income and minority populations who are disproportionately impacted by Hg exposures due to their economic, cultural, and religious activities that lead to higher levels of consumption of fish than the general populations. CAMR is expected to reduce Hg exposures among these populations. EPA's analysis of these impacts is found in the “Regulatory Impact Analysis for the Final Clean Air Mercury Rule.” List of Subjects 40 CFR Part 60 Environmental protection, Administrative practice and procedure, Air pollution control, Coal, Electric power plants, Intergovernmental relations, Metals, Natural gas, Nitrogen dioxide, Particulate matter, Reporting and recordkeeping requirements, Sulfur oxides. 40 CFR Part 62 Environmental protection, Air pollution control, Hazardous substances, Reporting and recordkeeping requirements. 40 CFR Part 72 Acid rain, Administrative practice and procedure, Air pollution control, Electric utilities, Intergovernmental relations, Nitrogen oxides, Reporting and recordkeeping requirements, Sulfur oxides. 40 CFR Part 78 Acid rain, Administrative practice and procedure, Air pollution control, Electric utilities, Nitrogen oxides, Reporting and recordkeeping requirements, Sulfur oxides. Dated: December 7, 2006. Stephen L. Johnson, Administrator. For the reasons set forth in the preamble, parts 60, 62, 72, and 78 of chapter 1 of title 40 of the Code of Federal Regulations are proposed to be amended as follows: PART 60—[AMENDED] 1. The authority citation for part 60 continues to read as follows: Authority: 42 U.S.C. 7401, 7403, 7426, and 7601. § 60.17 [Amended] 2. Section 60.17 is amended, in paragraph (a)(14) by revising the words “and 60.4102” to read “, 60.4120, and 62.15902”. 3. Section 60.24 is amended as follows: a. In paragraph (h)(8) in the definition of “Boiler”, by revising the words “fossil-or other fuel-fired” to read “fossil- or other-fuel-fired”; b. In paragraph (h)(8) in the definition of “Cogeneration unit”, by revising in paragraph

(2)the words “after which” to read “after the calendar year in which”; c. In paragraph (h)(8) in the definition of “Combustion turbine”, by revising in paragraph

(2)the words “heat recovery steam generator” to read “duct burner, heat recovery steam generator,”; d. In paragraph (h)(8), by removing the definition of “Heat input”; e. In paragraph (h)(8), by revising the definition of “Maximum design heat input”; f. In paragraph (h)(8) in the definition of “Nameplate capacity”, by revising the words “derates) as specified” to read “deratings) as of such installation as specified” and by revising the words “derates), such increased maximum amount as specified” to read “deratings), such increased maximum amount as of such completion as specified”; g. In paragraph (h)(8) in the definition of “Sequential use of energy”, by revising in paragraph

(2)the word “seful” to read “useful”; h. In paragraph (h)(8) in the definition of “Useful thermal energy”, by revising in paragraph

(2)the words “heat” to read “heating”; and i. In paragraph (h)(8), by adding new definitions of “Municipal waste” and “Solid waste incineration unit”; j. By adding a new paragraph (h)(9) to read as follows: § 60.24 Emission standards and compliance schedules.

(h)* * *

(8)* * * *Maximum design heat input* means the maximum amount of fuel per hour (in Btu/hr) that a unit is capable of combusting on a steady-state basis as of the initial installation of the unit as specified by the manufacturer of the unit. *Municipal waste* means “municipal waste” as defined in section 129(g)(5) of the Clean Air Act. *Solid waste incineration unit* means a stationary, coal-fired boiler or stationary, coal-fired combustion turbine that is a “solid waste incineration unit” as defined in section 129(g)(1) of the Clean Air Act.

(9)Notwithstanding any other provision of this paragraph, a State may adopt, and submit by May 30, 2007, a State Hg allowance allocation methodology replacing the provisions in §§ 62.15941 and 62.15942 of this chapter under the Federal Hg Budget Trading Program under subpart HHHH of this part with:

(i)Allocation provisions substantively identical to §§ 62.15941 and 62.15942 of this chapter, under which the permitting authority makes the allocations; or

(ii)Any methodology for allocating Hg allowances to individual sources under which the permitting authority makes the allocations, provided that:

(A)The State's methodology must not allow the permitting authority to allocate Hg allowances for a year in excess of the amount in the State's trading budget for such year.

(B)The State's methodology must require that, for EGUs commencing operation before January 1, 2001, the permitting authority will determine, and notify the Administrator of, each unit's allocation of Hg allowances by October 31, 2007 for 2010, 2011, and 2012 and by October 31, 2009 and October 31 of each year thereafter for the 4th year after the year of the notification deadline.

(C)The State's methodology must require that, for EGUs commencing operation on or after January 1, 2001, the permitting authority will determine, and notify the Administrator of, each unit's allocation of Hg allowances by October 31 of the year for which the Hg allowances are allocated. 4. Section 60.4102 is amended as follows: a. By revising the definition of “Allocate or allocation”; b. By revising the definition of “Allowance transfer deadline”; c. In the definition of “Alternate Hg designated representative”, by revising the words “in accordance with §§ 60.4110 through 60.4114,” to read “, in accordance with §§ 60.4110 through 60.4115,” and by adding four sentences at the end of the definition; d. In the definition of “Automated data acquisition and handling system or DAHS”, by revising the words “under §§ 60.4170 through 60.4176” to read “under §§ 60.4170 through 60.4175” and by revising the words “required §§ 60.4170 through 60.4176” to read “required by §§ 60.4170 through 60.4175”. e. In the definition of “Boiler”, by revising the words “fossil- or other-fuel-fired” to read “fossil- or other-fuel-fired”; f. By revising the definition of “CAIR NO X Annual Trading Program”; g. By revising the definition of “CAIR NO X Ozone Season Trading Program”; h. By revising the definition of “CAIR SO 2 Trading Program”; i. In the definition of “Cogeneration unit”, by revising in paragraph

(2)the words “after which” to read “after the calendar year in which”; j. In the definition of “Combustion turbine”, by revising in paragraph

(2)the words “heat recovery steam generator” to read “duct burner, heat recovery steam generator,”; k. By revising the definition of “Commence commercial operation”; l. By revising the definition of “Commence operation”; m. In the definition of “Continuous emission monitoring system or CEMS”, in the introductory text by revising the word “CEMS” to read “continuous emission monitoring systems” and by revising the words “§§ 60.4170 through 60.4176” to read “§§ 60.4170 through 60.4175” whenever they appear and in paragraphs

(1)and

(2)by revising the words “in units of” to read “in”. n. In the definition of “Control period”, by revising the words “January 1 of a calendar year and” to read “January 1 of a calendar year, except as provided in § 60.4106(c)(2), and”; o. In the definition of “Emissions”, by revising the words “§§ 60.4170 through 60.4176” to read “§§ 60.4170 through 60.4175”; p. In the definition of “Heat input”, by revising the words “§§ 60.4170 through 60.4176” to read “§§ 60.4170 through 60.4175”; q. By revising the definition of “Hg allowance”; r. In the definition of “Hg allowance deduction or deduct CAIR NO X allowances”, by adding, after the words “compliance account”, the words “, e.g.,”, by removing the words “§§ 60.4150 through 60.4157 and”, and by revising the words “§§ 60.4170 through 60.4176” to read “§§ 60.4170 through 60.4175”; s. In the definition of “Hg authorized account representative”, by revising the words “§ 60.4152” to read “§§ 60.4110 through 60.4115 and §§ 60.4150 through 60.4157”; t. In the definition of “Hg Budget emissions limitation”, by revising the words “in ounces” to read “, in ounces of Hg emissions in a control period,” and revising the words “for a control period” to read “for the control period”; u. By revising the definition of “Hg Budget Trading Program”; v. In the definition of “Hg designated representative”, by revising the words “§§ 60.4110 through 60.4114” to read “§§ 60.4110 through 60.4115” and by adding four sentences at the end of the definition; w. By revising the definition of “Maximum design heat input”; x. In the definition of “Monitoring system”, by revising the words “§§ 60.4170 through 60.4176” to read “§§ 60.4170 through 60.4175”; y. In the definition of Nameplate capacity”, by revising the words “other deratings) as specified” to read “other deratings) as of such installation as specified” and by revising the words “maximum amount as specified” to read “maximum amount as of such completion as specified; z. In the definition of “Ounce”, by revising the words “§§ 60.4170 through 60.4176” to read “§§ 60.4170 through 60.4175”; aa. In the definition of “Permitting authority”, by removing the words “in accordance with §§ 60.4120 through 60.4124”; bb. In the definition of “Receive or receipt”, by revising the words “correspondence log” to read “log”; cc. In the definition of “Source”, by revising the word “CAA” to read “Clean Air Act”; dd. In the definition of “Title V operating permit”, by revising the word “CAA” to read “Clean Air Act”; ee. In the definition of “Title V operating permit regulations”, by revising the word “CAA” to read “Clean Air Act”; ff. In the definition of “Useful thermal energy”, by revising in paragraph

(2)the words “heat application” to read “heating application”; and gg. Adding new definitions of “CAIR NO X Ozone Season source”, “CAIR NO X source”, “CAIR SO 2 source”, “Municipal waste”, “Replacement, replace, or replaced”, and “Solid waste incineration unit”: § 60.4102 Definitions. *Allocate* or *allocation* means, with regard to Hg allowances, the determination by a permitting authority or the Administrator of the amount of such Hg allowances to be initially credited to a Hg Budget unit, a new unit set-aside, or other entity. *Allowance transfer deadline* means, for a control period, midnight of March 1 (if it is a business day), or midnight of the first business day thereafter (if March 1 is not a business day), immediately following the control period and is the deadline by which a Hg allowance transfer must be submitted for recordation in a Hg Budget source's compliance account in order to be used to meet the source's Hg Budget emissions limitation for such control period in accordance with § 60.4154. *Alternate Hg designated representative* means * * * If the Hg Budget source is also a CAIR NO X source, then this natural person shall be the same person as the alternate CAIR designated representative under the CAIR NO X Annual Trading Program. If the Hg Budget source is also a CAIR SO 2 source, then this natural person shall be the same person as the alternate CAIR designated representative under the CAIR SO 2 Trading Program. If the Hg Budget source is also a CAIR NO X Ozone Season source, then this natural person shall be the same person as the alternate CAIR designated representative under the CAIR NO X Ozone Season Trading Program. If the Hg Budget source is also subject to the Acid Rain Program, then this natural person shall be the same person as the alternate designated representative under the Acid Rain Program. *CAIR NO* X * Annual Trading Program* means a multi-state nitrogen oxides air pollution control and emission reduction program approved and administered by the Administrator in accordance with subparts AA through II of part 96 of this chapter and § 51.123(o)(1) or

(2)of this chapter or established by the Administrator in accordance with subparts AA through II of part 97 of this chapter and §§ 51.123(p) and 52.35 of this chapter, as a means of mitigating interstate transport of fine particulates and nitrogen oxides. *CAIR NO* X *Ozone Season source* means a source that is subject to the CAIR NO X Ozone Season Trading Program. *CAIR NO* X * Ozone Season Trading Program* means a multi-state nitrogen oxides air pollution control and emission reduction program approved and administered by the Administrator in accordance with subparts AAAA through IIII of part 96 of this chapter and § 51.123(aa)(1) or

(2)(and (bb)(1)), (bb)(2), or

(dd)of this chapter or established by the Administrator in accordance with subparts AAAA through IIII of part 97 of this chapter and §§ 51.123(ee) and 52.35 of this chapter, as a means of mitigating interstate transport of ozone and nitrogen oxides. *CAIR NO* X *source* means a source that is subject to the CAIR NO X Annual Trading Program. *CAIR SO* 2 *source* means a source that is subject to the CAIR SO 2 Trading Program. *CAIR SO* 2 * Trading Program* means a multi-state sulfur dioxide air pollution control and emission reduction program approved and administered by the Administrator in accordance with subparts AAA through III of part 96 of this chapter and § 51.124(o)(1) or

(2)of this chapter or established by the Administrator in accordance with subparts AAA through III of part 97 of this chapter and §§ 51.124(r) and 52.36 of this chapter, as a means of mitigating interstate transport of fine particulates and sulfur dioxide. *Commence commercial operation* means, with regard to a unit:

(1)To have begun to produce steam, gas, or other heated medium used to generate electricity for sale or use, including test generation, except as provided in § 60.4105.

(i)For a unit that is a Hg Budget unit under § 60.4104 on the later of November 15, 1990 or the date the unit commences commercial operation as defined in paragraph

(1)of this definition and that subsequently undergoes a physical change (other than replacement of the unit by a unit at the same source), such date shall remain the date of commencement of commercial operation of the unit, which shall continue to be treated as the same unit.

(ii)For a unit that is a Hg Budget unit under § 60.4104 on the later of November 15, 1990 or the date the unit commences commercial operation as defined in paragraph

(1)of this definition and that is subsequently replaced by a unit at the same source ( *e.g.* , repowered), such date shall remain the replaced unit's date of commencement of commercial operation, and the replacement unit shall be treated as a separate unit with a separate date for commencement of commercial operation as defined in paragraph

(1)or

(2)of this definition as appropriate.

(2)Notwithstanding paragraph

(1)of this definition and except as provided in § 60.4105, for a unit that is not a Hg Budget unit under § 60.4104 on the later of November 15, 1990 or the date the unit commences commercial operation as defined in paragraph

(1)of this definition, the unit's date for commencement of commercial operation shall be the date on which the unit becomes a Hg Budget unit under § 60.4104.

(i)For a unit with a date for commencement of commercial operation as defined in paragraph

(2)of this definition and that subsequently undergoes a physical change (other than replacement of the unit by a unit at the same source), such date shall remain the unit's date of commencement of commercial operation of the unit, which shall continue to be treated as the same unit.

(ii)For a unit with a date for commencement of commercial operation as defined in paragraph

(2)of this definition and that is subsequently replaced by a unit at the same source ( *e.g.* , repowered), such date shall remain the replaced unit's date of commencement of commercial operation, and the replacement unit shall be treated as a separate unit with a separate date for commencement of commercial operation as defined in paragraph

(1)or

(2)of this definition as appropriate. *Commence operation* means:

(1)To have begun any mechanical, chemical, or electronic process, including, with regard to a unit, start-up of a unit's combustion chamber.

(2)For a unit that undergoes a physical change (other than replacement of the unit by a unit at the same source) after the date the unit commences operation as defined in paragraph

(1)of this definition, such date shall remain the date of commencement of operation of the unit, which shall continue to be treated as the same unit.

(3)For a unit that is replaced by a unit at the same source ( *e.g.* , repowered) after the date the unit commences operation as defined in paragraph

(1)of this definition, such date shall remain the replaced unit's date of commencement of operation, and the replacement unit shall be treated as a separate unit with a separate date for commencement of operation as defined in paragraph (1), (2), or

(3)of this definition, as appropriate. *Hg allowance* means a limited authorization issued by a permitting authority or the Administrator under provisions of a State plan that are approved under § 52.24(h)(6) of this chapter, or under §§ 62.15940 through 62.15943 of this chapter, to emit one ounce of mercury during a control period of the specified calendar year for which the authorization is allocated or of any calendar year thereafter under the Hg Budget Trading Program. An authorization to emit mercury that is not issued under provisions of a State plan that are approved under § 52.24(h)(6) of this chapter or under §§ 62.15940 through 62.15943 of this chapter shall not be a “Hg allowance.” *Hg Budget Trading Program* means a multi-state Hg air pollution control and emission reduction program approved and administered by the Administrator in accordance with this subpart and § 60.24(h)(6) or established by the Administrator in accordance with subpart LLL of part 62 of this chapter, § 60.24(h)(9), and § 62.13(f) of this chapter, as a means of reducing national Hg emissions. *Hg designated representative* means * * * If the Hg Budget source is also a CAIR NO X source, then this natural person shall be the same person as the CAIR designated representative under the CAIR NO X Annual Trading Program. If the Hg Budget source is also a CAIR SO 2 source, then this natural person shall be the same person as the CAIR designated representative under the CAIR SO 2 Trading Program. If the Hg Budget source is also a CAIR NO X Ozone Season source, then this natural person shall be the same person as the CAIR designated representative under the CAIR NO X Ozone Season Trading Program. If the Hg Budget source is also subject to the Acid Rain Program, then this natural person shall be the same person as the designated representative under the Acid Rain Program. *Maximum design heat input* means the maximum amount of fuel per hour (in Btu/hr) that a unit is capable of combusting on a steady-state basis as of the initial installation of the unit as specified by the manufacturer of the unit. *Municipal waste* means “municipal waste” as defined in section 129(g)(5) of the Clean Air Act. *Replacement, replace,* or *replaced* means, with regard to a unit, the demolishing of a unit, or the permanent shutdown and permanent disabling of a unit, and the construction of another unit (the replacement unit) to be used instead of the demolished or shutdown unit (the replaced unit). *Solid waste incineration unit* means a stationary, coal-fired boiler or stationary, coal-fired combustion turbine that is a “solid waste incineration unit” as defined in section 129(g)(1) of the Clean Air Act. 5. Section 60.4103 is revised to read as follows: § 60.4103 Measurements, abbreviations, and acronyms. Measurements, abbreviations, and acronyms used in this subpart are defined as follows: Btu—British thermal unit. CO 2 —carbon dioxide. H 2 O—water. Hg—mercury. hr—hour. kW—kilowatt electrical. kWh—kilowatt hour. lb—pound. MMBtu—million Btu. MWe—megawatt electrical. MWh—megawatt hour. NO X —nitrogen oxides. O 2 —oxygen. ppm—parts per million. scfh—standard cubic feet per hour. SO 2 —sulfur dioxide. yr—year. § 60.4104 [Amended] 6. Section 60.4104 is amended, in paragraph (a)(1) by removing the words “and subparts BB through HH of this part”. § 60.4105 [Amended] 7. Section 60.4105 is amended as follows: a. In paragraph (a)(1), by revising the words “through (8), § 60.4107, and §§ 60.4150” to read “through (7), § 60.4107, § 60.4108, §§ 60.4110 through 60.4115, and §§ 60.4140”; b. In paragraph (b)(3), by revising the words “shall retain at the source” to read “shall retain, at the source” and c. In paragraph (b)(7), by revising the words “§§ 60.4170 through 60.4176” to read “§§ 60.4170 through 60.4175” and by revising the words “commences operation and commercial operation” to read “commences commercial operation”. § 60.4106 [Amended] 8. Section 60.4106 is amended as follows: a. In paragraph (a)(1)(i), by revising the words “in § 60.4121(a) and (b)” to read “in § 60.4121”; b. In paragraph (a)(3), by revising the words “is not required” to read “is not otherwise required” whenever they appear; c. In paragraphs (b)(1), (b)(2), and (c)(1), by revising the words “§§ 60.4170 through 60.4176” to read “§§ 60.4170 through 60.4175”; d. In paragraph (c)(2), by revising the words “under paragraph (c)(1) of this section” to read “under paragraph (c)(1) of this section for the control period” and by revising the words “under § 60.4170(b)(1) or (2)” to read “under § 60.4170(b)(1) or

(2)and for each control period thereafter”; e. In paragraph (c)(4), by revising the words “§§ 60.4160” to read “§§ 60.4150”; f. In paragraph (c)(7), by revising the words “§§ 60.4150” to read “§§ 60.4140”, by revising the words “from a Hg Budget unit's compliance account” to read “from a Hg Budget source's compliance account”, and by removing the words “that includes the Hg Budget unit”; g. In paragraph (d)(1), by removing the paragraph designation “(1)” and by redesignating paragraph (d)(1)(i) as paragraph (d)(1); h. By removing paragraph (d)(2) and by redesignating paragraph (d)(1)(ii) as paragraph (d)(2); i. In paragraphs (e)(1)(ii) and (e)(2), by revising the words “§§ 60.4170 through 60.4176” to read “§§ 60.4170 through 60.4175” whenever they appear; and j. In paragraph (g), by revising the word “CAA” to read “Clean Air Act”. § 60.4108 [Amended] 9. Section 60.4108 is amended by revising the words “shall be the procedures” to read “are” and removing the second sentence. § 60.4110 [Amended] 10. Section 60.4110 is amended, in paragraph (e)(2), by revising the words “owner” to read “owners”. § 60.4111 [Amended] 11. Section 60.4111 is amended, in paragraph (c), by revising the words “60.4151, and 60.4174,” to read “60.4115, and 60.4151,”. § 60.4112 [Amended] 12. Section 60.4112 is amended, in paragraph (c)(1), by revising the words “a new owner” to read “an owner”, by revising the words “such new owner” to read “such owner”, and by revising the words “the new owner” to read “the owner”. § 60.4113 [Amended] 13. Section 60.4113 is amended as follows: a. In paragraph (a)(1), by revising the words “is submitted.” to read “is submitted, including identification and nameplate capacity of each generator served by each such unit”; and b. In paragraph (a)(4)(iv), by revising the words “where a customer” to read “where a utility or industrial customer”. 14. Add a new § 60.4115 to read as follows: § 60.4115 Delegation by Hg designated representative and alternate Hg designated representative.

(a)A Hg designated representative may delegate, to one or more natural persons, his or her authority to make an electronic submission to the Administrator provided for or required under this subpart.

(b)An alternate Hg designated representative may delegate, to one or more natural persons, his or her authority to make an electronic submission to the Administrator provided for or required under this subpart.

(c)In order to delegate authority to make an electronic submission to the Administrator in accordance with paragraph

(a)or

(b)of this section, the Hg designated representative or alternate Hg designated representative, as appropriate, must submit to the Administrator a notice of delegation, in a format prescribed by the Administrator, that includes the following elements:

(1)The name, address, e-mail address, telephone number, and facsimile transmission number (if any) of such Hg designated representative or alternate Hg designated representative;

(2)The name, address, e-mail address, telephone number, and facsimile transmission number (if any) of each such natural person (referred to as an “agent”);

(3)For each such natural person, a list of the type or types of electronic submissions under paragraph

(a)or

(b)of this section for which authority is delegated to him or her; and

(4)The following certification statements by such Hg designated representative or alternate Hg designated representative:

(i)“I agree that any electronic submission to the Administrator that is by an agent identified in this notice of delegation and of a type listed for such agent in this notice of delegation and that is made when I am a Hg designated representative or alternate Hg designated representative, as appropriate, and before this notice of delegation is superseded by another notice of delegation under 40 CFR 60.4115(d) shall be deemed to be an electronic submission by me.”

(ii)“Until this notice of delegation is superseded by another notice of delegation under 40 CFR 60.4115(d), I agree to maintain an e-mail account and to notify the Administrator immediately of any change in my e-mail address, unless all delegation of authority by me under 40 CFR 60.4115 is terminated.”

(d)A notice of delegation submitted under paragraph

(c)of this section shall be effective, with regard to the Hg designated representative or alternate Hg designated representative identified in such notice, upon receipt of such notice by the Administrator and until receipt by the Administrator of a superseding notice of delegation submitted by such Hg designated representative or alternate Hg designated representative, as appropriate. The superseding notice of delegation may replace any previously identified agent, add a new agent, or eliminate entirely any delegation of authority.

(e)Any electronic submission covered by the certification in paragraph (c)(4)(i) of this section and made in accordance with a notice of delegation effective under paragraph

(d)of this section shall be deemed to be an electronic submission by the Hg designated representative or alternative Hg designated representative submitting such notice of delegation. § 60.4120 [Amended] 15. Section 60.4120 is amended, in paragraph (a), by revising the words “otherwise by this section and” to read “otherwise by paragraph

(b)of this section, § 60.4105, and”. § 60.4121 [Amended] 16. Section 60.4121 is amended, in paragraph (a), by revising the words “commences operation” to read “commences commercial operation”. § 60.4123 [Amended] 17. Section 60.4123 is amended, in paragraph (b), by revising the words “§§ 60.4150” to read “§§ 60.4140”. § 60.4141 [Amended] 18. Section 60.4141 is amended as follows: a. In paragraph (b)(1), by removing the paragraph designation “(1)” and by revising the words “October 31, 2008” to read “October 31, 2009”; b. By removing paragraph (b)(2); c. In paragraph (c)(1), by removing the paragraph designation “(1)”; and d. By removing paragraph (c)(2). 19. Section 60.4142 is amended as follows: a. By revising paragraph

(c)introductory text; b. In paragraph (c)(2), by revising the words “The Hg allowance allocation request must be submitted on or before July 1 of the first control period for which Hg allowances are requested” to read “A separate Hg allowance allocation request for each control period for which Hg allowances are sought must be submitted on or before May 1 of such control period”; c. In paragraph (c)(3), by revising the words “control period immediately before” to read “calendar year immediately before”; d. In paragraph (c)(4)(ii), by revising the words “On or after July 1” to read “On or after May 1”; e. In paragraph (d), by revising the words “for 2010 through 2014, and 97 percent for 2014” to read “for a control period in 2010 through 2014, and 97 percent for a control period in 2015”. § 60.4142 Hg allowance allocations.

(c)For each control period in 2009 and thereafter, the permitting authority will allocate Hg allowances to Hg Budget units in a State that are not allocated Hg allowances under paragraph

(b)of this section because the units do not yet have a baseline heat input under paragraph

(a)of this section or because the units have a baseline heat input but all Hg allowances available under paragraph

(b)of this section for the control period are already allocated, in accordance with the following procedures: 20. Section 60.4151 is amended as follows: a. By revising paragraph (b)(2) introductory text; b. In paragraph (b)(3)(iii)(A), by revising the words “a new person” to read “a person”, by revising the words “such new person” to read “such person”, and by revising the words “the new person” to read “the person”; c. In paragraph (b)(3)(iii)(B), by revising the words “addition of persons” to read “addition of a new person”; d. In paragraph (b)(4) introductory text, by revising the word “representative” to read “representative and alternate Hg authorized account representative”; e. In paragraphs (b)(4)(ii) and (iii), by revising the words “alternative Hg” to read “alternate Hg” whenever they appear; and f. By adding a new paragraph (b)(5) to read as follows: § 60.4151 Establishment of accounts.

(b)* * *

(2)*Authorization of Hg authorized account representative and alternate Hg authorized account representative.* * * *

(5)*Delegation by Hg authorized account representative and alternate Hg authorized account representative.*

(i)A Hg authorized account representative may delegate, to one or more natural persons, his or her authority to make an electronic submission to the Administrator provided for or required under this section and §§ 60.4152 through 60.4162.

(ii)An alternate Hg authorized account representative may delegate, to one or more natural persons, his or her authority to make an electronic submission to the Administrator provided for or required under this section and §§ 60.4152 through 60.4162.

(iii)In order to delegate authority to make an electronic submission to the Administrator in accordance with paragraph (b)(5)(i) or

(ii)of this section, the Hg authorized account representative or alternate Hg authorized account representative, as appropriate, must submit to the Administrator a notice of delegation, in a format prescribed by the Administrator, that includes the following elements:

(A)The name, address, e-mail address, telephone number, and facsimile transmission number (if any) of such Hg authorized account representative or alternate Hg authorized account representative;

(B)The name, address, e-mail address, telephone number, and, facsimile transmission number (if any) of each such natural person (referred to as an “agent”);

(C)For each such natural person, a list of the type or types of electronic submissions under paragraph (b)(5)(i) or

(ii)of this section for which authority is delegated to him or her;

(D)The following certification statement by such Hg authorized account representative or alternate Hg authorized account representative: “I agree that any electronic submission to the Administrator that is by an agent identified in this notice of delegation and of a type listed for such agent in this notice of delegation and that is made when I am a Hg authorized account representative or alternate Hg authorized representative, as appropriate, and before this notice of delegation is superseded by another notice of delegation under 40 CFR 60.4151(b)(5)(iv) shall be deemed to be an electronic submission by me.”; and

(E)The following certification statement by such Hg authorized account representative or alternate Hg authorized account representative: “Until this notice of delegation is superseded by another notice of delegation under 40 CFR 60.4151 (b)(5)(iv), I agree to maintain an e-mail account and to notify the Administrator immediately of any change in my e-mail address unless all delegation of authority under 40 CFR 60.4151(b)(5) is terminated.”

(iv)A notice of delegation submitted under paragraph (b)(5)(iii) of this section shall be effective, with regard to the Hg authorized account representative or alternate Hg authorized account representative identified in such notice, upon receipt of such notice by the Administrator and until receipt by the Administrator of a superseding notice of delegation submitted by such Hg authorized account representative or alternate Hg authorized account representative, as appropriate. The superseding notice of delegation may replace any previously identified agent, add a new agent, or eliminate entirely any delegation of authority.

(v)Any electronic submission covered by the certification in paragraph (b)(5(iii)(D) of this section and made in accordance with a notice of delegation effective under paragraph (b)(5)(iv) of this section shall be deemed to be an electronic submission by the Hg designated representative or alternate Hg designated representative submitting such notice of delegation. 21. Section 60.4153 is amended as follows: a. In paragraph (a), by revising the words “By December 1, 2006,” to read “By December 1, 2007,” and by revising the words “at a source” to read “at the source”; b. In paragraph (b), by revising the words “December 1, 2008” to read “December 1, 2009” and by removing the words “or as determined by the Administrator”; c. By revising paragraph (c); and d. In paragraph (d), by removing the words “or determined by the Administrator”. § 60.4153 Recordation of Hg allowance allocations.

(c)By December 1, 2010 and December 1 of each year thereafter, the Administrator will record in the Hg Budget source's compliance account the Hg allowances allocated for the Hg Budget units at the source, as submitted by the permitting authority in accordance with § 60.4141(b), for the control period in the sixth year after the year of the applicable deadline for recordation under this paragraph. § 60.4154 [Amended] 22. Section 60.4154 is amended: a. In paragraph (a)(1), by revising the words “prior year;” to read “prior year; and”; b. In paragraph (a)(2), by revising the words “§§ 60.4160 through 60.4162 by the allowance transfer deadline for the control period; and” to read “§§ 60.4160 and 60.4161 by the allowance transfer deadline for the control period.”; c. By removing paragraph (a)(3); d. In paragraph

(b)introductory text, by revising the words “§§ 60.4160 through 60.4162” to read “§ 60.4161”; e. In paragraph (b)(1), by revising the words “§§ 60.4170 through 60.4176” to read “§§ 60.4170 through 60.4175”; f. In paragraph (c)(2)(ii), by revising the words “to any unit” to read “to any entity”; g. In paragraph (d)(2), by revising the word “violation” to read “violations”; h. In paragraph (e), by revising the words “under paragraph

(b)or (d)” to read “under paragraphs

(b)and (d)”; and i. In paragraph (f)(2), by revising the words “of this section.” to read “of this section, and record such deductions and transfers.” § 60.4157 [Amended] 23. Section 60.4157 is amended in paragraphs

(a)and

(b)by revising the words “§ 60.4160 through 60.4162” to read “§§ 60.4160 and 60.4161”. 24. Section 60.4170 is amended as follows: a. In the introductory text and paragraphs (a)(1) and (a)(2), by revising the words “§§ 60.4170 through 60.4176” to read “§§ 60.4170 through 60.4175”; b. In paragraph

(b)introductory text, by revising the words “The owner” to read “Except as provided in paragraph

(e)of this section, the owner”; c. In paragraph (c)(1), by removing the paragraph designation “(1)” and by revising the words “Except as provided in paragraph (c)(2) of this section, the owner” to read “The owner”; d. By removing paragraph (c)(2); e. In paragraph (d)(1), by revising the words “§§ 60.4171 through 60.4176” to read “§§ 60.4171 through 60.4174”; f. In paragraph (d)(2), by revising the words “§§ 60.4171 through 60.4176” to read “§§ 60.4171 through 60.4175”; g. In paragraph (d)(3), by revising the words “the atmosphere” to read “the atmosphere or heat input” and by revising the words “§§ 60.4171 through 60.4176” to read “§§ 60.4171 through 60.4175”; h. In paragraph (d)(4) introductory text, by revising the words “this subpart” to read “this section and §§ 60.4171 through 60.4175” i. In paragraph (d)(4)(ii), by revising the words “§§ 60.4171 through 60.4176” to read “§§ 60.4171 through 60.4175”; and j. By adding a new paragraph

(e)to read as follows: § 60.4170 General requirements.

(e)*Long-term cold storage.* The owner or operator of a Hg Budget unit is subject to the applicable provisions of part 75 of this chapter concerning units in long-term cold storage. § 60.4171 [Amended] 25. Section 60.4171 is amended as follows: a. In paragraph

(c)introductory text, by revising the words “(e.g.,” to read “(i.e.,”; b. In paragraph (c)(1), by revising the words “each monitoring system under § 60.4170(a)(1)” to read “each continuous monitoring system under § 60.4170(a)(1)”; c. In paragraph (c)(3) introductory text, by revising the words “apply the word ‘recertification’ instead of” to read “replace” and revise the words “and apply the word ‘recertified’ instead of the word ‘certified’ ” to read “with the word ‘recertification’, replace the word ‘certified’ with the word ‘recertified’,”; d. In paragraph (c)(3)(v)(A), by revising the words “§ 75.20(a)(4)(iii), or” to read “§ 75.20(a)(4)(iii) or”; e. In paragraph (c)(3)(v)(A)( *1* ), by revising the words “of this chapter, and” to read “of this chapter.”; and f. In paragraph (e), by revising the words “by the Administrator and, if applicable, the permitting authority” to read “by the Administrator”. § 60.4173 [Amended] 26. Section 60.4173 is amended by removing the words “, except that if the unit is not subject to an Acid Rain emissions limitation, the notification is only required to be sent to the permitting authority”. 27. Section 60.4174 is amended as follows: a. By revising paragraph (a); b. In paragraph (d)(3), by removing the words “and § 60.4176”; and c. In paragraph (e)(1), by removing the words “§ 60.4176,”; and d. Revising paragraph (e)(2). § 60.4174 Recordkeeping and reporting.

(a)*General provisions.* The Hg designated representative shall comply with all recordkeeping and reporting requirements in this section, the applicable recordkeeping and reporting requirements of § 75.84 of this chapter, and the requirements of § 60.4110(e)(1).

(e)* * *

(2)For a unit with add-on Hg emission controls, a flue gas desulfurization system, a selective catalytic reduction system, or a compact hybrid particulate collector system and for all hours where Hg data are substituted in accordance with § 75.34(a)(1) of this chapter, (i)(A) The Hg add-on emission controls, flue gas desulfurization system, selective catalytic reduction system, or compact hybrid particulate collector system were operating within the range of parameters listed in the quality assurance/quality control program under appendix B to part 75 of this chapter, or

(B)With regard to a flue gas desulfurization system or a selective catalytic reduction system, quality-assured SO 2 emission data recorded in accordance with part 75 of this chapter document that the flue gas desulfurization system was operating properly or quality-assured NO X emission data recorded in accordance with part 75 of this chapter document that the selective catalytic reduction system was operating properly, as applicable, and

(ii)The substitute data values do not systematically underestimate Hg emissions. § 60.4175 [Amended] 28. Section 60.4175 is amended by revising the words “Hg unit” to read “Hg Budget unit” and by removing the words “and § 60.4176” whenever they appear. § 60.4176 [Removed] 29. Section 60.4176 is removed. PART 62—[AMENDED] 30. The authority citation for part 62 continues to read as follows: Authority: 42 U.S.C. 7401, *et seq.* 31. Section 62.13 is amended by adding a new paragraph

(f)to read as follows: § 62.13 Federal plans.

(f)The substantive requirements of the coal-fired electric steam generating units mercury Federal plan are contained in subpart LLL of this part. These requirements include emission limits, compliance schedules, testing, monitoring, and reporting and recordkeeping requirements. 32. Add a new subpart LLL to read as follows: Subpart LLL—Emission Guidelines and Compliance Times for Coal-Fired Electric Steam Generating Units Sec. Hg Budget Trading Program General Provisions 62.15901 Purpose. 62.15902 Definitions. 62.15903 Measurements, abbreviations, and acronyms. 62.15904 Applicability. 62.15905 Retired unit exemption. 62.15906 Standard requirements. 62.15907 Computation of time. 62.15908 Appeal procedures. Hg Designated Representative for Hg Budget Sources 62.15910 Authorization and responsibilities of Hg designated representative. 62.15911 Alternate Hg designated representative. 62.15912 Changing Hg designated representative and alternate Hg designated representative; changes in owners and operators. 62.15913 Certificate of representation. 62.15914 Objections concerning Hg designated representative. 62.15915 Delegation by Hg designated representative and alternate Hg designated representative. Permits 62.15920 General Hg budget trading program permit requirements. 62.15921 Submission of Hg budget permit applications. 62.15922 Information requirements for Hg budget permit applications. 62.15923 Hg budget permit contents and term. 62.15924 Hg budget permit revisions. 62.15930 [Reserved] Hg Allowance Allocations 62.15940 State trading budgets. 62.15941 Timing requirements for Hg allowance allocations. 62.15942 Hg allowance allocations. 62.15943 Alternative of allocation of Hg allowances by permitting authority. Hg Allowance Tracking System 62.15950 [Reserved] 62.15951 Establishment of accounts. 62.15952 Responsibilities of Hg authorized account representative. 62.15953 Recordation of Hg allowance allocations. 62.15954 Compliance with Hg budget emissions limitation. 62.15955 Banking. 62.15956 Account error. 62.15957 Closing of general accounts. Hg Allowance Transfers 62.15960 Submission of Hg allowance transfers. 62.15961 EPA recordation. 62.15962 Notification. Monitoring and Reporting 62.15970 General requirements. 62.15971 Initial certification and recertification procedures. 62.15972 Out of control periods. 62.15973 Notifications. 62.15974 Recordkeeping and reporting. 62.15975 Petitions. Appendix A to Subpart Lll of Part 62—States With Approved State Plans Concerning Allocations Subpart LLL—Emission Guidelines and Compliance Times for Coal-Fired Electric Steam Generating Units Hg Budget Trading Program General Provisions § 62.15901 Purpose.

(a)This subpart sets forth the general provisions and the designated representative, permitting, allowance, and monitoring provisions for the federal mercury

(Hg)Budget Trading Program, under section 111 of the Clean Air Act (CAA), as a means of reducing national Hg emissions.

(b)Sources located in the following States, for which the Administrator has made a finding of failure to submit an approvable State plan under § 60.24(h) of this chapter and have not subsequently submitted to the Administrator an approved and currently effective State plan under § 60.24(h) of this chapter are subject to this subpart: [Reserved]. § 62.15902 Definitions. The terms used in this subpart shall have the meanings set forth in this section as follows: *Account number* means the identification number given by the Administrator to each Hg Allowance Tracking System account. *Acid Rain emissions limitation* means a limitation on emissions of sulfur dioxide or nitrogen oxides under the Acid Rain Program. *Acid Rain Program* means a multi-state sulfur dioxide and nitrogen oxides air pollution control and emission reduction program established by the Administrator under title IV of the CAA and parts 72 through 78 of this chapter. *Administrator* means the Administrator of the United States Environmental Protection Agency or the Administrator's duly authorized representative. *Allocate* or *allocation* means, with regard to Hg allowances, the determination by a permitting authority or the Administrator of the amount of Hg allowances to be initially credited to a Hg Budget unit, a new unit set-aside, or other entity. *Allowance transfer deadline* means, for a control period, midnight of March 1 (if it is a business day), or midnight of the first business day thereafter (if March 1 is not a business day), immediately following the control period and is the deadline by which a Hg allowance transfer must be submitted for recordation in a Hg Budget source's compliance account in order to be used to meet the source's Hg Budget emissions limitation for such control period in accordance with § 62.15954. *Alternate Hg designated representative* means, for a Hg Budget source and each Hg Budget unit at the source, the natural person who is authorized by the owners and operators of the source and all such units at the source, in accordance with §§ 62.15910 through 62.15915, to act on behalf of the Hg designated representative in matters pertaining to the Hg Budget Trading Program. If the Hg Budget source is also a CAIR NO X source, then this natural person shall be the same person as the alternate CAIR designated representative under the CAIR NO X Annual Trading Program. If the Hg Budget source is also a CAIR SO 2 source, then this natural person shall be the same person as the alternate CAIR designated representative under the CAIR SO 2 Trading Program. If the Hg Budget source is also a CAIR NO X Ozone Season source, then this natural person shall be the same person as the alternate CAIR designated representative under the CAIR NO X Ozone Season Trading Program. If the Hg Budget source is also subject to the Acid Rain Program, then this natural person shall be the same person as the alternate designated representative under the Acid Rain Program. *Automated data acquisition and handling system* or *DAHS* means that component of the continuous emission monitoring system (CEMS), or other emissions monitoring system approved for use under §§ 62.15970 though 62.15975, designed to interpret and convert individual output signals from pollutant concentration monitors, flow monitors, diluent gas monitors, and other component parts of the monitoring system to produce a continuous record of the measured parameters in the measurement units required under §§ 62.15970 through 62.15975. *Boiler* means an enclosed fossil- or other-fuel-fired combustion device used to produce heat and to transfer heat to recirculating water, steam, or other medium. *Bottoming-cycle cogeneration unit* means a cogeneration unit in which the energy input to the unit is first used to produce useful thermal energy and at least some of the reject heat from the useful thermal energy application or process is then used for electricity production. *CAIR NO* X *Annual Trading Program* means a multi-state nitrogen oxides air pollution control and emission reduction program established by the Administrator in accordance with subparts AA through II of part 97 of this chapter and §§ 51.123(p) and 52.35 of this chapter or approved and administered by the Administrator in accordance with subparts AA through II of part 96 of this chapter and § 51.123(o)(1) or

(2)of this chapter, as a means of mitigating interstate transport of fine particulates and nitrogen oxides. *CAIR NO* X *Ozone Season source* means a source that is subject to the CAIR NO X Ozone Season Trading Program. *CAIR NO* X *Ozone Season Trading Program* means a multi-state nitrogen oxides air pollution control and emission reduction program established by the Administrator in accordance with subparts AAAA through IIII of part 97 of this chapter and §§ 51.123(ee) and 52.35 of this chapter or approved and administered by the Administrator in accordance with subparts AAAA through IIII of part 96 of this chapter and § 51.123(aa)(1) or

(2)(and (bb)(1)), (bb)(2), or

(dd)of this chapter, as a means of mitigating interstate transport of ozone and nitrogen oxides. *CAIR NO* X *source* means a source that is subject to the CAIR NO X Annual Trading Program. *CAIR SO* 2 *source* means a source that is subject to the CAIR SO 2 Trading Program. *CAIR SO* 2 *Trading Program* means a multi-state sulfur dioxide air pollution control and emission reduction program established by the Administrator in accordance with subparts AAA through III of part 97 of this chapter and §§ 51.124(r) and 52.36 of this chapter or approved and administered by the Administrator in accordance with subparts AAA through III of part 96 of this chapter and § 51.124(o)(1) or

(2)of this chapter, as a means of mitigating interstate transport of fine particulates and sulfur dioxide. *Certifying official* means:

(1)For a corporation, a president, secretary, treasurer, or vice-president of the corporation in charge of a principal business function or any other person who performs similar policy or decision-making functions for the corporation;

(2)For a partnership or sole proprietorship, a general partner or the proprietor respectively; or

(3)For a local government entity or State, Federal, or other public agency, a principal executive officer or ranking elected official. *Clean Air Act* or *CAA* means the Clean Air Act, 42 U.S.C. 7401, *et seq.* *Coal* means any solid fuel classified as anthracite, bituminous, subbituminous, or lignite by the American Society of Testing and Materials

(ASTM)Standard Specification for Classification of Coals by Rank D388-77, 90, 91, 95, 98a, or 99 (Reapproved 2004)ε 1 (incorporated by reference, *see* § 60.17). *Coal-derived fuel* means any fuel (whether in a solid, liquid, or gaseous state) produced by the mechanical, thermal, or chemical processing of coal. *Coal-fired* means combusting any amount of coal or coal-derived fuel, alone or in combination with any amount of any other fuel, during any year. *Cogeneration unit* means a stationary, coal-fired boiler or stationary, coal-fired combustion turbine:

(1)Having equipment used to produce electricity and useful thermal energy for industrial, commercial, heating, or cooling purposes through the sequential use of energy; and

(2)Producing during the 12-month period starting on the date the unit first produces electricity and during any calendar year after the calendar year in which the unit first produces electricity:

(i)For a topping-cycle cogeneration unit,

(A)Useful thermal energy not less than 5 percent of total energy output; and

(B)Useful power that, when added to one-half of useful thermal energy produced, is not less then 42.5 percent of total energy input, if useful thermal energy produced is 15 percent or more of total energy output, or not less than 45 percent of total energy input, if useful thermal energy produced is less than 15 percent of total energy output.

(ii)For a bottoming-cycle cogeneration unit, useful power not less than 45 percent of total energy input. *Combustion turbine* means:

(1)An enclosed device comprising a compressor, a combustor, and a turbine and in which the flue gas resulting from the combustion of fuel in the combustor passes through the turbine, rotating the turbine; and

(2)If the enclosed device under paragraph

(1)of this definition is combined cycle, any associated duct burner, heat recovery steam generator, and steam turbine. *Commence commercial operation* means, with regard to a unit:

(1)To have begun to produce steam, gas, or other heated medium used to generate electricity for sale or use, including test generation, except as provided in § 62.15905.

(i)For a unit that is a Hg Budget unit under § 62.15904 on the later of November 15, 1990 or the date the unit commences commercial operation as defined in paragraph

(ii)For a unit that is a Hg Budget unit under § 62.15904 on the later of November 15, 1990 or the date the unit commences commercial operation as defined in paragraph

(1)or

(2)of this definition as appropriate.

(2)Notwithstanding paragraph

(1)of this definition and except as provided in § 62.15905, for a unit that is not a Hg Budget unit under § 62.15904 on the later of November 15, 1990 or the date the unit commences commercial operation as defined in paragraph

(1)of this definition, the unit's date for commencement of commercial operation shall be the date on which the unit becomes a Hg Budget unit under § 62.15904.

(i)For a unit with a date for commencement of commercial operation as defined in paragraph

(2)of this definition and that subsequently undergoes a physical change (other than replacement of the unit by a unit at the same source), such date shall remain the date of commencement of commercial operation of the unit, which shall continue to be treated as the same unit.

(ii)For a unit with a date for commencement of commercial operation as defined in paragraph

(1)or

(2)of this definition as appropriate. *Commence operation* means:

(1)To have begun any mechanical, chemical, or electronic process, including, with regard to a unit, start-up of a unit's combustion chamber.

(2)For a unit that undergoes a physical change (other than replacement of the unit by a unit at the same source) after the date the unit commences operation as defined in paragraph

(1)of this definition, such date shall remain the date of commencement of operation of the unit, which shall continue to be treated as the same unit.

(3)For a unit that is replaced by a unit at the same source ( *e.g.* , repowered) after the date the unit commences operation as defined in paragraph

(3)of this definition, as appropriate. *Common stack* means a single flue through which emissions from 2 or more units are exhausted. *Compliance account* means a Hg Allowance Tracking System account, established by the Administrator for a Hg Budget source under §§ 62.15950 through 62.15957, in which any Hg allowance allocations for the Hg Budget units at the source are initially recorded and in which are held any Hg allowances available for use for a control period in order to meet the source's Hg Budget emissions limitation in accordance with § 62.15954. *Continuous emission monitoring system* or *CEMS* means the equipment required under §§ 62.15970 through 62.15975 to sample, analyze, measure, and provide, by means of readings recorded at least once every 15 minutes (using an automated data acquisition and handling system (DAHS)), a permanent record of Hg emissions, stack gas volumetric flow rate, stack gas moisture content, and oxygen or carbon dioxide concentration (as applicable), in a manner consistent with part 75 of this chapter. The following systems are the principal types of continuous emission monitoring systems required under §§ 62.15970 through 62.15975:

(1)A flow monitoring system, consisting of a stack flow rate monitor and an automated data acquisition and handling system and providing a permanent, continuous record of stack gas volumetric flow rate, in standard cubic feet per hour (scfh);

(2)A Hg concentration monitoring system, consisting of a Hg pollutant concentration monitor and an automated data acquisition and handling system and providing a permanent, continuous record of Hg emissions in micrograms per dry standard cubic meter (μg/dscm);

(3)A moisture monitoring system, as defined in § 75.11(b)(2) of this chapter and providing a permanent, continuous record of the stack gas moisture content, in percent H 2 O.

(4)A carbon dioxide monitoring system, consisting of a CO 2 concentration monitor (or an oxygen monitor plus suitable mathematical equations from which the CO 2 concentration is derived) and an automated data acquisition and handling system and providing a permanent, continuous record of CO 2 emissions, in percent CO 2 ; and

(5)An oxygen monitoring system, consisting of an O 2 concentration monitor and an automated data acquisition and handling system and providing a permanent, continuous record of O 2 , in percent O 2 . *Control period* means the period beginning January 1 of a calendar year, except as provided in § 62.15906(c)(2), and ending on December 31 of the same year, inclusive. *Emissions* means air pollutants exhausted from a unit or source into the atmosphere, as measured, recorded, and reported to the Administrator by the Hg designated representative and as determined by the Administrator in accordance with §§ 62.15970 through 62.15975. *Excess emissions* means any ounce of mercury emitted by the Hg Budget units at a Hg Budget source during a control period that exceeds the Hg Budget emissions limitation for the source. *General account* means a Hg Allowance Tracking System account, established under § 62.15951, that is not a compliance account. *Generator* means a device that produces electricity. *Gross electrical output* means, with regard to a cogeneration unit, electricity made available for use, including any such electricity used in the power production process (which process includes, but is not limited to, any on-site processing or treatment of fuel combusted at the unit and any on-site emission controls). *Heat input* means, with regard to a specified period of time, the product (in MMBtu/time) of the gross calorific value of the fuel (in Btu/lb) divided by 1,000,000 Btu/MMBtu and multiplied by the fuel feed rate into a combustion device (in lb of fuel/time), as measured, recorded, and reported to the Administrator by the Hg designated representative and determined by the Administrator in accordance with §§ 62.15970 through 62.15975 and excluding the heat derived from preheated combustion air, recirculated flue gases, or exhaust from other sources. *Heat input rate* means the amount of heat input (in MMBtu) divided by unit operating time (in hr) or, with regard to a specific fuel, the amount of heat input attributed to the fuel (in MMBtu) divided by the unit operating time (in hr) during which the unit combusts the fuel. *Hg allowance* means a limited authorization issued by a permitting authority or the Administrator under §§ 62.15940 through 62.15943, or under provisions of a State plan that are approved under § 52.24(h)(6) of this chapter, to emit one ounce of mercury during a control period of the specified calendar year for which the authorization is allocated or of any calendar year thereafter under the Hg Budget Trading Program. An authorization to emit mercury that is not issued under §§ 62.15940 through 62.15943 or under provisions of a State plan that are approved under § 52.24(h)(6) of this chapter shall not be a “Hg allowance.” *Hg allowance deduction* or *deduct Hg allowances* means the permanent withdrawal of Hg allowances by the Administrator from a compliance account, *e.g.* , in order to account for a specified number of ounces of total mercury emissions from all Hg Budget units at a Hg Budget source for a control period, determined in accordance with §§ 62.15970 through 62.15975, or to account for excess emissions. *Hg Allowance Tracking System* means the system by which the Administrator records allocations, deductions, and transfers of Hg allowances under the Hg Budget Trading Program. Such allowances will be allocated, held, deducted, or transferred only as whole allowances. *Hg Allowance Tracking System account* means an account in the Hg Allowance Tracking System established by the Administrator for purposes of recording the allocation, holding, transferring, or deducting of Hg allowances. *Hg allowances held* or *hold Hg allowances* means the Hg allowances recorded by the Administrator, or submitted to the Administrator for recordation, in accordance with §§ 62.15950 through 62.15962, in a Hg Allowance Tracking System account. *Hg authorized account representative* means, with regard to a general account, a responsible natural person who is authorized, in accordance with §§ 62.15910 through 62.15915 and §§ 62.15950 through 62.15957, to transfer and otherwise dispose of Hg allowances held in the general account and, with regard to a compliance account, the Hg designated representative of the source. *Hg Budget emissions limitation* means, for a Hg Budget source, the equivalent, in ounces of Hg emissions in a control period, of the Hg allowances available for deduction for the source under § 62.15954(a) and

(b)for the control period. *Hg Budget permit* means the legally binding and Federally enforceable written document, or portion of such document, issued by the permitting authority under §§ 62.15920 through 62.15924, including any permit revisions, specifying the Hg Budget Trading Program requirements applicable to a Hg Budget source, to each Hg Budget unit at the source, and to the owners and operators and the Hg designated representative of the source and each such unit. *Hg Budget source* means a source that includes one or more Hg Budget units. *Hg Budget Trading Program* means a multi-state Hg air pollution control and emission reduction program established by the Administrator in accordance with this subpart, § 60.24(h)(9) of this chapter, and § 62.13(f) or approved and administered by the Administrator in accordance with subpart HHHH of part 60 and § 60.24(h)(6) of this chapter, as a means of reducing national Hg emissions. *Hg Budget unit* means a unit that is subject to the Hg Budget Trading Program under § 62.15904. *Hg designated representative* means, for a Hg Budget source and each Hg Budget unit at the source, the natural person who is authorized by the owners and operators of the source and all such units at the source, in accordance with §§ 62.15910 through 62.15915, to represent and legally bind each owner and operator in matters pertaining to the Hg Budget Trading Program. If the Hg Budget source is also a CAIR NO X source, then this natural person shall be the same person as the CAIR designated representative under the CAIR NO X Annual Trading Program. If the Hg Budget source is also a CAIR SO 2 source, then this natural person shall be the same person as the CAIR designated representative under the CAIR SO 2 Trading Program. If the Hg Budget source is also a CAIR NO X Ozone Season source, then this natural person shall be the same person as the CAIR designated representative under the CAIR NO X Ozone Season Trading Program. If the Hg Budget source is also subject to the Acid Rain Program, then this natural person shall be the same person as the designated representative under the Acid Rain Program. *Life-of-the-unit, firm power contractual arrangement* means a unit participation power sales agreement under which a utility or industrial customer reserves, or is entitled to receive, a specified amount or percentage of nameplate capacity and associated energy generated by any specified unit and pays its proportional amount of such unit's total costs, pursuant to a contract:

(1)For the life of the unit;

(2)For a cumulative term of no less than 30 years, including contracts that permit an election for early termination; or

(3)For a period no less than 25 years or 70 percent of the economic useful life of the unit determined as of the time the unit is built, with option rights to purchase or release some portion of the nameplate capacity and associated energy generated by the unit at the end of the period. *Lignite* means coal that is classified as lignite A or B according to the American Society of Testing and Materials

(ASTM)Standard Specification for Classification of Coals by Rank D388-77, 90, 91, 95, 98a, or 99 (Reapproved 2004) ε 1 (incorporated by reference, *see* § 60.17). *Maximum design heat input* means the maximum amount of fuel per hour (in Btu/hr) that a unit is capable of combusting on a steady-state basis as of the initial installation of the unit as specified by the manufacturer of the unit. *Monitoring system* means any monitoring system that meets the requirements of §§ 62.15970 through 62.15975, including a continuous emissions monitoring system, an alternative monitoring system, or an excepted monitoring system under part 75 of this chapter. *Municipal waste* means “municipal waste” as defined in section 129(g)(5) of the Clean Air Act. *Nameplate capacity* means, starting from the initial installation of a generator, the maximum electrical generating output (in MWe) that the generator is capable of producing on a steady-state basis and during continuous operation (when not restricted by seasonal or other deratings) as of such installation as specified by the manufacturer of the generator or, starting from the completion of any subsequent physical change in the generator resulting in an increase in the maximum electrical generating output (in MWe) that the generator is capable of producing on a steady-state basis and during continuous operation (when not restricted by seasonal or other deratings), such increased maximum amount as of such completion as specified by the person conducting the physical change. *Operator* means any person who operates, controls, or supervises a Hg Budget unit or a Hg Budget source and shall include, but not be limited to, any holding company, utility system, or plant manager of such a unit or source. *Ounce* means 2.84 × 10 7 micrograms. For the purpose of determining compliance with the Hg Budget emissions limitation, total ounces of mercury emissions for a control period shall be calculated as the sum of all recorded hourly emissions (or the mass equivalent of the recorded hourly emission rates) in accordance with §§ 62.15970 through 62.15975, but with any remaining fraction of an ounce equal to or greater than 0.50 ounces deemed to equal one ounce and any remaining fraction of an ounce less than 0.50 ounces deemed to equal zero ounces. *Owner* means any of the following persons:

(1)With regard to a Hg Budget source or a Hg Budget unit at a source, respectively:

(i)Any holder of any portion of the legal or equitable title in a Hg Budget unit at the source or the Hg Budget unit;

(ii)Any holder of a leasehold interest in a Hg Budget unit at the source or the Hg Budget unit; or

(iii)Any purchaser of power from a Hg Budget unit at the source or the Hg Budget unit under a life-of-the-unit, firm power contractual arrangement; provided that, unless expressly provided for in a leasehold agreement, owner shall not include a passive lessor, or a person who has an equitable interest through such lessor, whose rental payments are not based (either directly or indirectly) on the revenues or income from such Hg Budget unit; or

(2)With regard to any general account, any person who has an ownership interest with respect to the Hg allowances held in the general account and who is subject to the binding agreement for the Hg authorized account representative to represent the person's ownership interest with respect to Hg allowances. *Permitting authority* means the State air pollution control agency, local agency, other State agency, or other agency authorized by the Administrator to issue or revise permits to meet the requirements of the Hg Budget Trading Program or, if no such agency has been so authorized, the Administrator. *Potential electrical output capacity* means 33 percent of a unit's maximum design heat input, divided by 3,413 Btu/kWh, divided by 1,000 kWh/MWh, and multiplied by 8,760 hr/yr. *Receive or receipt of* means, when referring to the permitting authority or the Administrator, to come into possession of a document, information, or correspondence (whether sent in hard copy or by authorized electronic transmission), as indicated in an official log, or by a notation made on the document, information, or correspondence, by the permitting authority or the Administrator in the regular course of business. *Recordation, record,* or *recorded* means, with regard to Hg allowances, the movement of Hg allowances by the Administrator into or between Hg Allowance Tracking System accounts, for purposes of allocation, transfer, or deduction. *Reference method* means any direct test method of sampling and analyzing for an air pollutant as specified in § 75.22 of this chapter. *Replacement, replace,* or *replaced* means, with regard to a unit, the demolishing of a unit, or the permanent shutdown and permanent disabling of a unit, and the construction of another unit (the replacement unit) to be used instead of the demolished or shutdown unit (the replaced unit). *Repowered* means, with regard to a unit, replacement of a coal-fired boiler with one of the following coal-fired technologies at the same source as the coal-fired boiler:

(1)Atmospheric or pressurized fluidized bed combustion;

(2)Integrated gasification combined cycle;

(3)Magnetohydrodynamics;

(4)Direct and indirect coal-fired turbines;

(5)Integrated gasification fuel cells; or

(6)As determined by the Administrator in consultation with the Secretary of Energy, a derivative of one or more of the technologies under paragraphs

(1)through

(5)of this definition and any other coal-fired technology capable of controlling multiple combustion emissions simultaneously with improved boiler or generation efficiency and with significantly greater waste reduction relative to the performance of technology in widespread commercial use as of January 1, 2005. *Sequential use of energy* means:

(1)For a topping-cycle cogeneration unit, the use of reject heat from electricity production in a useful thermal energy application or process; or

(2)For a bottoming-cycle cogeneration unit, the use of reject heat from useful thermal energy application or process in electricity production. *Serial number* means, for a Hg allowance, the unique identification number assigned to each Hg allowance by the Administrator. *Solid waste incineration unit* means a stationary, coal-fired boiler or stationary, coal-fired combustion turbine that is a “solid waste incineration unit” as defined in section 129(g)(1) of the Clean Air Act. *Source* means all buildings, structures, or installations located in one or more contiguous or adjacent properties under common control of the same person or persons. For purposes of section 502(c) of the Clean Air Act, a “source,” including a “source” with multiple units, shall be considered a single “facility.” *State* means:

(1)For purposes of referring to a governing entity, one of the States in the United States, the District of Columbia, or, if approved for treatment as a State under part 49 of this chapter, the Navajo Nation or Ute Indian Tribe where such governing entity is subject to a finding by the Administrator of failure to submit an approvable State plan under § 60.24(h) of this chapter and has not subsequently submitted to the Administrator an approved and currently effective State plan under § 60.24(h) of this chapter; or

(2)For purposes of referring to geographic areas, one of the States in the United States, the District of Columbia, the Navajo Nation Indian country, or the Ute Tribe Indian country that is not covered by an Administrator approved and currently effective State or Tribal plan. *Subbituminous* means coal that is classified as subbituminous A, B, or C, according to the American Society of Testing and Materials

(ASTM)Standard Specification for Classification of Coals by Rank D388-77, 90, 91, 95, 98a, or 99 (Reapproved 2004) 1 (incorporated by reference, *see* § 60.17). *Submit or serve* means to send or transmit a document, information, or correspondence to the person specified in accordance with the applicable regulation:

(1)In person;

(2)By United States Postal Service; or

(3)By other means of dispatch or transmission and delivery. Compliance with any “submission” or “service” deadline shall be determined by the date of dispatch, transmission, or mailing and not the date of receipt. *Title V operating permit* means a permit issued under title V of the Clean Air Act and part 70 or part 71 of this chapter. *Title V operating permit regulations* means the regulations that the Administrator has approved or issued as meeting the requirements of title V of the Clean Air Act and part 70 or 71 of this chapter. *Topping-cycle cogeneration unit* means a cogeneration unit in which the energy input to the unit is first used to produce useful power, including electricity, and at least some of the reject heat from the electricity production is then used to provide useful thermal energy. *Total energy input* means, with regard to a cogeneration unit, total energy of all forms supplied to the cogeneration unit, excluding energy produced by the cogeneration unit itself. *Total energy output* means, with regard to a cogeneration unit, the sum of useful power and useful thermal energy produced by the cogeneration unit. *Unit* means a stationary, coal-fired boiler or a stationary, coal-fired combustion turbine. *Unit operating day* means a calendar day in which a unit combusts any fuel. *Unit operating hour* or *hour of unit operation* means an hour in which a unit combusts any fuel. *Useful power* means, with regard to a cogeneration unit, electricity or mechanical energy made available for use, excluding any such energy used in the power production process (which process includes, but is not limited to, any on-site processing or treatment of fuel combusted at the unit and any on-site emission controls). *Useful thermal energy* means, with regard to a cogeneration unit, thermal energy that is:

(1)Made available to an industrial or commercial process (not a power production process), excluding any heat contained in condensate return or makeup water;

(2)Used in a heating application ( *e.g.* , space heating or domestic hot water heating); or

(3)Used in a space cooling application ( *i.e.* , thermal energy used by an absorption chiller). *Utility power distribution system* means the portion of an electricity grid owned or operated by a utility and dedicated to delivering electricity to customers. § 62.15903 Measurements, abbreviations, and acronyms. Measurements, abbreviations, and acronyms used in this subpart are defined as follows: Btu—British thermal unit. CO 2 —carbon dioxide. H 2 O—water. Hg—mercury. hr—hour. kW—kilowatt electrical. kWh—kilowatt hour. lb—pound. MMBtu—million Btu. MWe—megawatt electrical. MWh—megawatt hour. NO X —nitrogen oxides. O 2 —oxygen. ppm—parts per million. scfh—standard cubic feet per hour. SO 2 —sulfur dioxide. yr—year. § 62.15904 Applicability.

(a)Except as provided in paragraph

(b)of this section:

(1)The following units in a State shall be Hg Budget units, and any source that includes one or more such units shall be a Hg Budget source, subject to the requirements of this subpart: Any stationary, coal-fired boiler or stationary, coal-fired combustion turbine serving at any time, since the later of November 15, 1990 or the start-up of the unit's combustion chamber, a generator with nameplate capacity of more than 25 MWe producing electricity for sale.

(2)If a stationary boiler or stationary combustion turbine that, under paragraph (a)(1) of this section, is not a Hg Budget unit begins to combust coal or coal-derived fuel or to serve a generator with nameplate capacity of more than 25 MWe producing electricity for sale, the unit shall become a Hg Budget unit as provided in paragraph (a)(1) of this section on the first date on which it both combusts coal or coal-derived fuel and serves such generator.

(b)The units in a State that meet the requirements set forth in paragraph (b)(1)(i) or (b)(2) of this section shall not be Hg Budget units: (1)(i) Any unit that is a Hg Budget unit under paragraph (a)(1) or

(2)of this section:

(A)Qualifying as a cogeneration unit during the 12-month period starting on the date the unit first produces electricity and continuing to qualify as a cogeneration unit; and

(B)Not serving at any time, since the later of November 15, 1990 or the start-up of the unit's combustion chamber, a generator with nameplate capacity of more than 25 MWe supplying in any calendar year more than one-third of the unit's potential electric output capacity or 219,000 MWh, whichever is greater, to any utility power distribution system for sale.

(ii)If a unit qualifies as a cogeneration unit during the 12-month period starting on the date the unit first produces electricity and meets the requirements of paragraphs (b)(1)(i) of this section for at least one calendar year, but subsequently no longer meets all such requirements, the unit shall become a Hg Budget unit starting on the earlier of January 1 after the first calendar year during which the unit first no longer qualifies as a cogeneration unit or January 1 after the first calendar year during which the unit no longer meets the requirements of paragraph (b)(1)(i)(B) of this section.

(2)Any unit that is a Hg Budget unit under paragraph (a)(1) or

(2)of this section, is a solid waste incineration unit combusting municipal waste, and is subject to the requirements of:

(i)A State Plan approved by the Administrator in accordance with subpart Cb of part 60 of this chapter (emissions guidelines and compliance times for certain large municipal waste combustors);

(ii)Subpart Eb of part 60 of this chapter (standards of performance for certain large municipal waste combustors);

(iii)Subpart AAAA of part 60 of this chapter (standards of performance for certain small municipal waste combustors);

(iv)A State Plan approved by the Administrator in accordance with subpart BBBB of part 60 of this chapter (emission guidelines and compliance times for certain small municipal waste combustion units);

(v)Subpart FFF, of part 62 of this chapter (Federal Plan requirements for certain large municipal waste combustors); or

(vi)Subpart JJJ of part 62 of this chapter (Federal Plan requirements for certain small municipal waste combustion units).

(c)A certifying official of an owner or operator of any combustion device may petition the Administrator at any time for a determination concerning the applicability, under paragraphs

(a)and

(b)of this section, of the Hg Budget Trading Program to the combustion device.

(1)*Petition content.* The petition shall be in writing and include the identification of the combustion device and the relevant facts about the combustion device. The petition and any other documents provided to the Administrator in connection with the petition shall include the following certification statement, signed by the certifying official: “I am authorized to make this submission on behalf of the owners and operators of the combustion device for which the submission is made. I certify under penalty of law that I have personally examined, and am familiar with, the statements and information submitted in this document and all its attachments. Based on my inquiry of those individuals with primary responsibility for obtaining the information, I certify that the statements and information are to the best of my knowledge and belief true, accurate, and complete. I am aware that there are significant penalties for submitting false statements and information or omitting required statements and information, including the possibility of fine or imprisonment.”

(2)*Submission.* The petition and any other documents provided in connection with the petition shall be submitted to the Director of the Clean Air Markets Division (or its successor), U.S. Environmental Protection Agency, who will act on the petition as the Administrator's duly authorized representative.

(3)*Response.* The Administrator will issue a written response to the petition and may request supplemental information relevant to such petition. The Administrator's determination concerning the applicability, under paragraphs

(a)and

(b)of this section, of the Hg Budget Trading Program to the combustion device shall be binding on the permitting authority unless the petition or other information or documents provided in connection with the petition are found to have contained significant, relevant errors or omissions. § 62.15905 Retired unit exemption. (a)(1) Any Hg Budget unit that is permanently retired shall be exempt from the Hg Budget Trading Program, except for the provisions of this section, § 62.15902, § 62.15903, § 62.15904, § 62.15906(c)(4) through (7), § 62.15907, § 62.15908, §§ 62.15910 through 62.15915, and §§ 62.15940 through 62.15962.

(2)The exemption under paragraph (a)(1) of this section shall become effective the day on which the Hg Budget unit is permanently retired. Within 30 days of the unit's permanent retirement, the Hg designated representative shall submit a statement to the permitting authority otherwise responsible for administering any Hg Budget permit for the unit and shall submit a copy of the statement to the Administrator. The statement shall state, in a format prescribed by the permitting authority, that the unit was permanently retired on a specific date and will comply with the requirements of paragraph

(b)of this section.

(3)After receipt of the statement under paragraph (a)(2) of this section, the permitting authority will amend any permit under §§ 62.15920 through 62.15924 covering the source at which the unit is located to add the provisions and requirements of the exemption under paragraphs (a)(1) and

(b)of this section.

(b)*Special provisions.*

(1)A unit exempt under paragraph

(a)of this section shall not emit any mercury, starting on the date that the exemption takes effect.

(2)The Administrator or the permitting authority will allocate Hg allowances under §§ 62.15940 through 62.15943 to a unit exempt under paragraph

(a)of this section.

(3)For a period of 5 years from the date the records are created, the owners and operators of a unit exempt under paragraph

(a)of this section shall retain, at the source that includes the unit, records demonstrating that the unit is permanently retired. The 5-year period for keeping records may be extended for cause, at any time before the end of the period, in writing by the permitting authority or the Administrator. The owners and operators bear the burden of proof that the unit is permanently retired.

(4)The owners and operators and, to the extent applicable, the Hg designated representative of a unit exempt under paragraph

(a)of this section shall comply with the requirements of the Hg Budget Trading Program concerning all periods for which the exemption is not in effect, even if such requirements arise, or must be complied with, after the exemption takes effect.

(5)A unit exempt under paragraph

(a)of this section and located at a source that is required, or but for this exemption would be required, to have a title V operating permit shall not resume operation unless the Hg designated representative of the source submits a complete Hg Budget permit application under § 62.15922 for the unit not less than 18 months (or such lesser time provided by the permitting authority) before the later of January 1, 2010 or the date on which the unit resumes operation.

(6)On the earlier of the following dates, a unit exempt under paragraph

(a)of this section shall lose its exemption:

(i)The date on which the Hg designated representative submits a Hg Budget permit application for the unit under paragraph (b)(5) of this section;

(ii)The date on which the Hg designated representative is required under paragraph (b)(5) of this section to submit a Hg Budget permit application for the unit; or

(iii)The date on which the unit resumes operation, if the Hg designated representative is not required to submit a Hg Budget permit application for the unit.

(7)For the purpose of applying monitoring, reporting, and recordkeeping requirements under §§ 62.15970 through 62.15975, a unit that loses its exemption under paragraph

(a)of this section shall be treated as a unit that commences commercial operation on the first date on which the unit resumes operation. § 62.15906 Standard requirements.

(a)*Permit requirements.*

(1)The Hg designated representative of each Hg Budget source required to have a title V operating permit and each Hg Budget unit required to have a title V operating permit at the source shall:

(i)Submit to the permitting authority a complete Hg Budget permit application under § 62.15922 in accordance with the deadlines specified in § 62.15921; and

(ii)Submit in a timely manner any supplemental information that the permitting authority determines is necessary in order to review a Hg Budget permit application and issue or deny a Hg Budget permit.

(2)The owners and operators of each Hg Budget source required to have a title V operating permit and each Hg Budget unit required to have a title V operating permit at the source shall have a Hg Budget permit issued by the permitting authority under §§ 62.15920 through 62.15924 for the source and operate the source and the unit in compliance with such Hg Budget permit.

(3)The owners and operators of a Hg Budget source that is not otherwise required to have a title V operating permit and each Hg Budget unit that is not otherwise required to have a title V operating permit are not required to submit a Hg Budget permit application, and to have a Hg Budget permit, under §§ 62.15920 through 62.15924 for such Hg Budget source and such Hg Budget unit.

(b)*Monitoring, reporting, and recordkeeping requirements.*

(1)The owners and operators, and the Hg designated representative, of each Hg Budget source and each Hg Budget unit at the source shall comply with the monitoring, reporting, and recordkeeping requirements of §§ 62.15970 through 62.15975.

(2)The emissions measurements recorded and reported in accordance with §§ 62.15970 through 62.15975 shall be used to determine compliance by each Hg Budget source with the Hg Budget emissions limitation under paragraph

(c)of this section.

(c)*Mercury emission requirements.*

(1)As of the allowance transfer deadline for a control period, the owners and operators of each Hg Budget source and each Hg Budget unit at the source shall hold, in the source's compliance account, Hg allowances available for compliance deductions for the control period under § 62.15954(a) in an amount not less than the ounces of total mercury emissions for the control period from all Hg Budget units at the source, as determined in accordance with §§ 62.15970 through 62.15975.

(2)A Hg Budget unit shall be subject to the requirements under paragraph (c)(1) of this section for the control period starting on the later of January 1, 2010 or the deadline for meeting the unit's monitor certification requirements under § 62.15970(b)(1) or

(2)and for each control period thereafter.

(3)A Hg allowance shall not be deducted, for compliance with the requirements under paragraph (c)(1) of this section, for a control period in a calendar year before the year for which the Hg allowance was allocated.

(4)Hg allowances shall be held in, deducted from, or transferred into or among Hg Allowance Tracking System accounts in accordance with §§ 62.15940 through 62.15962.

(5)A Hg allowance is a limited authorization to emit one ounce of mercury in accordance with the Hg Budget Trading Program. No provision of the Hg Budget Trading Program, the Hg Budget permit application, the Hg Budget permit, or an exemption under § 62.15905 and no provision of law shall be construed to limit the authority of the United States to terminate or limit such authorization.

(6)A Hg allowance does not constitute a property right.

(7)Upon recordation by the Administrator under §§ 62.15940 through 62.15962, every allocation, transfer, or deduction of a Hg allowance to or from a Hg Budget source's compliance account is incorporated automatically in any Hg Budget permit of the source.

(d)*Excess emissions requirements* . If a Hg Budget source emits mercury during any control period in excess of the Hg Budget emissions limitation, then:

(1)The owners and operators of the source and each Hg Budget unit at the source shall surrender the Hg allowances required for deduction under § 62.15954(d)(1) and pay any fine, penalty, or assessment or comply with any other remedy imposed, for the same violations, under the Clean Air Act or applicable State law; and

(2)Each ounce of such excess emissions and each day of such control period shall constitute a separate violation of this subpart, the Clean Air Act, and applicable State law.

(e)*Recordkeeping and reporting requirements* .

(1)Unless otherwise provided, the owners and operators of the Hg Budget source and each Hg Budget unit at the source shall keep on site at the source each of the following documents for a period of 5 years from the date the document is created. This period may be extended for cause, at any time before the end of 5 years, in writing by the permitting authority or the Administrator.

(i)The certificate of representation under § 62.15913 for the Hg designated representative for the source and each Hg Budget unit at the source and all documents that demonstrate the truth of the statements in the certificate of representation; provided that the certificate and documents shall be retained on site at the source beyond such 5-year period until such documents are superseded because of the submission of a new certificate of representation under § 62.15913 changing the Hg designated representative.

(ii)All emissions monitoring information, in accordance with §§ 62.15970 through 62.15975, provided that to the extent that §§ 62.15970 through 62.15975 provides for a 3-year period for recordkeeping, the 3-year period shall apply.

(iii)Copies of all reports, compliance certifications, and other submissions and all records made or required under the Hg Budget Trading Program.

(iv)Copies of all documents used to complete a Hg Budget permit application and any other submission under the Hg Budget Trading Program or to demonstrate compliance with the requirements of the Hg Budget Trading Program.

(2)The Hg designated representative of a Hg Budget source and each Hg Budget unit at the source shall submit the reports required under the Hg Budget Trading Program, including those under §§ 62.15970 through 62.15975.

(f)*Liability* .

(1)Each Hg Budget source and each Hg Budget unit shall meet the requirements of the Hg Budget Trading Program.

(2)Any provision of the Hg Budget Trading Program that applies to a Hg Budget source or the Hg designated representative of a Hg Budget source shall also apply to the owners and operators of such source and of the Hg Budget units at the source.

(3)Any provision of the Hg Budget Trading Program that applies to a Hg Budget unit or the Hg designated representative of a Hg Budget unit shall also apply to the owners and operators of such unit.

(g)*Effect on other authorities* . No provision of the Hg Budget Trading Program, a Hg Budget permit application, a Hg Budget permit, or an exemption under § 62.15905 shall be construed as exempting or excluding the owners and operators, and the Hg designated representative, of a Hg Budget source or Hg Budget unit from compliance with any other provision of the applicable, approved State implementation plan, a Federally enforceable permit, or the Clean Air Act. § 62.15907 Computation of time.

(a)Unless otherwise stated, any time period scheduled, under the Hg Budget Trading Program, to begin on the occurrence of an act or event shall begin on the day the act or event occurs.

(b)Unless otherwise stated, any time period scheduled, under the Hg Budget Trading Program, to begin before the occurrence of an act or event shall be computed so that the period ends the day before the act or event occurs.

(c)Unless otherwise stated, if the final day of any time period, under the Hg Budget Trading Program, falls on a weekend or a State or Federal holiday, the time period shall be extended to the next business day. § 62.15908 Appeal procedures. The appeal procedures for decisions of the Administrator under the Hg Budget Trading Program are set forth in part 78 of this chapter. Hg Designated Representative for Hg Budget Sources § 62.15910 Authorization and responsibilities of Hg designated representative.

(a)Except as provided under § 62.15911, each Hg Budget source, including all Hg Budget units at the source, shall have one and only one Hg designated representative, with regard to all matters under the Hg Budget Trading Program concerning the source or any Hg Budget unit at the source.

(b)The Hg designated representative of the Hg Budget source shall be selected by an agreement binding on the owners and operators of the source and all Hg Budget units at the source and shall act in accordance with the certification statement in § 62.15913(a)(4)(iv).

(c)Upon receipt by the Administrator of a complete certificate of representation under § 62.15913, the Hg designated representative of the source shall represent and, by his or her representations, actions, inactions, or submissions, legally bind each owner and operator of the Hg Budget source represented and each Hg Budget unit at the source in all matters pertaining to the Hg Budget Trading Program, notwithstanding any agreement between the Hg designated representative and such owners and operators. The owners and operators shall be bound by any decision or order issued to the Hg designated representative by the permitting authority, the Administrator, or a court regarding the source or unit.

(d)No Hg Budget permit will be issued, no emissions data reports will be accepted, and no Hg Allowance Tracking System account will be established for a Hg Budget unit at a source, until the Administrator has received a complete certificate of representation under § 62.15913 for a Hg designated representative of the source and the Hg Budget units at the source. (e)(1) Each submission under the Hg Budget Trading Program shall be submitted, signed, and certified by the Hg designated representative for each Hg Budget source on behalf of which the submission is made. Each such submission shall include the following certification statement by the Hg designated representative: “I am authorized to make this submission on behalf of the owners and operators of the source or units for which the submission is made. I certify under penalty of law that I have personally examined, and am familiar with, the statements and information submitted in this document and all its attachments. Based on my inquiry of those individuals with primary responsibility for obtaining the information, I certify that the statements and information are to the best of my knowledge and belief true, accurate, and complete. I am aware that there are significant penalties for submitting false statements and information or omitting required statements and information, including the possibility of fine or imprisonment.”

(2)The permitting authority and the Administrator will accept or act on a submission made on behalf of owners or operators of a Hg Budget source or a Hg Budget unit only if the submission has been made, signed, and certified in accordance with paragraph (e)(1) of this section. § 62.15911 Alternate Hg designated representative.

(a)A certificate of representation under § 62.15913 may designate one and only one alternate Hg designated representative, who may act on behalf of the Hg designated representative. The agreement by which the alternate Hg designated representative is selected shall include a procedure for authorizing the alternate Hg designated representative to act in lieu of the Hg designated representative.

(b)Upon receipt by the Administrator of a complete certificate of representation under § 62.15913, any representation, action, inaction, or submission by the alternate Hg designated representative shall be deemed to be a representation, action, inaction, or submission by the Hg designated representative.

(c)Except in this section and §§ 62.15902, 62.15910(a) and (d), 62.15912, 62.15913, 62.15915, and 62.15951, whenever the term “Hg designated representative” is used in this subpart, the term shall be construed to include the Hg designated representative or any alternate Hg designated representative. § 62.15912 Changing Hg designated representative and alternate Hg designated representative; changes in owners and operators.

(a)*Changing Hg designated representative.* The Hg designated representative may be changed at any time upon receipt by the Administrator of a superseding complete certificate of representation under § 62.15913. Notwithstanding any such change, all representations, actions, inactions, and submissions by the previous Hg designated representative before the time and date when the Administrator receives the superseding certificate of representation shall be binding on the new Hg designated representative and the owners and operators of the Hg Budget source and the Hg Budget units at the source.

(b)*Changing alternate Hg designated representative.* The alternate Hg designated representative may be changed at any time upon receipt by the Administrator of a superseding complete certificate of representation under § 62.15913. Notwithstanding any such change, all representations, actions, inactions, and submissions by the previous alternate Hg designated representative before the time and date when the Administrator receives the superseding certificate of representation shall be binding on the new alternate Hg designated representative and the owners and operators of the Hg Budget source and the Hg Budget units at the source.

(c)*Changes in owners and operators.*

(1)In the event a owner or operator of a Hg Budget source or a Hg Budget unit is not included in the list of owners and operators in the certificate of representation under § 62.15913, such owner or operator shall be deemed to be subject to and bound by the certificate of representation, the representations, actions, inactions, and submissions of the Hg designated representative and any alternate Hg designated representative of the source or unit, and the decisions and orders of the permitting authority, the Administrator, or a court, as if the owner or operator were included in such list.

(2)Within 30 days following any change in the owners and operators of a Hg Budget source or a Hg Budget unit, including the addition of a new owner or operator, the Hg designated representative or any alternate Hg designated representative shall submit a revision to the certificate of representation under § 62.15913 amending the list of owners and operators to include the change. § 62.15913 Certificate of representation.

(a)A complete certificate of representation for a Hg designated representative or an alternate Hg designated representative shall include the following elements in a format prescribed by the Administrator:

(1)Identification of the Hg Budget source, and each Hg Budget unit at the source, for which the certificate of representation is submitted, including identification and nameplate capacity of each generator served by each such unit.

(2)The name, address, e-mail address (if any), telephone number, and facsimile transmission number (if any) of the Hg designated representative and any alternate Hg designated representative.

(3)A list of the owners and operators of the Hg Budget source and of each Hg Budget unit at the source.

(4)The following certification statements by the Hg designated representative and any alternate Hg designated representative:

(i)“I certify that I was selected as the Hg designated representative or alternate Hg designated representative, as applicable, by an agreement binding on the owners and operators of the source and each Hg Budget unit at the source.”

(ii)“I certify that I have all the necessary authority to carry out my duties and responsibilities under the Hg Budget Trading Program on behalf of the owners and operators of the source and of each Hg Budget unit at the source and that each such owner and operator shall be fully bound by my representations, actions, inactions, or submissions.”

(iii)“I certify that the owners and operators of the source and of each Hg Budget unit at the source shall be bound by any order issued to me by the Administrator, the permitting authority, or a court regarding the source or unit.”

(iv)“Where there are multiple holders of a legal or equitable title to, or a leasehold interest in, a Hg Budget unit, or where a utility or industrial customer purchases power from a Hg Budget unit under a life-of-the-unit, firm power contractual arrangement, I certify that: I have given a written notice of my selection as the ‘Hg designated representative’ or ‘alternate Hg designated representative,’ as applicable, and of the agreement by which I was selected to each owner and operator of the source and of each Hg Budget unit at the source; and Hg allowances and proceeds of transactions involving Hg allowances will be deemed to be held or distributed in proportion to each holder's legal, equitable, leasehold, or contractual reservation or entitlement, except that, if such multiple holders have expressly provided for a different distribution of Hg allowances by contract, Hg allowances and proceeds of transactions involving Hg allowances will be deemed to be held or distributed in accordance with the contract.”

(5)The signature of the Hg designated representative and any alternate Hg designated representative and the dates signed.

(b)Unless otherwise required by the permitting authority or the Administrator, documents of agreement referred to in the certificate of representation shall not be submitted to the permitting authority or the Administrator. Neither the permitting authority nor the Administrator shall be under any obligation to review or evaluate the sufficiency of such documents, if submitted. § 62.15914 Objections concerning Hg designated representative.

(a)Once a complete certificate of representation under § 62.15913 has been submitted and received, the permitting authority and the Administrator will rely on the certificate of representation unless and until a superseding complete certificate of representation under § 62.15913 is received by the Administrator.

(b)Except as provided in § 62.15912(a) or (b), no objection or other communication submitted to the permitting authority or the Administrator concerning the authorization, or any representation, action, inaction, or submission, of the Hg designated representative shall affect any representation, action, inaction, or submission of the Hg designated representative or the finality of any decision or order by the permitting authority or the Administrator under the Hg Budget Trading Program.

(c)Neither the permitting authority nor the Administrator will adjudicate any private legal dispute concerning the authorization or any representation, action, inaction, or submission of any Hg designated representative, including private legal disputes concerning the proceeds of Hg allowance transfers. § 62.15915 Delegation by Hg designated representative and alternate Hg designated representative.

(a)A Hg designated representative may delegate, to one or more natural persons, his or her authority to make an electronic submission to the Administrator provided for or required under this subpart.

(c)In order to delegate authority to make an electronic submission to the Administrator in accordance with paragraph

(a)or

(1)The name, address, e-mail address, telephone number, and facsimile transmission number (if any) of such Hg designated representative or alternate Hg designated representative;

(2)The name, address, e-mail address, telephone number, and facsimile transmission number (if any) of each such natural person (referred to as an “agent”);

(3)For each such natural person, a list of the type or types of electronic submissions under paragraph

(a)or

(b)of this section for which authority is delegated to him or her; and

(4)The following certification statements by such Hg designated representative or alternate Hg designated representative:

(i)“I agree that any electronic submission to the Administrator that is by an agent identified in this notice of delegation and of a type listed for such agent in this notice of delegation and that is made when I am a Hg designated representative or alternate Hg designated representative, as appropriate, and before this notice of delegation is superseded by another notice of delegation under 40 CFR 62.15915(d) shall be deemed to be an electronic submission by me.”

(ii)“Until this notice of delegation is superseded by another notice of delegation under 40 CFR 62.15915(d), I agree to maintain an e-mail account and to notify the Administrator immediately of any change in my e-mail address, unless all delegation of authority by me under 40 CFR 62.15915 is terminated.”

(d)A notice of delegation submitted under paragraph

(e)Any electronic submission covered by the certification in paragraph (c)(4)(i) of this section and made in accordance with a notice of delegation effective under paragraph

(d)of this section shall be deemed to be an electronic submission by the Hg designated representative or alternate Hg designated representative submitting such notice of delegation. Permits § 62.15920 General Hg budget trading program permit requirements.

(a)For each Hg Budget source required to have a title V operating permit, such permit shall include a Hg Budget permit administered by the permitting authority for the title V operating permit. The Hg Budget portion of the title V permit shall be administered in accordance with the permitting authority's title V operating permits regulations promulgated under part 70 or 71 of this chapter, except as provided otherwise by paragraph

(b)of this section, § 62.15905, and §§ 62.15921 through 62.15924.

(b)Each Hg Budget permit shall contain, with regard to the Hg Budget source and the Hg Budget units at the source covered by the Hg Budget permit, all applicable Hg Budget Trading Program requirements and shall be a complete and separable portion of the title V operating permit. § 62.15921 Submission of Hg budget permit applications.

(a)*Duty to apply.* The Hg designated representative of any Hg Budget source required to have a title V operating permit shall submit to the permitting authority a complete Hg Budget permit application under § 62.15922 for the source covering each Hg Budget unit at the source at least 18 months (or such lesser time provided by the permitting authority) before the later of January 1, 2010 or the date on which the Hg Budget unit commences commercial operation.

(b)*Duty to reapply.* For a Hg Budget source required to have a title V operating permit, the Hg designated representative shall submit a complete Hg Budget permit application under § 62.15922 for the source covering each Hg Budget unit at the source to renew the Hg Budget permit in accordance with the permitting authority's title V operating permits regulations addressing permit renewal. § 62.15922 Information requirements for Hg budget permit applications. A complete Hg Budget permit application shall include the following elements concerning the Hg Budget source for which the application is submitted, in a format prescribed by the permitting authority:

(a)Identification of the Hg Budget source;

(b)Identification of each Hg Budget unit at the Hg Budget source; and

(c)The standard requirements under § 62.15906. § 62.15923 Hg budget permit contents and term.

(a)Each Hg Budget permit will contain, in a format prescribed by the permitting authority, all elements required for a complete Hg Budget permit application under § 62.15922.

(b)Each Hg Budget permit is deemed to incorporate automatically the definitions of terms under § 62.15902 and, upon recordation by the Administrator under §§ 62.15940 through 62.15962, every allocation, transfer, or deduction of a Hg allowance to or from the compliance account of the Hg Budget source covered by the permit.

(c)The term of the Hg Budget permit will be set by the permitting authority, as necessary to facilitate coordination of the renewal of the Hg Budget permit with issuance, revision, or renewal of the Hg Budget source's title V operating permit. § 62.15924 Hg budget permit revisions. Except as provided in § 62.15923(b), the permitting authority will revise the Hg Budget permit, as necessary, in accordance with the permitting authority's title V operating permits regulations addressing permit revisions. § 62.15930 [Reserved]. Hg Allowance Allocations § 62.15940 State trading budgets. The State trading budgets for annual allocations of Hg allowances for the control periods in 2010 through 2017 and in 2018 and thereafter are respectively as follows: State State trading budget

(a)The Administrator will determine by order the Hg allowance allocations, in accordance with § 62.15942(a) and (b), for the control periods in 2010, 2011, 2012, 2013, and 2014.

(b)By July 31, 2011 and July 31 of each year thereafter, the Administrator will determine by order the Hg allowance allocations, in accordance with § 62.15942(a) and (b), for the control period in the fourth year after the year of the applicable deadline for determination under this paragraph.

(c)By July 31, 2010 and July 31 of each year thereafter, the Administrator will determine by order the Hg allowance allocations, in accordance with § 62.15942(a), (c), and (d), for the control period in the year of the applicable deadline for determination under this paragraph.

(d)The Administrator will make available to the public each determination of Hg allowances under paragraph (a), (b), or

(c)of this section and will provide an opportunity for submission of objections to the determination. Objections shall be limited to addressing whether the determination is in accordance with § 62.15942. Based on any such objections, the Administrator will adjust each determination to the extent necessary to ensure that it is in accordance with § 62.15942. § 62.15942 Hg allowance allocations. (a)(1) The baseline heat input (in MMBtu) used with respect to Hg allowance allocations under paragraph

(b)of this section for each Hg Budget unit will be:

(i)For units commencing operation before January 1, 2001, the average of the three highest amounts of the unit's adjusted control period heat input for 2000 through 2004, with the adjusted control period heat input for each year calculated as the sum of the following:

(A)Any portion of the unit's control period heat input for the year that results from the unit's combustion of lignite, multiplied by 3.0;

(B)Any portion of the unit's control period heat input for the year that results from the unit's combustion of subbituminous coal, multiplied by 1.25; and

(C)Any portion of the unit's control period heat input for the year that is not covered by paragraph (a)(1)(i)(A) or

(B)of this section, multiplied by 1.0.

(ii)For units commencing operation on or after January 1, 2001 and operating each calendar year during a period of 5 or more consecutive calendar years, the average of the 3 highest amounts of the unit's total converted control period heat input over the first such 5 years. (2)(i) A unit's control period heat input for a calendar year under paragraph (a)(1)(i) of this section, and a unit's total ounces of Hg emissions during a calendar year under paragraph (c)(3) of this section, will be determined in accordance with part 75 of this chapter, to the extent the unit was otherwise subject to the requirements of part 75 of this chapter for the year, or will be based on the best available data reported to the Administrator for the unit, to the extent the unit was not otherwise subject to the requirements of part 75 of this chapter for the year. The unit's types and amounts of fuel combusted, under paragraph (a)(1)(i) of this section, will be based on the best available data reported to the Administrator for the unit.

(ii)A unit's converted control period heat input for a calendar year specified under paragraph (a)(1)(ii) of this section equals:

(A)Except as provided in paragraph (a)(2)(ii)(B) or

(C)of this section, the control period gross electrical output of the generator or generators served by the unit multiplied by 7,900 Btu/kWh and divided by 1,000,000 Btu/MMBtu, provided that if a generator is served by 2 or more units, then the gross electrical output of the generator will be attributed to each unit in proportion to the unit's share of the total control period heat input of such units for the year;

(B)For a unit that is a boiler and has equipment used to produce electricity and useful thermal energy for industrial, commercial, heating, or cooling purposes through the sequential use of energy, the total heat energy (in Btu) of the steam produced by the boiler during the control period, divided by 0.8 and by 1,000,000 Btu/MMBtu; or

(C)For a unit that is a combustion turbine and has equipment used to produce electricity and useful thermal energy for industrial, commercial, heating, or cooling purposes through the sequential use of energy, the control period gross electrical output of the enclosed device comprising the compressor, combustor, and turbine multiplied by 3,413 Btu/kWh, plus the total heat energy (in Btu) of the steam produced by any associated heat recovery steam generator during the control period divided by 0.8, and with the sum divided by 1,000,000 Btu/MMBtu.

(iii)Gross electrical output and total heat energy under paragraph (a)(2)(ii) of this section will be determined based on the best available data reported to the Administrator.

(3)The Administrator will determine what data are the best available data under paragraph (a)(2) of this section by weighing the likelihood that data are accurate and reliable and giving greater weight to data submitted to a governmental entity in compliance with legal requirements or substantiated by an independent entity. (b)(1) For each control period in 2010 and thereafter, the Administrator will allocate to all Hg Budget units in a State that have a baseline heat input (as determined under paragraph

(a)of this section) a total amount of Hg allowances equal to 95 percent for a control period in 2010 through 2014, and 97 percent for a control period in 2015 and thereafter, of the amount of ounces (i.e., tons multiplied by 32,000 ounces/ton) of Hg emissions in the applicable State trading budget under § 62.15940 (except as provided in paragraph

(d)of this section).

(2)The Administrator will allocate Hg allowances to each Hg Budget unit under paragraph (b)(1) of this section in an amount determined by multiplying the total amount of Hg allowances allocated under paragraph (b)(1) of this section by the ratio of the baseline heat input of such Hg Budget unit to the total amount of baseline heat input of all such Hg Budget units in the State and rounding to the nearest whole allowance as appropriate.

(c)For each control period in 2009 and thereafter, the Administrator will allocate Hg allowances to Hg Budget units in a State that are not allocated Hg allowances under paragraph

(b)of this section because the units do not yet have a baseline heat input under paragraph

(a)of this section or because the units have a baseline heat input but all Hg allowances available under paragraph

(b)of this section for the control period are already allocated, in accordance with the following procedures:

(1)The Administrator will establish a separate new unit set-aside for each control period. Each new unit set-aside will be allocated Hg allowances equal to 5 percent for a control period in 2010 through 2014, and 3 percent for a control period in 2015 and thereafter, of the amount of ounces ( *i.e.* , tons multiplied by 32,000 ounces/ton) of Hg emissions in the applicable State trading budget under § 62.15940.

(2)The Hg designated representative of such a Hg Budget unit may submit to the Administrator a request, in a format specified by the Administrator, to be allocated Hg allowances, starting with the later of the control period in 2010 or the first control period after the control period in which the Hg Budget unit commences commercial operation and until the first control period for which the unit is allocated Hg allowances under paragraph

(b)of this section. A separate Hg allowance allocation request for each control period for which Hg allowances are sought must be submitted on or before May 1 of such control period and after the date on which the Hg Budget unit commences commercial operation.

(3)In a Hg allowance allocation request under paragraph (c)(2) of this section, the Hg designated representative may request for a control period Hg allowances in an amount not exceeding the Hg Budget unit's total ounces of Hg emissions during the calendar year immediately before such control period.

(4)The Administrator will review each Hg allowance allocation request under paragraph (c)(2) of this section and will allocate Hg allowances for each control period pursuant to such request as follows:

(i)The Administrator will accept an allowance allocation request only if the request meets, or is adjusted by the Administrator as necessary to meet, the requirements of paragraphs (c)(2) and

(3)of this section.

(ii)On or after May 1 of the control period, the Administrator will determine the sum of the Hg allowances requested (as adjusted under paragraph (c)(4)(i) of this section) in all allowance allocation requests accepted under paragraph (c)(4)(i) of this section for the control period.

(iii)If the amount of Hg allowances in the new unit set-aside for the control period is greater than or equal to the sum under paragraph (c)(4)(ii) of this section, then the Administrator will allocate the amount of Hg allowances requested (as adjusted under paragraph (c)(4)(i) of this section) to each Hg Budget unit covered by an allowance allocation request accepted under paragraph (c)(4)(i) of this section.

(iv)If the amount of Hg allowances in the new unit set-aside for the control period is less than the sum under paragraph (c)(4)(ii) of this section, then the Administrator will allocate to each Hg Budget unit covered by an allowance allocation request accepted under paragraph (c)(4)(i) of this section the amount of the Hg allowances requested (as adjusted under paragraph (c)(4)(i) of this section), multiplied by the amount of Hg allowances in the new unit set-aside for the control period, divided by the sum determined under paragraph (c)(4)(ii) of this section, and rounded to the nearest whole allowance as appropriate.

(v)The Administrator will notify each Hg designated representative that submitted an allowance allocation request of the amount of Hg allowances (if any) allocated for the control period to the Hg Budget unit covered by the request.

(d)If, after completion of the procedures under paragraph (c)(4) of this section for a control period, any unallocated Hg allowances remain in the new unit set-aside under paragraph

(c)for a State for the control period, the Administrator will allocate to each Hg Budget unit that was allocated Hg allowances under paragraph

(b)of this section in the State an amount of Hg allowances equal to the total amount of such remaining unallocated Hg allowances, multiplied by the unit's allocation under paragraph

(b)of this section, divided by 95 percent for a control period in 2010 through 2014, and 97 percent for a control period in 2015 and thereafter, of the amount of ounces (i.e., tons multiplied by 32,000 ounces/ton) of Hg emissions in the applicable State trading budget under § 62.15940, and rounded to the nearest whole allowance as appropriate.

(e)If the Administrator determines that Hg allowances were allocated under paragraphs

(a)and

(b)of this section, paragraphs

(a)and

(c)of this section, or paragraph

(d)of this section for a control period and that the recipient of the allocation is not actually a Hg Budget unit under § 62.15904 in such control period, then the Administrator will notify the Hg designated representative and will act in accordance with the following procedures:

(1)Except as provided in paragraph (e)(2) or

(3)of this section, the Administrator will not record such Hg allowances under § 62.15953.

(2)If the Administrator already recorded such Hg allowances under § 62.15953 and if the Administrator makes such determination before making deductions for the source that includes such recipient under § 62.15954(b) for the control period, then the Administrator will deduct from the account in which such Hg allowances were recorded under § 62.15953 an amount of Hg allowances allocated for the same or a prior control period equal to the amount of such already recorded Hg allowances. The Hg authorized account representative shall ensure that there are sufficient Hg allowances in such account for completion of the deduction.

(3)If the Administrator already recorded such Hg allowances under § 62.15953 and if the Administrator makes such determination after making deductions for the source that includes such recipient under § 62.15954(b) for the control period, then the Administrator will apply paragraph (e)(1) or

(2)of this section, as appropriate, to any subsequent control period for which Hg allowances were allocated to such recipient.

(4)The Administrator will transfer the Hg allowances that are not recorded, or that are deducted, in accordance with paragraphs (e)(1), (2), and

(3)of this section to a new unit set-aside for the State in which such recipient is located. § 62.15943 Alternative of allocation of Hg allowances by permitting authority.

(a)Notwithstanding §§ 62.15941, 62.15942, and 62.15953 if a State submits, and the Administrator approves, a State allocation methodology in accordance with § 60.24(h)(9) of this chapter providing for allocation of Hg allowances for any control period by the permitting authority, then, for each such control period:

(1)The permitting authority shall make such allocations in accordance with such approved State allocation methodology;

(2)The Administrator will not make allocations under §§ 62.15941 and 62.15942 for the Hg Budget units in the State; and

(3)Under § 62.15953, the Administrator will record the allocations made under such approved State allocation methodology instead of allocations under §§ 62.15941 and 62.15942.

(b)In implementing paragraph

(a)of this section and §§ 62.15941, 62.15942, and 62.15953, the Administrator will ensure that the total amount of Hg allowances allocated, under such provisions and under a State's State allocation methodology approved in accordance with § 60.24(h)(9) of this chapter, for a control period for Hg Budget sources in the State or for other entities specified by the permitting authority will not exceed the State's State trading budget for the year of the control period. Hg Allowance Tracking System § 62.15950 [Reserved] § 62.15951 Establishment of accounts.

(a)*Compliance accounts.* Upon receipt of a complete certificate of representation under § 62.15913, the Administrator will establish a compliance account for the Hg Budget source for which the certificate of representation was submitted unless the source already has a compliance account.

(b)*General accounts.*

(1)*Application for general account.*

(i)Any person may apply to open a general account for the purpose of holding and transferring Hg allowances. An application for a general account may designate one and only one Hg authorized account representative and one and only one alternate Hg authorized account representative who may act on behalf of the Hg authorized account representative. The agreement by which the alternate Hg authorized account representative is selected shall include a procedure for authorizing the alternate Hg authorized account representative to act in lieu of the Hg authorized account representative.

(ii)A complete application for a general account shall be submitted to the Administrator and shall include the following elements in a format prescribed by the Administrator:

(A)Name, mailing address, e-mail address (if any), telephone number, and facsimile transmission number (if any) of the Hg authorized account representative and any alternate Hg authorized account representative;

(B)Organization name and type of organization, if applicable;

(C)A list of all persons subject to a binding agreement for the Hg authorized account representative and any alternate Hg authorized account representative to represent their ownership interest with respect to the Hg allowances held in the general account;

(D)The following certification statement by the Hg authorized account representative and any alternate Hg authorized account representative: “I certify that I was selected as the Hg authorized account representative or the alternate Hg authorized account representative, as applicable, by an agreement that is binding on all persons who have an ownership interest with respect to Hg allowances held in the general account. I certify that I have all the necessary authority to carry out my duties and responsibilities under the Hg Budget Trading Program on behalf of such persons and that each such person shall be fully bound by my representations, actions, inactions, or submissions and by any order or decision issued to me by the Administrator or a court regarding the general account.”

(E)The signature of the Hg authorized account representative and any alternate Hg authorized account representative and the dates signed.

(iii)Unless otherwise required by the permitting authority or the Administrator, documents of agreement referred to in the application for a general account shall not be submitted to the permitting authority or the Administrator. Neither the permitting authority nor the Administrator shall be under any obligation to review or evaluate the sufficiency of such documents, if submitted.

(2)*Authorization of Hg authorized account representative and alternate Hg authorized account representative.*

(i)Upon receipt by the Administrator of a complete application for a general account under paragraph (b)(1) of this section:

(A)The Administrator will establish a general account for the person or persons for whom the application is submitted.

(B)The Hg authorized account representative and any alternate Hg authorized account representative for the general account shall represent and, by his or her representations, actions, inactions, or submissions, legally bind each person who has an ownership interest with respect to Hg allowances held in the general account in all matters pertaining to the Hg Budget Trading Program, notwithstanding any agreement between the Hg authorized account representative or any alternate Hg authorized account representative and such person. Any such person shall be bound by any order or decision issued to the Hg authorized account representative or any alternate Hg authorized account representative by the Administrator or a court regarding the general account.

(C)Any representation, action, inaction, or submission by any alternate Hg authorized account representative shall be deemed to be a representation, action, inaction, or submission by the Hg authorized account representative.

(ii)Each submission concerning the general account shall be submitted, signed, and certified by the Hg authorized account representative or any alternate Hg authorized account representative for the persons having an ownership interest with respect to Hg allowances held in the general account. Each such submission shall include the following certification statement by the Hg authorized account representative or any alternate Hg authorized account representative: “I am authorized to make this submission on behalf of the persons having an ownership interest with respect to the Hg allowances held in the general account. I certify under penalty of law that I have personally examined, and am familiar with, the statements and information submitted in this document and all its attachments. Based on my inquiry of those individuals with primary responsibility for obtaining the information, I certify that the statements and information are to the best of my knowledge and belief true, accurate, and complete. I am aware that there are significant penalties for submitting false statements and information or omitting required statements and information, including the possibility of fine or imprisonment.”

(iii)The Administrator will accept or act on a submission concerning the general account only if the submission has been made, signed, and certified in accordance with paragraph (b)(2)(ii) of this section.

(3)*Changing Hg authorized account representative and alternate Hg authorized account representative; changes in persons with ownership interest.*

(i)The Hg authorized account representative for a general account may be changed at any time upon receipt by the Administrator of a superseding complete application for a general account under paragraph (b)(1) of this section. Notwithstanding any such change, all representations, actions, inactions, and submissions by the previous Hg authorized account representative before the time and date when the Administrator receives the superseding application for a general account shall be binding on the new Hg authorized account representative and the persons with an ownership interest with respect to the Hg allowances in the general account.

(ii)The alternate Hg authorized account representative for a general account may be changed at any time upon receipt by the Administrator of a superseding complete application for a general account under paragraph (b)(1) of this section. Notwithstanding any such change, all representations, actions, inactions, and submissions by the previous alternate Hg authorized account representative before the time and date when the Administrator receives the superseding application for a general account shall be binding on the new alternate Hg authorized account representative and the persons with an ownership interest with respect to the Hg allowances in the general account. (iii)(A) In the event a person having an ownership interest with respect to Hg allowances in the general account is not included in the list of such persons in the application for a general account, such person shall be deemed to be subject to and bound by the application for a general account, the representation, actions, inactions, and submissions of the Hg authorized account representative and any alternate Hg authorized account representative of the account, and the decisions and orders of the Administrator or a court, as if the person were included in such list.

(B)Within 30 days following any change in the persons having an ownership interest with respect to Hg allowances in the general account, including the addition of a new person, the Hg authorized account representative or any alternate Hg authorized account representative shall submit a revision to the application for a general account amending the list of persons having an ownership interest with respect to the Hg allowances in the general account to include the change.

(4)*Objections concerning Hg authorized account representative and alternate Hg authorized account representative.*

(i)Once a complete application for a general account under paragraph (b)(1) of this section has been submitted and received, the Administrator will rely on the application unless and until a superseding complete application for a general account under paragraph (b)(1) of this section is received by the Administrator.

(ii)Except as provided in paragraph (b)(3)(i) or

(ii)of this section, no objection or other communication submitted to the Administrator concerning the authorization, or any representation, action, inaction, or submission of the Hg authorized account representative or any alternate Hg authorized account representative for a general account shall affect any representation, action, inaction, or submission of the Hg authorized account representative or any alternate Hg authorized account representative or the finality of any decision or order by the Administrator under the Hg Budget Trading Program.

(iii)The Administrator will not adjudicate any private legal dispute concerning the authorization or any representation, action, inaction, or submission of the Hg authorized account representative or any alternate Hg authorized account representative for a general account, including private legal disputes concerning the proceeds of Hg allowance transfers.

(5)*Delegation by Hg authorized account representative and alternate Hg authorized account representative.*

(iii)In order to delegate authority to make an electronic submission to the Administrator in accordance with paragraph (b)(5)(i) or

(A)The name, address, e-mail address, telephone number, and facsimile transmission number (if any) of such Hg authorized account representative or alternate Hg authorized account representative;

(B)The name, address, e-mail address, telephone number, and, facsimile transmission number (if any) of each such natural person (referred to as an “agent”);

(C)For each such natural person, a list of the type or types of electronic submissions under paragraph (b)(5)(i) or

(ii)of this section for which authority is delegated to him or her;

(D)The following certification statement by such Hg authorized account representative or alternate Hg authorized account representative: “I agree that any electronic submission to the Administrator that is by an agent identified in this notice of delegation and of a type listed for such agent in this notice of delegation and that is made when I am a Hg authorized account representative or alternate Hg authorized representative, as appropriate, and before this notice of delegation is superseded by another notice of delegation under 40 CFR 62.15951(b)(5)(iv) shall be deemed to be an electronic submission by me.”; and

(E)The following certification statement by such Hg authorized account representative or alternate Hg authorized account representative: “Until this notice of delegation is superseded by another notice of delegation under 40 CFR 62.15951 (b)(5)(iv), I agree to maintain an e-mail account and to notify the Administrator immediately of any change in my e-mail address unless all delegation of authority under 40 CFR 62.15951(b)(5) is terminated.”

(c)*Account identification.* The Administrator will assign a unique identifying number to each account established under paragraph

(a)or

(b)of this section. § 62.15952 Responsibilities of Hg authorized account representative. Following the establishment of a Hg Allowance Tracking System account, all submissions to the Administrator pertaining to the account, including, but not limited to, submissions concerning the deduction or transfer of Hg allowances in the account, shall be made only by the Hg authorized account representative for the account. § 62.15953 Recordation of Hg allowance allocations.

(a)By December 1, 2007, the Administrator will record in the Hg Budget source's compliance account the Hg allowances allocated for the Hg Budget units at the source in accordance with § 62.15942(a) and

(b)for the control period in 2010.

(b)By December 1, 2008, the Administrator will record in the Hg Budget source's compliance account the Hg allowances allocated for the Hg Budget units at the source in accordance with § 62.15942(a) and

(b)for the control period in 2011.

(c)By December 1, 2009, the Administrator will record in the Hg Budget source's compliance account the Hg allowances allocated for the Hg Budget units at the source in accordance with § 62.15942(a) and

(b)for the control periods in 2012 and 2013.

(d)By December 1, 2010 and December 1 of each year thereafter, the Administrator will record in the Hg Budget source's compliance account the Hg allowances allocated for the Hg Budget units at the source in accordance with § 62.15942(a) and

(b)for the control period in the fourth year after the year of the applicable deadline for recordation under this paragraph.

(e)By December 1, 2009 and December 1 of each year thereafter, the Administrator will record in the Hg Budget source's compliance account the Hg allowances allocated for the Hg Budget units at the source in accordance with § 62.15942(a) and

(c)for the control period in the year of the applicable deadline for recordation under this paragraph.

(f)Serial numbers for allocated Hg allowances. When recording the allocation of Hg allowances for a Hg Budget unit in a compliance account, the Administrator will assign each Hg allowance a unique identification number that will include digits identifying the year of the control period for which the Hg allowance is allocated. § 62.15954 Compliance with Hg Budget emissions limitation.

(a)*Allowance transfer deadline.* The Hg allowances are available to be deducted for compliance with a source's Hg Budget emissions limitation for a control period in a given calendar year only if the Hg allowances:

(1)Were allocated for the control period in the year or a prior year; and

(2)Are held in the compliance account as of the allowance transfer deadline for the control period or are transferred into the compliance account by a Hg allowance transfer correctly submitted for recordation under §§ 62.15960 and 62.15961 by the allowance transfer deadline for the control period.

(b)*Deductions for compliance.* Following the recordation, in accordance with § 62.15961, of Hg allowance transfers submitted for recordation in a source's compliance account by the allowance transfer deadline for a control period, the Administrator will deduct from the compliance account Hg allowances available under paragraph

(a)of this section in order to determine whether the source meets the Hg Budget emissions limitation for the control period, as follows:

(1)Until the amount of Hg allowances deducted equals the number of ounces of total Hg emissions, determined in accordance with §§ 62.15970 through 62.15975, from all Hg Budget units at the source for the control period; or

(2)If there are insufficient Hg allowances to complete the deductions in paragraph (b)(1) of this section, until no more Hg allowances available under paragraph

(a)of this section remain in the compliance account. (c)(1) *Identification of Hg allowances by serial number.* The Hg authorized account representative for a source's compliance account may request that specific Hg allowances, identified by serial number, in the compliance account be deducted for emissions or excess emissions for a control period in accordance with paragraph

(b)or

(d)of this section. Such request shall be submitted to the Administrator by the allowance transfer deadline for the control period and include, in a format prescribed by the Administrator, the identification of the Hg Budget source and the appropriate serial numbers.

(2)*First-in, first-out.* The Administrator will deduct Hg allowances under paragraph

(b)or

(d)of this section from the source's compliance account, in the absence of an identification or in the case of a partial identification of Hg allowances by serial number under paragraph (c)(1) of this section, on a first-in, first-out

(FIFO)accounting basis in the following order:

(i)Any Hg allowances that were allocated to the units at the source, in the order of recordation; and then

(ii)Any Hg allowances that were allocated to any entity and transferred and recorded in the compliance account pursuant to §§ 62.15960 through 62.15962, in the order of recordation.

(d)*Deductions for excess emissions.*

(1)After making the deductions for compliance under paragraph

(b)of this section for a control period in a calendar year in which the Hg Budget source has excess emissions, the Administrator will deduct from the source's compliance account an amount of Hg allowances, allocated for the control period in the immediately following calendar year, equal to 3 times the number of ounces of the source's excess emissions.

(2)Any allowance deduction required under paragraph (d)(1) of this section shall not affect the liability of the owners and operators of the Hg Budget source or the Hg Budget units at the source for any fine, penalty, or assessment, or their obligation to comply with any other remedy, for the same violations, as ordered under the Clean Air Act or applicable State law.

(e)*Recordation of deductions.* The Administrator will record in the appropriate compliance account all deductions from such an account under paragraph

(b)and

(d)of this section.

(f)*Administrator's action on submissions.*

(1)The Administrator may review and conduct independent audits concerning any submission under the Hg Budget Trading Program and make appropriate adjustments of the information in the submissions.

(2)The Administrator may deduct Hg allowances from or transfer Hg allowances to a source's compliance account based on the information in the submissions, as adjusted under paragraph (f)(1) of this section, and record such deductions and transfers. § 62.15955 Banking.

(a)Hg allowances may be banked for future use or transfer in a compliance account or a general account in accordance with paragraph

(b)of this section.

(b)Any Hg allowance that is held in a compliance account or a general account will remain in such account unless and until the Hg allowance is deducted or transferred under § 62.15942, § 62.15954, § 62.15956, or §§ 62.15960 through 62.15962. § 62.15956 Account error. The Administrator may, at his or her sole discretion and on his or her own motion, correct any error in any Hg Allowance Tracking System account. Within 10 business days of making such correction, the Administrator will notify the Hg authorized account representative for the account. § 62.15957 Closing of general accounts.

(a)The Hg authorized account representative of a general account may submit to the Administrator a request to close the account, which shall include a correctly submitted allowance transfer under §§ 62.15960 and 62.15961 for any Hg allowances in the account to one or more other Hg Allowance Tracking System accounts.

(b)If a general account has no allowance transfers in or out of the account for a 12-month period or longer and does not contain any Hg allowances, the Administrator may notify the Hg authorized account representative for the account that the account will be closed following 20 business days after the notice is sent. The account will be closed after the 20-day period unless, before the end of the 20-day period, the Administrator receives a correctly submitted transfer of Hg allowances into the account under §§ 62.15960 and 62.15961 or a statement submitted by the Hg authorized account representative demonstrating to the satisfaction of the Administrator good cause as to why the account should not be closed. Hg Allowance Transfers § 62.15960 Submission of Hg allowance transfers. An Hg authorized account representative seeking recordation of a Hg allowance transfer shall submit the transfer to the Administrator. To be considered correctly submitted, the Hg allowance transfer shall include the following elements, in a format specified by the Administrator:

(a)The account numbers for both the transferor and transferee accounts;

(b)The serial number of each Hg allowance that is in the transferor account and is to be transferred; and

(c)The name and signature of the Hg authorized account representative of the transferor account and the date signed. § 62.15961 EPA recordation.

(a)Within 5 business days (except as provided in paragraph

(b)of this section) of receiving a Hg allowance transfer, the Administrator will record a Hg allowance transfer by moving each Hg allowance from the transferor account to the transferee account as specified by the request, provided that:

(1)The transfer is correctly submitted under § 62.15960; and

(2)The transferor account includes each Hg allowance identified by serial number in the transfer.

(b)A Hg allowance transfer that is submitted for recordation after the allowance transfer deadline for a control period and that includes any Hg allowances allocated for any control period before such allowance transfer deadline will not be recorded until after the Administrator completes the deductions under § 62.15954 for the control period immediately before such allowance transfer deadline.

(c)Where a Hg allowance transfer submitted for recordation fails to meet the requirements of paragraph

(a)of this section, the Administrator will not record such transfer. § 62.15962 Notification.

(a)*Notification of recordation.* Within 5 business days of recordation of a Hg allowance transfer under § 62.15961, the Administrator will notify the Hg authorized account representatives of both the transferor and transferee accounts.

(b)*Notification of non-recordation.* Within 10 business days of receipt of a Hg allowance transfer that fails to meet the requirements of § 62.15961(a), the Administrator will notify the Hg authorized account representatives of both accounts subject to the transfer of:

(1)A decision not to record the transfer, and

(2)The reasons for such non-recordation.

(c)Nothing in this section shall preclude the submission of a Hg allowance transfer for recordation following notification of non-recordation. Monitoring and Reporting § 62.15970 General requirements. The owners and operators, and to the extent applicable, the Hg designated representative, of a Hg Budget unit, shall comply with the monitoring, recordkeeping, and reporting requirements as provided in this section, §§ 62.15971 through 62.15975, and subpart I of part 75 of this chapter. For purposes of complying with such requirements, the definitions in § 62.15902 and in § 72.2 of this chapter shall apply, and the terms “affected unit,” “designated representative,” and “continuous emission monitoring system” (or “CEMS”) in part 75 of this chapter shall be deemed to refer to the terms “Hg Budget unit,” “Hg designated representative,” and “continuous emission monitoring system” (or “CEMS”) respectively, as defined in § 62.15902. The owner or operator of a unit that is not a Hg Budget unit but that is monitored under § 75.82(b)(2)(i) of this chapter shall comply with the same monitoring, recordkeeping, and reporting requirements as a Hg Budget unit.

(a)*Requirements for installation, certification, and data accounting.* The owner or operator of each Hg Budget unit shall:

(1)Install all monitoring systems required under this section and §§ 62.15971 through 62.15975 for monitoring Hg mass emissions and individual unit heat input (including all systems required to monitor Hg concentration, stack gas moisture content, stack gas flow rate, and CO 2 or O 2 concentration, as applicable, in accordance with §§ 75.81 and 75.82 of this chapter);

(2)Successfully complete all certification tests required under § 62.15971 and meet all other requirements of this section, §§ 62.15971 through 62.15975, and subpart I of part 75 of this chapter applicable to the monitoring systems under paragraph (a)(1) of this section; and

(3)Record, report, and quality-assure the data from the monitoring systems under paragraph (a)(1) of this section.

(b)*Compliance deadlines.* Except as provided in paragraph

(e)of this section, the owner or operator shall meet the monitoring system certification and other requirements of paragraphs (a)(1) and

(2)of this section on or before the following dates. The owner or operator shall record, report, and quality-assure the data from the monitoring systems under paragraph (a)(1) of this section on and after the following dates.

(1)For the owner or operator of a Hg Budget unit that commences commercial operation before July 1, 2008, by January 1, 2009.

(2)For the owner or operator of a Hg Budget unit that commences commercial operation on or after July 1, 2008, by the later of the following dates:

(i)January 1, 2009; or

(ii)90 unit operating days or 180 calendar days, whichever occurs first, after the date on which the unit commences commercial operation.

(3)For the owner or operator of a Hg Budget unit for which construction of a new stack or flue or installation of add-on Hg emission controls, a flue gas desulfurization system, a selective catalytic reduction system, or a compact hybrid particulate collector system is completed after the applicable deadline under paragraph (b)(1) or

(2)of this section, by 90 unit operating days or 180 calendar days, whichever occurs first, after the date on which emissions first exit to the atmosphere through the new stack or flue, add-on Hg emissions controls, flue gas desulfurization system, selective catalytic reduction system, or compact hybrid particulate collector system.

(c)*Reporting data.* The owner or operator of a Hg Budget unit that does not meet the applicable compliance date set forth in paragraph

(b)of this section for any monitoring system under paragraph (a)(1) of this section shall, for each such monitoring system, determine, record, and report maximum potential (or, as appropriate, minimum potential) values for Hg concentration, stack gas flow rate, stack gas moisture content, and any other parameters required to determine Hg mass emissions and heat input in accordance with § 75.80(g) of this chapter.

(d)*Prohibitions.*

(1)No owner or operator of a Hg Budget unit shall use any alternative monitoring system, alternative reference method, or any other alternative to any requirement of this section and §§ 62.15971 through 62.15974 without having obtained prior written approval in accordance with § 62.15975.

(2)No owner or operator of a Hg Budget unit shall operate the unit so as to discharge, or allow to be discharged, Hg emissions to the atmosphere without accounting for all such emissions in accordance with the applicable provisions of this section, §§ 62.15971 through 62.15975, and subpart I of part 75 of this chapter.

(3)No owner or operator of a Hg Budget unit shall disrupt the continuous emission monitoring system, any portion thereof, or any other approved emission monitoring method, and thereby avoid monitoring and recording Hg mass emissions discharged into the atmosphere or heat input, except for periods of recertification or periods when calibration, quality assurance testing, or maintenance is performed in accordance with the applicable provisions of this section, §§ 62.15971 through 62.15975, and subpart I of part 75 of this chapter.

(4)No owner or operator of a Hg Budget unit shall retire or permanently discontinue use of the continuous emission monitoring system, any component thereof, or any other approved monitoring system under this section and §§ 62.15971 through 62.15975, except under any one of the following circumstances:

(i)During the period that the unit is covered by an exemption under § 62.15905 that is in effect;

(ii)The owner or operator is monitoring emissions from the unit with another certified monitoring system approved, in accordance with the applicable provisions of this section, §§ 62.15971 through 62.15975, and subpart I of part 75 of this chapter, by the Administrator for use at that unit that provides emission data for the same pollutant or parameter as the retired or discontinued monitoring system; or

(iii)The Hg designated representative submits notification of the date of certification testing of a replacement monitoring system for the retired or discontinued monitoring system in accordance with § 62.15971(c)(3)(i).

(e)*Long-term cold storage.* The owner or operator of a Hg Budget unit is subject to the applicable provisions of part 75 of this chapter concerning units in long-term cold storage. § 62.15971 Initial certification and recertification procedures.

(a)The owner or operator of a Hg Budget unit shall be exempt from the initial certification requirements of this section for a monitoring system under § 62.15970(a)(1) if the following conditions are met:

(1)The monitoring system has been previously certified in accordance with part 75 of this chapter; and

(2)The applicable quality-assurance and quality-control requirements of § 75.21 of this chapter and appendix B to part 75 of this chapter are fully met for the certified monitoring system described in paragraph (a)(1) of this section.

(b)The recertification provisions of this section shall apply to a monitoring system under § 62.15970(a)(1) exempt from initial certification requirements under paragraph

(a)of this section.

(c)Except as provided in paragraph

(a)of this section, the owner or operator of a Hg Budget unit shall comply with the following initial certification and recertification procedures for a continuous monitoring system ( *i.e.* , a continuous emission monitoring system and an excepted monitoring system (sorbent trap monitoring system) under § 75.15) under § 62.15970(a)(1). The owner or operator of a unit that qualifies to use the Hg low mass emissions excepted monitoring methodology under § 75.81(b) of this chapter or that qualifies to use an alternative monitoring system under subpart E of part 75 of this chapter shall comply with the procedures in paragraph

(d)or

(e)of this section respectively.

(1)*Requirements for initial certification.* The owner or operator shall ensure that each continuous monitoring system under § 62.15970(a)(1) (including the automated data acquisition and handling system) successfully completes all of the initial certification testing required under § 75.20 of this chapter by the applicable deadline in § 62.15970(b). In addition, whenever the owner or operator installs a monitoring system to meet the requirements of this subpart in a location where no such monitoring system was previously installed, initial certification in accordance with § 75.20 of this chapter is required.

(2)*Requirements for recertification.* Whenever the owner or operator makes a replacement, modification, or change in any certified continuous emission monitoring system, or an excepted monitoring system (sorbent trap monitoring system) under § 75.15, under § 62.15970(a)(1) that may significantly affect the ability of the system to accurately measure or record Hg mass emissions or heat input rate or to meet the quality-assurance and quality-control requirements of § 75.21 of this chapter or appendix B to part 75 of this chapter, the owner or operator shall recertify the monitoring system in accordance with § 75.20(b) of this chapter. Furthermore, whenever the owner or operator makes a replacement, modification, or change to the flue gas handling system or the unit's operation that may significantly change the stack flow or concentration profile, the owner or operator shall recertify each continuous emission monitoring system, and each excepted monitoring system (sorbent trap monitoring system) under § 75.15, whose accuracy is potentially affected by the change, in accordance with § 75.20(b) of this chapter. Examples of changes to a continuous emission monitoring system that require recertification include replacement of the analyzer, complete replacement of an existing continuous emission monitoring system, or change in location or orientation of the sampling probe or site.

(3)*Approval process for initial certification and recertification.* Paragraphs (c)(3)(i) through

(iv)of this section apply to both initial certification and recertification of a continuous monitoring system under § 62.15970(a)(1). For recertifications, replace the words “certification” and “initial certification” with the word “recertification”, replace the word “certified” with the word “recertified”, and follow the procedures in § 75.20(b)(5) of this chapter in lieu of the procedures in paragraph (c)(3)(v) of this section.

(i)*Notification of certification.* The Hg designated representative shall submit to the Administrator and the appropriate EPA Regional Office written notice of the dates of certification testing, in accordance with § 62.15973.

(ii)*Certification application.* The Hg designated representative shall submit to the Administrator a certification application for each monitoring system. A complete certification application shall include the information specified in § 75.63 of this chapter.

(iii)*Provisional certification date.* The provisional certification date for a monitoring system shall be determined in accordance with § 75.20(a)(3) of this chapter. A provisionally certified monitoring system may be used under the Hg Budget Trading Program for a period not to exceed 120 days after receipt by the Administrator of the complete certification application for the monitoring system under paragraph (c)(3)(ii) of this section. Data measured and recorded by the provisionally certified monitoring system, in accordance with the requirements of part 75 of this chapter, will be considered valid quality-assured data (retroactive to the date and time of provisional certification), provided that the Administrator does not invalidate the provisional certification by issuing a notice of disapproval within 120 days of the date of receipt of the complete certification application by the Administrator.

(iv)*Certification application approval process.* The Administrator will issue a written notice of approval or disapproval of the certification application to the owner or operator within 120 days of receipt of the complete certification application under paragraph (c)(3)(ii) of this section. In the event the Administrator does not issue such a notice within such 120-day period, each monitoring system that meets the applicable performance requirements of part 75 of this chapter and is included in the certification application will be deemed certified for use under the Hg Budget Trading Program.

(A)*Approval notice.* If the certification application is complete and shows that each monitoring system meets the applicable performance requirements of part 75 of this chapter, then the Administrator will issue a written notice of approval of the certification application within 120 days of receipt.

(B)*Incomplete application notice.* If the certification application is not complete, then the Administrator will issue a written notice of incompleteness that sets a reasonable date by which the Hg designated representative must submit the additional information required to complete the certification application. If the Hg designated representative does not comply with the notice of incompleteness by the specified date, then the Administrator may issue a notice of disapproval under paragraph (c)(3)(iv)(C) of this section. The 120-day review period shall not begin before receipt of a complete certification application.

(C)*Disapproval notice.* If the certification application shows that any monitoring system does not meet the performance requirements of part 75 of this chapter or if the certification application is incomplete and the requirement for disapproval under paragraph (c)(3)(iv)(B) of this section is met, then the Administrator will issue a written notice of disapproval of the certification application. Upon issuance of such notice of disapproval, the provisional certification is invalidated by the Administrator and the data measured and recorded by each uncertified monitoring system shall not be considered valid quality-assured data beginning with the date and hour of provisional certification (as defined under § 75.20(a)(3) of this chapter). The owner or operator shall follow the procedures for loss of certification in paragraph (c)(3)(v) of this section for each monitoring system that is disapproved for initial certification.

(D)*Audit decertification.* The Administrator may issue a notice of disapproval of the certification status of a monitor in accordance with § 62.15972(b).

(v)*Procedures for loss of certification.* If the Administrator issues a notice of disapproval of a certification application under paragraph (c)(3)(iv)(C) of this section or a notice of disapproval of certification status under paragraph (c)(3)(iv)(D) of this section, then:

(A)The owner or operator shall substitute the following values, for each disapproved monitoring system, for each hour of unit operation during the period of invalid data specified under § 75.20(a)(4)(iii) or § 75.21(e) of this chapter and continuing until the applicable date and hour specified under § 75.20(a)(5)(i) of this chapter: ( *1* ) For a disapproved Hg pollutant concentration monitors and disapproved flow monitor, respectively, the maximum potential concentration of Hg and the maximum potential flow rate, as defined in sections 2.1.7.1 and 2.1.4.1 of appendix A to part 75 of this chapter. ( *2* ) For a disapproved moisture monitoring system and disapproved diluent gas monitoring system, respectively, the minimum potential moisture percentage and either the maximum potential CO 2 concentration or the minimum potential O 2 concentration (as applicable), as defined in sections 2.1.5, 2.1.3.1, and 2.1.3.2 of appendix A to part 75 of this chapter. ( *3* ) For a disapproved excepted monitoring system (sorbent trap monitoring system) under § 75.15 and disapproved flow monitor, respectively, the maximum potential concentration of Hg and maximum potential flow rate, as defined in sections 2.1.7.1 and 2.1.4.1 of appendix A to part 75 of this chapter.

(B)The Hg designated representative shall submit a notification of certification retest dates and a new certification application in accordance with paragraphs (c)(3)(i) and

(ii)of this section.

(C)The owner or operator shall repeat all certification tests or other requirements that were failed by the monitoring system, as indicated in the Administrator's notice of disapproval, no later than 30 unit operating days after the date of issuance of the notice of disapproval.

(d)*Initial certification and recertification procedures for units using the Hg low mass emission excepted methodology under § 75.81(b) of this chapter.* The owner or operator of a unit qualified to use the Hg low mass emissions (HgLME) excepted methodology under § 75.81(b) of this chapter shall meet the applicable certification and recertification requirements in § 75.81(c) through

(f)of this chapter.

(e)*Certification/recertification procedures for alternative monitoring systems.* The Hg designated representative of each unit for which the owner or operator intends to use an alternative monitoring system approved by the Administrator under subpart E of part 75 of this chapter shall comply with the applicable notification and application procedures of § 75.20(f) of this chapter. § 62.15972 Out of control periods.

(a)Whenever any monitoring system fails to meet the quality-assurance and quality-control requirements or data validation requirements of part 75 of this chapter, data shall be substituted using the applicable missing data procedures in subpart D of part 75 of this chapter.

(b)*Audit decertification.* Whenever both an audit of a monitoring system and a review of the initial certification or recertification application reveal that any monitoring system should not have been certified or recertified because it did not meet a particular performance specification or other requirement under § 62.15971 or the applicable provisions of part 75 of this chapter, both at the time of the initial certification or recertification application submission and at the time of the audit, the Administrator will issue a notice of disapproval of the certification status of such monitoring system. For the purposes of this paragraph, an audit shall be either a field audit or an audit of any information submitted to the permitting authority or the Administrator. By issuing the notice of disapproval, the Administrator revokes prospectively the certification status of the monitoring system. The data measured and recorded by the monitoring system shall not be considered valid quality-assured data from the date of issuance of the notification of the revoked certification status until the date and time that the owner or operator completes subsequently approved initial certification or recertification tests for the monitoring system. The owner or operator shall follow the applicable initial certification or recertification procedures in § 62.15971 for each disapproved monitoring system. § 62.15973 Notifications. The Hg designated representative for a Hg Budget unit shall submit written notice to the Administrator in accordance with § 75.61 of this chapter. § 62.15974 Recordkeeping and reporting.

(b)*Monitoring plans.* The owner or operator of a Hg Budget unit shall comply with requirements of § 75.84(e) of this chapter.

(c)*Certification applications.* The Hg designated representative shall submit an application to the Administrator within 45 days after completing all initial certification or recertification tests required under § 62.15971, including the information required under § 75.63 of this chapter.

(d)*Quarterly reports.* The Hg designated representative shall submit quarterly reports, as follows:

(1)The Hg designated representative shall report the Hg mass emissions data and heat input data for the Hg Budget unit, in an electronic quarterly report in a format prescribed by the Administrator, for each calendar quarter beginning with:

(i)For a unit that commences commercial operation before July 1, 2008, the calendar quarter covering January 1, 2009 through March 31, 2009; or

(ii)For a unit that commences commercial operation on or after July 1, 2008, the calendar quarter corresponding to the earlier of the date of provisional certification or the applicable deadline for initial certification under § 62.15970(b), unless that quarter is the third or fourth quarter of 2008, in which case reporting shall commence in the quarter covering January 1, 2009 through March 31, 2009.

(2)The Hg designated representative shall submit each quarterly report to the Administrator within 30 days following the end of the calendar quarter covered by the report. Quarterly reports shall be submitted in the manner specified in § 75.84(f) of this chapter.

(3)For Hg Budget units that are also subject to an Acid Rain emissions limitation or the CAIR NO X Annual Trading Program, CAIR SO 2 Trading Program, or CAIR NO X Ozone Season Trading Program, quarterly reports shall include the applicable data and information required by subparts F through H of part 75 of this chapter as applicable, in addition to the Hg mass emission data, heat input data, and other information required by this section, §§ 62.15970 through 62.15973, and § 62.15975.

(e)*Compliance certification.* The Hg designated representative shall submit to the Administrator a compliance certification (in a format prescribed by the Administrator) in support of each quarterly report based on reasonable inquiry of those persons with primary responsibility for ensuring that all of the unit's emissions are correctly and fully monitored. The certification shall state that:

(1)The monitoring data submitted were recorded in accordance with the applicable requirements by this section, §§ 62.15970 through 62.15973, § 62.15975, and part 75 of this chapter, including the quality assurance procedures and specifications; and

(ii)The substitute data values do not systematically underestimate Hg emissions. § 62.15975 Petitions. The Hg designated representative of a Hg Budget unit may submit a petition under § 75.66 of this chapter to the Administrator requesting approval to apply an alternative to any requirement of §§ 62.15970 through 62.15974. Application of an alternative to any requirement of §§ 62.15970 through 62.15974 is in accordance with this section and §§ 62.15970 through 62.15974 only to the extent that the petition is approved in writing by the Administrator, in consultation with the permitting authority. Appendix A to Subpart LLL of Part 62—States With Approved State Allocation Methodology The following States have a State allocation methodology under § 52.24(h)(9) of this chapter approved by the Administrator and providing for allocation of Hg allowances by the permitting authority under § 62.15943(a): [Reserved] PART 72—PERMITS REGULATION 33. The authority citation for part 72 continues to read as follows: Authority: 42 U.S.C. 7601 and 7651, *et seq.* § 72.22 [Amended] 34. Section 72.22 is amended as follows: a. In paragraph (b), by revising the words “an action, representation, or failure to act” to read “a representation, action, inaction, or submission”; and b. Removing paragraph (e). PART 78—APPEAL PROCEDURES 35. The authority citation for part 78 is revised to read as follows: Authority: 42 U.S.C. 7401, 7403, 7410, 7411, 7426, 7601, and 7651, *et seq.* 36. Section 78.1 is amended as follows: a. In paragraph (a)(1), revising the words “under part 72” to read “under subpart HHHH of part 60 of this chapter or State regulations approved under § 60.24(h)(6) of this chapter, subpart LLL of part 62 of this chapter, parts 72”; and b. Adding new paragraphs (b)(13) and (b)(14) to read as follows: § 78.1 Purpose and scope.

(b)* * *

(13)Under subpart HHHH of part 60 of this chapter,

(i)The decision on the allocation of Hg allowances under §§ 60.4140 through 60.4142 of this chapter.

(ii)The decision on the deduction of Hg allowances, and the adjustment of the information in a submission and the decision on the deduction or transfer of Hg allowances based on the information as adjusted, under § 60.4154 of this chapter;

(iii)The correction of an error in a Hg Allowance Tracking System account under § 60.4156 of this chapter;

(iv)The decision on the transfer of Hg allowances under § 60.4161 of this chapter;

(v)The finalization of control period emissions data, including retroactive adjustment based on audit;

(vi)The approval or disapproval of a petition under § 60.4175 of this chapter.

(14)Under subpart LLL of part 62 of this chapter,

(i)The decision on the allocation of Hg allowances under §§ 62.15940 through 62.15942 of part 62 of this chapter.

(iii)The correction of an error in a Hg Allowance Tracking System account under § 62.15956 of this chapter;

(iv)The decision on the transfer of Hg allowances under § 62.15961;

(v)The finalization of control period emissions data, including retroactive adjustment based on audit;

(vi)The approval or disapproval of a petition under § 62.15975 of this chapter. 37. Section 78.3 is amended as follows: a. By adding new paragraphs (a)(10), (a)(11), (d)(11), and (d)(12); b. In paragraph (b)(3)(i), by adding the words “or the Hg designated representative or Hg authorized account representative under paragraph (a)(10) or

(11)of this section (unless the Hg designated representative or Hg authorized account representative is the petitioner) after the words “(unless the CAIR designated representative or CAIR authorized account representative is the petitioner)”; c. In paragraph (d)(3), by adding the words “or a certificate of representation submitted by a Hg designated representative or an application of a general account submitted by a Hg authorized account representative under subpart HHHH of part 60 of this chapter or subpart LLL of part 62 of this chapter” after the words “subparts AAAA through IIII of part 96 of this chapter, or under part 97 of this chapter”: § 78.3 Petition for administrative review and request for evidentiary hearing.

(a)* * *

(10)The following persons may petition for administrative review of a decision of the Administrator that is made under subpart HHHH of part 60 of this chapter and that is appealable under § 78.1(a):

(i)The Hg designated representative for a unit or source, or the Hg authorized account representative for any Hg Allowance Tracking System account, covered by the decision; or

(ii)Any interested person.

(11)The following persons may petition for administrative review of a decision of the Administrator that is made under subpart LLL of part 62 and that is appealable under § 78.1(a):

(i)The Hg designated representative for a unit or source, or the Hg authorized account representative for any Hg Allowance Tracking System account, covered by the decision; or

(ii)Any interested person.

(d)* * *

(11)Any provision or requirement of subpart HHHH of part 60 of this chapter, including the standard requirements under § 60.4106 of this chapter and any emission monitoring or reporting requirements.

(12)Any provision or requirement of subpart LLL of part 62 of this chapter, including the standard requirements under § 97.206 of this chapter and any emission monitoring or reporting requirements. [FR Doc. E6-21573 Filed 12-21-06; 8:45 am] BILLING CODE 6560-50-P 71 246 Friday, December 22, 2006 Rules and Regulations Part III National Credit Union Administration 12 CFR Part 708a Conversion of Insured Credit Unions to Mutual Savings Banks; Final Rule NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Part 708a RIN 3133-AD16 Conversion of Insured Credit Unions to Mutual Savings Banks AGENCY: National Credit Union Administration. ACTION: Final rule. SUMMARY: The National Credit Union Administration

(NCUA)is issuing final revisions to its rules regarding the conversion of insured credit unions to mutual savings banks or mutual savings associations. The final rule improves the information available to members and the board of directors as they consider a possible conversion. The final rule includes revised disclosures, revised voting procedures, procedures to facilitate communications among members, and procedures for members to provide their comments to directors before the credit union board votes on a conversion plan. DATES: This rule is effective January 22, 2007. FOR FURTHER INFORMATION CONTACT: Moisette Green and Paul Peterson, Staff Attorneys, Division of Operations, Office of General Counsel, at the National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428 or telephone:

(703)518-6540. SUPPLEMENTARY INFORMATION: A. Background Under the Federal Credit Union Act (FCUA), a federally insured credit union (credit union) may convert to a mutual savings bank or savings association in mutual form (collectively referred to as MSBs). 12 U.S.C. 1785(b)(2). NCUA has regulations on the conversion process. 12 CFR part 708a. In June 2006, the NCUA Board published proposed amendments to part 708a in the **Federal Register** for a 60-day public comment period. 71 FR 36946 (June 28, 2006). As stated in the preamble to the proposal, the conversion from a credit union charter to a bank charter is a fundamental shift. The decision to convert belongs to the members. To make this decision, members must be fully informed as to the reasons for the conversion and have time to consider the advantages and disadvantages of conversion. They should also have an opportunity to communicate their views to the credit union's directors and to communicate with other members about the proposed conversion. NCUA believes the current conversion process can be improved in these areas. Briefly summarized, the proposal: • Required a converting credit union to give advance notice to members that the board intends to vote on a conversion proposal and established procedures for members to share their views with directors before they adopt the proposal. • Clarified that credit union directors may vote in favor of a conversion proposal only if they have determined the conversion is in the best interests of the members and required the board of directors to submit a certification to NCUA of its support for the conversion proposal and plan. • Simplified the boxed disclosures that a credit union must provide to its members. • Changed the current requirement for delivery of the boxed disclosures (i.e., with all written communications to members) to require that the disclosures need only be delivered with the 90-, 60- and 30-day member notices. • Provided for the form of the member ballot and that the ballot must be sent only with the 30-day notice. • Required the board of directors to set a voting record date not less than one hundred twenty days before the board notifies the members it is considering adopting a conversion proposal. • Required that, after the board has approved an MSB conversion proposal and upon the request of a member, a credit union must disseminate information from that requestor to other members at the requestor's expense. • Stated that members of federal credit unions

(FCUs)may request and be granted access to the books and records of a converting credit union under the same terms and conditions that a state-chartered for-profit corporation in the state in which the FCU is located must grant access to its shareholders. • Required the Regional Director to make a determination to approve or disapprove the methods and procedures for the membership vote within thirty calendar days of the receipt of the certification of the member vote and permitted a credit union dissatisfied with the determination to appeal to the NCUA Board. • Required a credit union to complete a conversion within one year of NCUA's approval of the methods and procedures of the vote. • Modified the voting guidelines to include information on the use of voting incentives such as raffles. NCUA received 52 comment letters on the proposal from a variety of sources, including credit unions, credit union trade associations, bank trade associations, and individuals and entities associated with the conversion process. The final rule retains most of the proposed rule as described above but does include some changes in response to comments. For purposes of this preamble, the comments are divided into three categories: general comments on NCUA's rulemaking authority, comments addressed to particular sections of the rule, and other comments. The preamble addresses each of these categories in turn. B. Legal Authority for the Rulemaking The FCUA grants the NCUA Board broad, general rulemaking authority over federal and federally-insured state-chartered credit unions: Powers of the Board and Administration personnel.—(a) The Board may prescribe rules and regulations for the administration of [the FCUA] (including, but not by way of limitation, the merger, consolidation, and dissolution of corporations organized under this chapter) * * *. 12 U.S.C. 1766(a). The FCUA contains numerous provisions governing credit union activities, including reorganizations and charter conversions. *See, e.g.* , 12 U.S.C. 1771 and 1785. Section 1785, in particular, addresses the conversion of credit unions to MSBs, including specific voting and notice requirements and limitations on benefits for directors and management. Section 1785 also charges NCUA with oversight of the membership vote: Oversight of member vote. The member vote concerning charter conversion under this paragraph shall be administered by the Administration, and shall be verified by the Federal or State regulatory agency that would have jurisdiction over the institution after the conversion. If either the Administration or that regulatory agency disapproves of the methods by which the member vote was taken or procedures applicable to the member vote, the member vote shall be taken again, as directed by the Administration or the agency. 12 U.S.C. 1785(b)(2)(G)(ii). The FCUA also gives the NCUA Board specific rulemaking authority over credit union conversions to MSBs as follows:

(G)Consistent rules.

(i)In general. Not later than 6 months after the date of enactment of the Credit Union Membership Access Act the Administration shall promulgate final rules applicable to charter conversions described in this paragraph that are consistent with rules promulgated by other financial regulators, including the Office of Thrift Supervision and the Office of the Comptroller of the Currency. The rules required by this clause shall provide that charter conversion by an insured credit union shall be subject to regulation that is no more or less restrictive than that applicable to charter conversions by other financial institutions. 12 U.S.C. 1785(b)(2)(G)(ii). The key rulemaking provisions, added by the Credit Union Membership Access Act (CUMAA) in 1998, are twofold. First, NCUA's rules must be “consistent with rules promulgated by other financial regulators, including the Office of Thrift Supervision and the Office of the Comptroller of the Currency;” and, second, NCUA's rules must be “no more or less restrictive than [those rules] applicable to charter conversions by other financial institutions.” *Id.* In the preamble to the proposed rule, the NCUA Board addressed NCUA's statutory rulemaking authority. 71 FR 36946, 36947-49 (June 28, 2006). The Board noted that, due to differences in the structure of different financial institutions and differences in the statutes that enable charter conversions, it would not be possible for NCUA to adopt conversion rules that were identical to those of all other financial regulators and, therefore, that Congress could not have intended such a result. After analyzing the FCUA enabling legislation at some length, the Board reached several conclusions about its statutory authority. The first conclusion, interpreting the FCUA's requirement that NCUA's rules be “consistent with rules promulgated by other financial regulators” was: NCUA's rules applicable to conversion from credit unions to MSBs should be compatible with the rules, if any, that govern conversions to new banking entities. In other words, a credit union that wishes to convert to a federally-chartered MSB (“FMSB”) should not encounter insurmountable contradictions between NCUA's rules governing conversions to FMSBs and the existing Office of Thrift Supervision (“OTS”) and Federal Deposit Insurance Corporation (“FDIC”) rules governing the same * * *. Likewise, if a credit union wishes to convert to a state-chartered MSB, NCUA's rules should be compatible with the state regulator's rules, if any, governing the same conversion. *Id.* at 36948. The Board next turned to the FCUA's “no more or less restrictive” requirement and, after demonstrating that this “no more or less restrictive” phrase could not mean “identical,” analyzed the phrase in terms of its constituent pieces, that is, the meanings of “no * * * less restrictive” and “no * * * more restrictive.” The Board concluded that “no * * * less restrictive than [those] applicable to charter conversions by other financial institutions” meant: [T]hat when NCUA is aware of a particular federal or state law that confines the choices or action of a converting institution, NCUA should consider if that restriction makes sense for a converting credit union in light of the underlying principles that inform NCUA's and other regulator's rulemakings * * *. *Id.* at 36948. The Board then concluded the requirement that NCUA's rules be “no more * * * restrictive than [those] applicable to charter conversions by other financial institutions” meant that: [NCUA's] rule, taken in its entirety, should not confine a converting credit union's actions or choices more significantly than the rules of other financial regulators, taken in their entirety, confine the actions or choices of the converting institutions they regulate. *Id.* at 36949. As discussed above, the FCUA language “no * * * less restrictive than the rules governing charter conversions by other financial institutions” instructs NCUA to consider particular, procedural elements in other conversion rules and determine if those provisions make sense for a converting credit union in light of the underlying principles that inform NCUA's and other regulator's rulemakings. NCUA has discretion to adopt particular procedural provisions used by other regulators, or not adopt them, or establish new procedural provisions depending on whether those provisions make sense for credit unions and their members. The particular regulatory provisions considered by NCUA for this rulemaking, and their utility, are discussed in the preamble to the proposed rule. 71 FR 36946, 36949-60 (June 28, 2006). The FCUA limits NCUA's discretion to adopt particular regulatory provisions through its requirement that NCUA's rule also be “no * * * more restrictive than the rules governing charter conversions by other financial institutions,” meaning that NCUA's rule should not, when taken in its entirety, constrain a converting credit union's action or choice more significantly than the rules of other financial regulators taken in their entirety. Accordingly, NCUA compared its final rule to the charter conversion rules of other regulators, including, in particular, to the following conversion rules of the OCC and the OTS: • OCC rules governing the conversion of state banks to national banks. • OTS rules governing the conversion of state mutual savings banks to federal mutual savings banks; and • OTS rules governing the conversion of mutual savings banks to stock banks, including state to federal charter conversions. NCUA believes these particular rules are appropriate for comparison to NCUA's rule because they have procedural protections that ensure informed decision making and that protect the interests of the relevant stakeholders. 1 These rules place various requirements on a converting financial institution, including: 1 The relevant decision makers do vary among these conversion situations. In NCUA's rulemaking, directors and stakeholders (i.e., the members) make substantive decisions about the conversion, and NCUA, the regulator, administers the member vote and approves the methods and procedures of the vote. The conversion of state MSBs to federal MSBs and the associated OTS rule involve the directors and the regulator as the substantive decision makers. For the conversion of a state bank to a national bank and the conversion of mutual savings banks to stock banks and the associated OCC and OTS rules, the decision makers are the directors, stakeholders, and regulators. Despite the variance in the decision makers among these NCUA, OTS, and OCC conversion situations, in all cases the applicable rules and the requirements placed on the converting institution by the rules ensure the decision makers make an informed decision. Accordingly, these OTS and OCC rules are appropriate precedent for NCUA's rule. • Director voting; • Director certifications; • Stakeholder voting and procedures; • Disclosures; • Public notice, comment, and meetings; • Obtaining legal opinions; • Procedures for communication among stakeholders using the resources of the converting institution, including proxy solicitations and other communication measures; and • Regulatory compliance provisions, such as applications for insurance coverage, Community Reinvestment Act

(CRA)compliance, and Qualified Thrift Lender Test

(QTL)compliance. The following chart summarizes those elements of each rule, including NCUA's final rule, that confine the converting institution's actions or choice: Regulatory conversion provisions 2 NCUA (CU to MSB) OCC (state bank to national bank) OTS (state/federal MSB to federal stock bank) OTS (state MSB to federal MSB) Requires director approval of conversion plan Yes Yes Yes. Two-thirds vote Yes. Requires director certifications Yes Yes Yes Yes. Requires legal or other third party opinions No Yes Yes Yes. Requires regulator approval Methods and procedures only Yes Yes Yes. May require a regulator examination No Yes No No. May require a regulator meeting No Yes Yes Yes. Publication of notice of intent to convert Yes Yes Yes Yes. Solicitation of comments Yes, member-to-director Yes, public Yes, public Yes, public. May require a public meeting or hearing No Yes Yes Yes. Requires stakeholder approval Yes Yes Yes Yes. Sets a minimum level of stakeholder participation No. Simple majority of those who actually vote Yes. At least 51% of all voting stock must approve Yes. Majority of total outstanding votes must approve No. Requires general disclosures to stakeholders or public Yes Yes Yes No. Requires specific disclosures to stakeholders Yes No Not currently, but may require (see, for example, OTS TB 58) No. Provides a process for communication among stakeholders Yes Yes Yes (two different methods) Yes. Restricts date of record for stakeholder voting purposes Yes No Yes N/A. Provides deadline for completing conversion Yes. 18 months Yes. Six months Yes. 24 months Yes. 24 months. Can add additional requirements on converting institution through policies incorporated into regulation No Yes Yes Yes. Other significant requirements No Yes, e.g., business plan, subsidiaries, non-conforming assets, insider compensation Yes, e.g., detailed conversion plan, business plan Yes, e.g., business plan, CRA. After comparing NCUA's final rule to these OCC and OTS rules, the Board believes NCUA's final rule, taken in its entirety, does not confine a converting credit union's actions or choice more than these OCC and OTS rules taken in their entirety. Accordingly, NCUA's final rule is “no more or less restrictive than the rules governing charter conversions by other financial institutions.” 12 U.S.C. 1785(b)(2)(G)(i). 2 OCC regulations applicable to the OCC conversions include 12 CFR part 5, § 5.24(d) and the incorporated Comptroller's Licensing Manual. OTS regulations generally applicable to mutual-to-stock conversions include 12 CFR part 516, §§ 543.1, 543.8 through 543.14, 544.1 through 544.5, and the incorporated OTS Form AC. OTS regulations generally applicable to the conversion of a state MSB to a federal MSB include 12 CFR parts 516 and 563b and the incorporated §§ 420 and 430 of the OTS Applications Handbook. Several commenters suggested NCUA lacked legal authority for its proposed revisions to part 708a. Some of these commenters focused on the NCUA's reliance on particular provisions in the regulations of other regulators, including state regulations. These commenters made the following arguments: • The FCUA requires NCUA to look only to the rules of other federal regulators, not state regulators, for precedent; • The FCUA does not permit NCUA to consider the rules of non-bank financial regulators (e.g., the Securities and Exchange Commission or the Farm Credit Administration) as precedent; • The FCUA requires NCUA to look only to the conversion regulations governing the loss of a converting institution, not the gain of a converting institution; and • The FCUA prohibits NCUA from referring to the rules surrounding mutual-to-stock conversions as precedent because stock conversions are amendments to an existing charter, not charter conversions. The Board does not find any support for these limitations in the text of the FCUA. The phrase “including the Office of Thrift Supervision and the Office of the Comptroller of the Currency (OCC)” modifies the phrase “other financial regulators” and is not a limitation. The word “including” references the OTS and the OCC by way of example and does not limit NCUA to considering only the rules of the OTS or OCC, or only the rules of federal regulators or banking regulators, or only the rules applicable to the loss, but not the gain, of a converting institution. Likewise, the plain language of the phrases “other financial institutions” or “other financial regulators” does not limit NCUA as suggested by these commenters. Further, the plain language of the statute does not direct NCUA to consider only the conversion regulations governing the loss of a converting institution. As discussed in the preamble of the proposed rule, there is no legislative history for these FCUA provisions, and so there is nothing in the legislative history that would support such narrow interpretations. *See* 71 FR 36946, 36947 fn.3 (June 28, 2006). Despite the absence of anything in the FCUA or legislative history that suggests NCUA should restrict its search for precedent as described above, some commenters argue that, because NCUA is regulating the conversion of an institution that is leaving NCUA's jurisdiction, it should look only to OTS and OCC rules that govern conversions where the OTS or OCC is also losing a regulated institution. The Board carefully considered this argument and concluded that reliance on these types of OTS and OCC rules as precedent would be inappropriate. The Board first considered the conversion of a federal MSB to a state MSB. The OTS has rules applicable to this process, and the OTS would, in most of these cases, be losing regulatory authority over the converted institution to a state regulator. The OTS does not impose any significant procedural requirements on these conversions, which is understandable because there is no shift in ownership interests or rights when one MSB converts into another MSB. The NCUA Board believes, however, that the conversion from a credit union to an MSB is different because it involves a diminution of ownership rights. Some key differences between credit union and MSB membership are: • FCU members exert control over the affairs of the institution through their voting power, not delegable by proxy. 12 U.S.C. 1760. MSB members not only can delegate their votes by proxy, but they can give them up forever in the form of running proxies. OTS staff has stated that “[t]he use of these proxies, coupled with the management's control over meetings of a mutual savings institution, attenuates the influence that depositors may have.” 3 3 D. Smith and J. Underwood, Memorandum: Mutual Savings Associations and Conversion to Stock Form, p. 17 (Office of Thrift Supervision, Business Transactions Division, May 1997)(OTS Conversion Memorandum). • FCU members have the right to one-member, one-vote. MSBs, for the most part, give greater voting power to depositors with larger deposits. 4 4 Some credit unions converting to MSBs have announced that they intend to maintain the one-member, one-vote method of voting. Even so, NCUA believes that, with the use of running proxies, the directors of an MSB could easily change the MSB's charter to establish account balance voting. • The net worth of a credit union belongs to its members, and they may recognize it in a variety of ways, including lower loan rates and higher savings rates than banks ( *See* 71 FR 36946, 36953 (June 28, 2006)) and the special dividends paid by many credit unions. *See,* *e.g. Loan Growth, Excess Capital Play Huge Role in Dividend Payouts,* Credit Union Times, January 4, 2006, at p. 1. • Ownership is measured not only in terms of possible rewards, but also in terms of the assumption of risk—and credit unions and MSBs are different in this regard as well. Dividends on FCU shares are not a contractual right, as is interest on a bank certificate of deposit, but may only be paid if the FCU has sufficient retained earnings. 12 U.S.C. 1763; NCUA OGC Legal Opinion 96-0917 (January 22, 1997), located at *http://www.ncua.gov.* In the event of a credit union liquidation, unsecured creditors have priority over members to the extent of the members' uninsured shares,12 CFR 709.5(b)(5) and (6), unlike bank depositors who take equally with unsecured creditors to the extent of uninsured deposits. *See, e.g.,* 12 CFR 360.3(a)(6). • As discussed below, credit union directors have a fiduciary duty to act in the best interests of credit union members. While MSB directors have a fiduciary duty to act in the best interests of the institution, there is no apparent duty to act in the best interests of the MSB members, at least for federal MSBs. 5 The shift in fiduciary duty when a credit union converts to an MSB, and the associated loss of focus on the members, diminishes the member's ownership rights. 5 The Home Owners' Loan Act does not describe any duty to act in the best interests of a federal MSB's member-depositors. 12 U.S.C. §§ 1461 *et seq.* OTS regulations refer only to the director's duty to act in the best interests of the institution. See 12 CFR 563.200 (Conflicts of Interest) and 563.201 (Corporate Opportunities). The OTS Thrift Activities Handbook makes numerous references to the fiduciary duties of MSB directors, but none of these state a duty is owed to the members. One state case refers to a director's fiduciary duty to the members of a state-chartered MSB. *Appeal of Concerned Corporators of the Portsmouth Savings Bank,* 525 A.2d 671 (N.H. 1987). OTS staff, in reviewing the *Portsmouth* case, stated “the court's decision was based primarily upon the fact that the depositors” rights in this transaction were specifically provided for in the savings bank's charter, a special charter granted by the state legislature in 1823. Since charters of most savings institutions, including those of federal mutual institutions, do not have the unique provisions of the New Hampshire savings bank's charter, the *Portsmouth* decision is of limited precedential value.” OTS Conversion Memorandum, *supra* note 3, at 23. The diminution in ownership interests when a credit union converts to an MSB make this conversion fundamentally different than an MSB to MSB conversion. Credit union members need the procedural protections afforded by NCUA's rule, while MSB members need little or no protection when converting from one form of MSB to another. Accordingly, the NCUA does not believe the particular OTS rules associated with conversions from a federal MSB to a state MSB are appropriate precedent for NCUA's rule. The Board also considered the OCC process for converting a national bank to a state bank, where the OCC loses jurisdiction over the converted bank. Two provisions in OCC regulations and federal law work in tandem to provide significant protection to the ownership interests of the converting bank's stockholders. First, the conversion requires the approval of two-thirds of all the outstanding stock. 12 CFR 5.24(e); 12 U.S.C. 214a. Second, those stockholders who dissent to the conversion have the right to an appraisal and a cash payment in exchange for their ownership interests. 12 CFR 5.24(e); 12 U.S.C. 214c. Together, these two provisions ensure that no conversion takes place unless a significant majority of the ownership interests support conversion and also that minority ownership interests are protected through the right to cash out their ownership interests. NCUA, however, cannot adopt a similar approach to protect the ownership interests of credit union members. The FCUA establishes the voting threshold for MSB conversions as “the affirmative vote of the majority of the members of the insured credit union who vote on the proposal.” 12 U.S.C. 1785(b)(2)(B). This FCUA provision not only does not protect the members in the manner a supermajority would, it hypothetically would allow the directors of a credit union to convert it to an MSB even if only a handful of members approve. Accordingly, NCUA does not believe the OCC process for converting national banks to state banks is appropriate precedent for NCUA's rulemaking. The better approach is to ensure that, through the various notice, disclosure, and communication channels in this final rule, the directors and members will make a careful and informed conversion decision. The approach in this final rule is similar to the approach taken by the OTS and OCC in other charter conversions, such as the OTS mutual-to-stock charter conversion rules, the OTS state MSB to federal MSB conversion rules, and the OCC state bank to national bank conversion rules discussed above. The Board disagrees with commenters who state OTS rules governing mutual-to-stock conversions are not relevant to NCUA's rulemaking because these are not “charter” conversions. These commenters state that, because the OTS may technically amend the existing charter when a federal mutual bank converts to a federal stock bank, and not issue a new charter, it is not a charter conversion. First, NCUA notes that the FCUA does not define the term charter conversion, and that NCUA has significant discretion to define and interpret the FCUA, both in general and in terms of its specific authority to administer the conversion vote as discussed above. In the Board's view, a mutual-to-stock conversion is a *de facto* charter conversion because the mutual-to-stock conversion results in a fundamental restructuring of ownership interests and, usually, a wholesale change in owners. The Board also notes that OTS rules on mutual-to-stock conversions cover not only federal-to-federal stock conversions, but also state-to-federal stock conversions. 12 CFR 563b.430. In a state-to-federal stock conversion, OTS will not amend the state charter, but will issue a new federal charter. In both form and substance, this is a charter conversion. Accordingly, NCUA is satisfied that the proposed rule, and this final rule as adopted, are well within the rulemaking authority provided by Congress to NCUA. C. Section by Section Analysis 708a.1 Definitions The current § 708a.1 contains definitions for the terms credit union, mutual savings bank, savings association, federal banking agencies, and senior management official. The proposal added a definition for “clear and conspicuous,” meaning “text that is in bold type in a font at least as large as that used for headings, but in no event smaller than 12 point.” The proposal also added a definition for “regional director” to clarify that, for natural person credit unions, it means the NCUA director for the region where the credit union's main office is located and, for corporate credit unions, it means the Director, NCUA Office of Corporate Credit Unions. One commenter thought the use of bold text at least as large as that used for headings but in any event no smaller than 12 point would not necessarily be clear and conspicuous. This commenter recommended a definition of “clear and conspicuous” like NCUA uses for its privacy rules at 12 CFR 716(3)(b). Another commenter stated that NCUA should define what it means by headings. Upon consideration of these comments, the Board has modified the definition of clear and conspicuous to mean “text in bold type in a font size at least one size larger than any other text used in the document (exclusive of headings), but in no event smaller than 12 point.” The Board believes that this definition will be easier for converting credit unions to apply, particularly if there are multiple headings with different font sizes, while ensuring members notice the information. The Board notes that if the document contains multiple passages that must be clear and conspicuous all these passages would be the same font size. 708a.2 Authority to Convert The current § 708a.2 recites the authority of a federally insured credit union to convert to a mutual savings bank or savings association as provided in the FCUA. The proposed § 708a.2 maintained this same recitation. NCUA received no public comments on this section, and the section is adopted as proposed. 708a.3 Board of Directors' Approval and Members' Opportunity to Comment The current § 708a.3 provides the board of directors must approve a conversion proposal by a majority vote and set a date for a member vote. Members must approve the proposal by the affirmative vote of those members who vote on the proposal. The proposed rule retained the same requirement for a board vote on the conversion proposal but clarified that directors may vote in favor of a conversion proposal only if they have determined that the conversion is in the best interests of the members. The proposal also contained a new requirement for advance notice to members of the board's intent to consider a conversion proposal. The board must publish a notice in a local area newspaper and on the credit union's Web site, as well as post a notice in the credit union's offices, no later than 30 days before the directors meeting. Directors must consider the comments before voting on the conversion proposal. The proposal also required that, if the credit union maintains a Web site, the credit union must post any comments received on its Web site. The Fiduciary Duty of the Board of Directors (Public Comments) Proposed § 708a.3(c) required the directors adopting a conversion proposal to determine that the conversion is in the best interests of the members. A related provision in proposed § 708a.5 required directors to certify to NCUA that the conversion is in the best interests of the members. NCUA received many comments on this issue of the fiduciary duty of the board of directors to its members. One commenter felt the fiduciary duty of the board of directors to act in the best interests of members was self-evident and needed no reference in the rule. One commenter asked NCUA to clarify that its interpretation of fiduciary duty, that the officers and management must act in the best interests of the members, is not a departure from traditional interpretations of fiduciary duty. This commenter believes the directors' deciding to act in the best interests of members is part of deciding whether the conversion is in the best interests of the institution. One commenter noted the concept of fiduciary duty is discussed only in the preamble to the proposed rule, and the rule itself should state the credit union officials have fiduciary duties and should define fiduciary duty as “[a] legal obligation directors and senior management have in their capacity as officials of the credit union to place the interests of the credit union's membership ahead of their own personal financial interests.” This commenter felt the proposed voting guidelines should be further expanded to include a discussion of the obligations of credit union officials to act with due care and prudence, with loyalty to the membership, and in good faith. Another commenter suggested NCUA include guidance to directors on how this determination is to be made. This commenter gave an example: If a credit union is seeking to convert in order to increase its member business lending activity, how has the board assessed whether members are interested in obtaining more loans of this nature? One commenter suggested the rule require a board to obtain an opinion from an unbiased third party to validate the directors' determination that a conversion was in the members' best interests. Another suggested the board should obtain an opinion from counsel that discusses the board's compliance with applicable legal requirements. This commenter thought the opinion should be made available to members upon request. One commenter expressed concern that, in some states, the officials of a state-chartered credit union may not have a fiduciary duty that runs to the members of the credit union, citing *Save Columbia CU Committee* v. *Columbia Community Credit Union* , 139 P.3d 386 (2006). The Fiduciary Duty of the Board of Directors (Discussion) The FCUA has numerous references to the duty to act in the best interests of the credit union's members, including: • The NCUA Board may act to remove or prohibit any institution-affiliated party at a federally-insured credit union if that action meets certain requirements, including that the “interests of the insured credit union's members have been or could be prejudiced.” 12 U.S.C. 1787(g)(1)(B). • Credit unions applying for federal account insurance must agree to maintain such special reserves as the NCUA Board may require “for protecting the interests of the members.” 12 U.S.C. 1781(b)(6). • The NCUA Board must review the application of any individual to become a director or senior manager at a newly chartered or troubled federally-insured credit union, and disapprove that application, if acceptance of the applicant would not be in the best interests of the depositors (members). 12 U.S.C. 1790a. • When acting as the conservator or liquidating agent of a federally-insured credit union, the NCUA Board may take any action it determines is in the best interests of the credit union's account holders (members). 12 U.S.C. 1787(b)(2)(J)(2). • A voluntary liquidation of an FCU must be in the best interests of the members. 12 U.S.C. 1766(b)(2). Most of these FCUA provisions on the duty to act in the best interests of the members refer specifically to the NCUA Board. A closer look at how the cited provisions function, however, connects them to the directors. Specifically, the best interests of the members will dictate the Board's actions when removing or prohibiting a director, approving the appointment of a director, operating a conserved credit union in the role of the board of directors, and reviewing the propriety of a board of directors' decision to pursue a voluntary liquidation. If the best interests of the members standard guides the conduct of the Board, it must also guide the conduct of directors. NCUA believes it is important for the directors of every credit union to understand the duty to act in the best interests of the members. It is particularly important, however, that the directors recognize this duty and act upon it when considering a proposal to convert a credit union to a bank. First, there is a financial incentive, as discussed in the preamble of the proposed rule, for the directors of a converting institution to put their own personal financial interests ahead of the interests of their members. 71 FR 369546, 36953-56 (June 28, 2006). Second, there may be a tendency by directors of a converting credit union to focus solely on the projected growth of the converting institution and acquiring new customers and not to focus, as the best interests of the members standard suggests, on the financial services existing members want and how the conversion will affect the quality, rates, and fees associated with these services. NCUA's boxed disclosure on the relative rates at banks and credit unions is relevant to this issue, and converting credit unions should be able to explain how and why their institution will be different than the average bank in this regard. Third, as discussed previously, a conversion to an MSB dilutes the ownership interests of the members. Further, if the MSB subsequently converts to a stock bank, as about ninety percent of converting credit unions ultimately do, the vast majority of the former credit union members will likely not subscribe to the stock offering. 6 This, in turn, either deprives former credit union owners of any ownership interest, or, in the case of a mutual holding company structure, creates a competing minority stock ownership class that can, and does, result in benefit to the minority stockholders at the members' expense. 7 6 There is significant anecdotal information supporting the conclusion that member participation in IPOs is extremely low. “Long-time members of IGA FCU were mostly left out of the money when IGA became the first credit union convert to sell stock * * * [F]ewer than 5% of the 22,200 members of the credit union shared in the profits from the sale of the institution.” Credit Union Journal, November 13, 2000, p. 1. “All who had their subscriptions filled were depositors-but only 5% of all depositors subscribed.” FDIC Review, Mutual-to-Stock Conversions of State Nonmember Savings Banks, 59 FR 30357, 30359 (June 13, 1994). And, in just the past few months, “about 3,500 depositors at ViewPoint Bank, the former Community Credit Union, subscribed to [the IPO] * * * The 3,500 members represent 1.56% of the [CU's] 223,000 members * * *.” Credit Union Times, October 4, 2006, at *www.cutimes.com.* 7 FDIC Review of Mutual-to-Stock Conversions of State Nonmember Savings Banks, 59 FR 30357, 30363 (June 13, 1994). Some converting credit unions, and law firms that advise them, have written NCUA suggesting that, because credit union members cannot force a distribution of credit union assets, or transfer or pledge their interest in the credit union for value, the members have little or no real ownership interest in the credit union. This view ignores the fiduciary duty that credit union directors owe to their members. The duty owed by credit union directors is analogous to the duty owed by a trustee to the beneficiaries of a trust. In a typical family trust, the trustees have discretion in the management and distribution of the trust assets. Many family trusts also have provisions forbidding the beneficiaries from pledging, selling, or otherwise alienating their interests in the trust. The inclusion of these provisions in the trust agreement, however, does not result in any loss or diminution of the beneficiaries' ownership interest in the trust. On the contrary, any trustee who might manage trust assets other than in the interest of the beneficiaries, including using the trust assets for his or her own personal gain or attempting to take personal ownership of trust assets, would be guilty of a gross breach of fiduciary duty. All these factors make it imperative that the board of directors of a converting credit union understand they must act in the best interests of their members. A conversion from a credit union to a bank should only take place after the board has completed its due diligence, including consideration of the above factors, and an informed membership has approved the conversion. Directors should question the assertion of any consultant that minimizes the ownership rights of members or their fiduciary duty to members. NCUA believes this delineation of a board's fiduciary responsibility to members restates existing law without change or modification. In the normal course of business when a board acts in the bests interests of the credit union it is also furthering the interests of the members. But the duty to act in the best interests of members is primary, and, if there is any divergence or conflict between the interests of the institution and the interests of members, the latter takes precedence. 8 8 One situation in which the best interests of the institution and the members may diverge is the possible voluntary liquidation of a healthy credit union. The FCUA provides that the decision to undertake a voluntary liquidation is determined by the best interests of the members and not the best interests of the institution. 12 U.S.C. 1766(b)(2). The Board has considered the views of commenters who believe the rule should provide additional information on the fiduciary duty standard and how compliance with that standard is measured in the conversion context. The Board offers the following additional guidance. The Board believes that members want their depository institution to provide the types of financial services that they need. They want those services to be convenient and of high quality. And they want those services to be provided at a good price, meaning good rates and low fees. Accordingly, when directors consider a conversion to the bank they should, as part of their due diligence and in consonance with the duty to act in the best interests of the members, answer the following questions: What financial services do the majority of my members want? How do I know this? Can the institution best provide these services to its members as a credit union or a bank? If the credit union converts to a bank, how will that affect the rates and fees that the institution charges the members for these services? And if the credit union converts to a bank, will it be able to offer members (now customers) something in the way of services or value that existing banks in the area are not offering? Mere assertions that a charter change is needed to facilitate growth are not, by themselves, sufficient to establish that the change is in the best interests of the members. 9 While post-conversion growth may possibly result in profits and dividends payable to the bank's future stockholders, it does not necessarily follow that the credit union's members also benefit. 10 Accordingly, if the directors rely on growth as a reason for conversion, they should establish specifically how accelerated growth will benefit the members in terms of providing services the members want, higher quality services, and better pricing on those services. 9 The only time that growth, by itself, would be sufficient to justify a charter change would be in the highly unusual case where the credit union cannot survive as a credit union and so the continued existence of the institution requires a charter change. 10 As discussed above, *supra* note 7 and associated discussion, historic data suggests only a tiny fraction of the credit union's members will become future stockholders. This guidance is provided by way of example and is not intended to be all inclusive of a director's due diligence. The nature of the due diligence required may vary somewhat from credit union to credit union depending on each credit union's particular circumstances. NCUA has also carefully considered the decision of the Washington state appellate court in *Save Columbia CU Committee* v. *Columbia Community Credit Union* , 139 P.3d 386 (Wash. Ct. App. 2006) ( *Save Columbia* ) and how it affects the proposed certification requirement. One of the issues considered by the court in *Save Columbia* was if members of the Columbia Community Credit Union, a state-chartered credit union, had standing to bring a breach of fiduciary duty claim against the directors. In reversing the trial court, the appellate court ruled that the Committee (i.e., the members) had no private action to sue for a breach of fiduciary duty and that such duty must be enforced by the state regulator. While NCUA does not necessarily agree with the holding or reasoning of the state court, any inference that the directors owed no duty to the members of the credit union was dicta and not necessary to the holding. NCUA also believes it unlikely that under Washington state law, or the laws of any other state, the directors of a state-chartered credit union owe no fiduciary duty to their members. The *Save Columbia* court did not consider how the FCUA might apply to the facts in that case. When a state-chartered credit union applies for, and receives, federal account insurance, it is bound by those portions of the FCUA applicable to federally-insured credit unions. 12 U.S.C. 1781 *et seq.* (Title II). Four of the five FCUA citations to the duty to act in the best interests of members are found in Title II of the FCUA and so are applicable to all federally-insured credit unions, including state charters. Accordingly, the FCUA imposes a duty to act in the best interests of the members on the directors of all federally-insured state-chartered credit unions regardless of whether state law also imposes such a duty. Advance Notice (Comments) Most commenters supported the advance notice requirement, and some commenters suggested additional ways a credit union should provide the advance notice, including the use of statement stuffers, newsletters, and e-mails or a notice on the quarterly periodic statement preceding the meeting. Many commenters felt a credit union should be required to send an advance notice directly to members, either by mail or e-mail. One commenter believed that, in addition to the advance notice, the portion of the directors' meeting on the conversion proposal should be open to the membership or, alternatively, the directors should be required to hold a town hall style meeting immediately after they adopted the conversion plan. Another commenter made a similar suggestion but suggested the meeting be a special meeting of the members. One commenter suggested the rule require 60 days notice instead of 30 days; another suggested 120 days. These commenters believe the additional time would allow for better communications between members and directors without adversely affecting the conversion process. Several commenters objected to the advance notice requirement. Some did not think NCUA had the authority to require advance notice, stating variously that the FCUA limited the notices to members to three and that a fourth notice violated this limitation or that the advance notice was contrary to the FCUA provision that a proposal to convert “shall first be approved * * * by a majority of the directors.” Other objections to the advance notice included statements that it would: • Not provide meaningful information to credit union members or a credit union's board of directors; • Fuel the spread of misinformation; • Generate submissions only from dissenters and those would lack value because they would be based on incomplete information about the proposal; • Interject member participation at a very early stage in a manner unlike most other corporate governance situations; • Constitute a member vote before the board vote; • Lead to an ill-informed director vote based on limited input; • Undermine the authority of the board of directors because the members elect their board of directors to study and make all types of business decisions on behalf of the members; • Be costly and burdensome for the credit union; • Impair the ability of a board to act quickly and decisively on a conversion proposal; and • Discourage candid and informed discussion among the directors. Some commenters stated the credit union should not have to post views of nonmembers on its Web site. One commenter suggested NCUA should provide additional guidance on posting of member comments, including whether the comments must be put in a particular order; how long the comments must remain on the Web site; whether a credit union has the right to respond to comments and in what manner it may respond; whether the credit union is responsible for any misinformation in the postings; and whether there are any privacy concerns that must be addressed when posting member comments. Advance Notice (Discussion) NCUA does not believe the language of the FCUA prohibits an advance notice requirement. The 90-, 60-, and 30-day notice requirements enumerated in the FCUA are not exclusive, and, in any event, relate only to the notice of the member vote and so are different than the proposed advance notice of a directors meeting to adopt a conversion proposal. The advance notice is also not an approval requirement, so that the notice requirement does not contravene the FCUA provision that the conversion proposal must first be approved by the board of directors. As stated in the preamble to the proposed rule, NCUA intends the advance notice requirement to facilitate the flow of information between members and directors. NCUA does not believe information provided by a member to directors undermines the directors' authority, discourages candid discussion among the directors, or otherwise impedes their ability to make an appropriate and timely decision. Directors should welcome member input and are free to consider any particular member's point of view and reject it. Directors are also free to obtain additional information from their members, beyond the input received as a result of the advance notice, by using member surveys, questionnaires, or other collection techniques. NCUA has, however, reconsidered the proposal to require posting of the member's comments on the credit union's Web site. The intent of the advance notice is to inform members that a credit union is considering a conversion and to facilitate member-director contact, not member-member contact, in the period of time preceding the directors' decision on the conversion proposal. As noted by some commenters, posting member comments does not directly further the stated purposes of the advance notice, and the posting does impose some burden on the converting credit union in determining the propriety of particular postings. Accordingly, the final rule does not require the converting credit union to publicize comments received before the adoption of a conversion proposal. As discussed below, this final rule does include other procedures to facilitate member-to-member contact in the period of time following the directors' adoption of a conversion proposal. NCUA also considered alternatives suggested by commenters for communicating the advance notice to the members. NCUA believes its proposal for publication and posting in the credit union's branch offices and on its Web site minimizes the burden on the credit union while ensuring that members have a reasonable chance to learn of the proposal and provide input to directors. One commenter suggested that the rule be clarified to require the advance notice be posted in the lobby of a converting credit union. NCUA agrees with this clarification and has made the suggested change to the final rule. Converting credit unions are, of course, free to use additional methods of communicating, including mailings, statement stuffers, newsletters, and e-mails. Accordingly, and except as described above, NCUA adopts § 708a.3 as proposed. 708a.4 Disclosures and Communications to Members Section 708a.4 of the current rule, entitled Voting procedures, provides for a member vote on the conversion at a special meeting or by mail and describes the notices that must be provided to members 90, 60, and 30 days before the vote. It prescribes certain information and disclosures that must be in the notices. It also requires the vote must be by secret ballot and conducted by an independent entity. The proposal contained several changes to § 708a.4. It modified the mandatory boxed disclosures the board of directors must give to members once the board has approved a proposal to convert to read: IMPORTANT REGULATORY DISCLOSURE ABOUT YOUR VOTE The National Credit Union Administration, the federal government agency that supervises credit unions, requires [insert name of credit union] to provide the following disclosures: 1. LOSS OF CREDIT UNION MEMBERSHIP. A vote “FOR” the proposed conversion means your credit union will become a mutual savings bank. A vote “AGAINST” the proposed conversion means your credit union will remain a credit union. 2. RATES ON LOANS AND SAVINGS. If your credit union converts to a bank, you may experience changes in your loan and savings rates. Available historic data indicates that, for most loan products, credit unions on average charge lower rates than banks. For most savings products, credit unions on average pay higher rates than banks. 3. POTENTIAL PROFITS BY OFFICERS AND DIRECTORS. Conversion to a mutual savings bank is often the first step in a two-step process to convert to a stock-issuing bank or holding company structure. In such a scenario, the officers and directors of the institution often profit by obtaining stock in excess of that available to other members. The proposal required that these boxed disclosures be sent only with the three written notices and not with all written communications as under the current rule. The proposal also established procedures for members to share their views with other members during the 90-day notice period preceding the membership vote. The proposal further stated that the ballot must be sent only with the 30-day notice and may not contain any information other than a statement of the proposition being voted on, a short statement of the board's recommendation, and voting instructions. Proposed Boxed Disclosure #1 (Loss of Credit Union Membership) Most commenters supported the disclosure as written. These commenters thought members need to know precisely what a FOR vote and an AGAINST vote mean. Some commenters thought the title line, “LOSS OF CREDIT UNION MEMBERSHIP,” was unnecessarily negative and should be changed or eliminated. The Board disagrees that there is anything negative about the title. In every conversion, the converting credit union will emphasize why it wants to convert including what it perceives are the positive aspects of the conversion. Nothing in NCUA's rule prohibits such statements, as long as they are accurate and not deceptive. 12 CFR 740.2. A few commenters also suggested that this proposed box disclosure on the effect of a “FOR” vote might be misinterpreted by a member as indicating that the member's vote, by itself, would determine the outcome of the vote. To clarify this, the final rule amends this disclosure to read: 1. LOSS OF CREDIT UNION MEMBERSHIP. A vote “FOR” the proposed conversion means you want your credit union to become a mutual savings bank. A vote “AGAINST” the proposed conversion means you want your credit union to remain a credit union. Proposed Boxed Disclosure #2 (Rates on Loans and Savings) Most commenters strongly supported this disclosure. These commenters thought this disclosure highlighted a fundamental difference between banks and credit unions. Some of these commenters stated credit unions generally charge fewer and smaller fees than banks and recommended the disclosure should also address differences in fees. One such commenter suggested that, if NCUA did not have data on the fees banks and credit unions charge, it should commission a study. One commenter suggested that, in addition to the discussion of historic averages, the boxed disclosure should include actual examples of specific rate disparities. One commenter noted that, in addition to the data and studies cited by NCUA in the preamble to the proposed rule, a study by University of North Carolina Economist William Jackson, entitled *The Benefits of Credit Unions to North Carolina Consumers of Financial Services* , also supports this disclosure. Several commenters thought the proposed boxed disclosure was misleading. One thought it implies rates on existing loans and deposits established by contract could be changed post-conversion. Another commenter thought the proposed language was not representative of the actual transaction being voted on: “the conversion to a mutual savings bank.” A few commenters objected to the disclosure because credit unions do not always have more favorable rates than banks. One commenter objected to the disclosure because it implies a credit union's current pricing is more attractive than the competition and its future pricing will be less attractive than the competition. This commenter also stated that, in a free market economy, the marketplace determines pricing, and that requiring this disclosure suggests otherwise. One commenter dismissed the method by which NCUA uses the economic data, stating that it focused on one particular year (2002-2003) and particular data points rather than a more extensive and complete analysis including regional and market differences, market trends, and a full spectrum of products and services. None of the commenters disputed the accuracy of the data supporting the disclosure. Contrary to the comments above, the data did not focus on one particular year or point in time, but covered three separate years of rates for thousands of banks and credit unions. The data were clear that for most loan and savings products credit union rates are, on average, significantly better than banks. While this is not true of *all* products surveyed, what is true is that for no particular product was the average bank rate significantly better than the credit union rate. The boxed disclosure makes no statement about particular credit union rates, only average rates. Also, in this disclosure the generic word “bank” is more appropriate than the phrase “mutual savings bank.” The disclosure is true of all banks, including both mutual and stock banks—and most converting credit unions convert to mutual banks and then to stock banks. Accordingly, the Board has determined the disclosure is not misleading. NCUA requested data from DATATRAC on credit unions that had previously converted to banks, but DATATRAC had only incomplete data on them. NCUA also asked, in the preamble to the proposed rule, for comments on the rates at converted credit unions. NCUA received no comments responsive to this request. This lack of data on converted credit unions, however, is not critical. Looking at just the small number of previous credit union to bank conversions could, if one or more of the new banks ran promotional rates, skew the real effect of the conversion on rates. NCUA believes that averaging rates over a large number of banks and credit unions is the best way to remove the effects of occasional promotional rates. NCUA also has no reason to believe that the average rates at banks that were formerly credit unions will be different than banks that have always been banks, particularly with the passage of time following the conversion. Accordingly, the Board does not believe this disclosure, as proposed, was misleading in any way, and the final rule adopts this disclosure as proposed. 11 The Board would also like to address a few of the other comments related to this disclosure. 11 NCUA compared average rates for banks and credit unions for 20 savings and loan products over a three-year period. Recently, the General Accounting Office

(GAO)completed a similar comparison of average bank and credit union rates for 15 savings and loan products over a five year period. The NCUA and GAO reached the same conclusion that, while there was virtually no difference between banks and credit unions in mortgage rates, the data “indicate(s) that credit unions offer more favorable rates on average than similarly sized banks for a number of savings products and consumer loans.” *Greater Transparency Needed on Who Credit Unions Serve and on Senior Executive Compensation Arrangements* , U.S. General Accounting Office Report GAO-07-29, p. 57. First, the Board disagrees with the commenters who stated that the “marketplace” dictates the prices of loan and savings products, implying that credit unions and banks have no control over prices because prices are predetermined solely by external market forces. Clearly, depository institutions have some control over their prices, since competing depositories in a given market area can and do offer different prices for the same product. While external forces play a part in determining prices, internal factors such as how much of the product the depository wishes to sell and what margin it desires also play a part in setting prices. In particular, the cost of offering a product, including expenses, figures into the profit margin calculation and the pricing determination. Credit unions may also offer better prices than banks because lower loan rates and higher savings rates return value directly to the credit union's member-owners while, at least for stock banks and mutual holding companies, the bank may seek higher margins through higher pricing to benefit the bank's stockholders. NCUA does not intend for these disclosures on savings and loan rates to keep a converting credit union from providing its views on the rate issue. On the contrary, NCUA wants members and directors to think about and discuss this issue, and for the directors to fully explain why their bank, after conversion, will differ from the average bank. In this regard, one commenter who objected to the proposed disclosure as bad policy gave the following reasons: • The studies cited by NCUA do not compare the rates for converted credit unions pre-conversion and post-conversion, and the growth rates for converted credit unions are much higher after conversion than before conversion; and • The NCUA makes comparisons using products, such as 60-month certificates of deposit (CDs), that typically do not compose a large proportion of a mutual bank's balance sheet. 12 12 NCUA does not know if this comment about the proportion of a bank's balance sheet devoted to certificates of deposit is accurate. The DATATRAC data analyzed by NCUA included thousands of banks offering 60-month CDs. For example, the DATATRAC data for year-end 2005 included 60-month CD rates offered by 4,824 banks. This comment raises important issues. If the converted credit union will charge less favorable rates to its members as a result of its growth, the Board questions how the conversion is in the best interests of the members or how members benefit from the growth, particularly if the bank converts to stock and the vast majority of members do not become stockholders, as historic data indicates. Also, if the converting credit union plans to reduce the availability of its term savings products after conversion, it should tell its members and explain why the members do not need the product. If the converting credit union plans to offer a 60-month CD, but at lower rates as is suggested by the average historic data, it should tell its members that as well. Proposed Boxed Disclosures (Potential Profits by Officers and Directors) Most commenters supported the proposed disclosure. One suggested an “actual, worst-case” example be provided. One suggested NCUA replace the word “often” in the phrase “often the first step in a two-step process to convert to a stock-issuing bank or holding company structure” with an actual percentage based on historical data. The NCUA Board does not believe an example is appropriate. In addition, the use of an actual historical percentage would quickly become out of date as a result of future conversions. Several commenters objected to the proposed boxed disclosure and stated variously: • The disclosure is speculative because the stock conversion may not take place and NCUA should not assume it will; • The disclosure is misleading and inflammatory; • OTS regulations ensure that officials are not enriched at the expense of depositors; • NCUA does not have authority to require disclosures about transactions outside of its jurisdiction; • The disclosure suggests unreasonably that stock option and stock benefit plans are unfair and unethical; and • The disclosure is not balanced and should include statements about the benefits of such stock plans. As discussed in the preamble to the proposed rule, a credit union that converts to an MSB converts to a stock bank almost ninety percent of the time. 13 An event that occurs about ninety percent of the time is not speculative. In addition, no commenter challenged the accuracy of the past insider benefits as discussed in the preamble. 14 Accordingly, the Board does not believe the proposed box disclosure is inaccurate or misleading. Additionally, if a credit union does not plan to convert to stock, it is free to tell its members. Of course, it may change its mind after conversion to a mutual, and credit union members should be aware that a converting credit union still could convert to stock. 13 71 FR 36946, 36954 (June 28, 2006). 14 The preamble to the proposed rule also contains a discussion of what management and officials at former credit unions obtained in stock and other benefits as a result of the stock conversion. *Id.* at 36954. Since the proposed rule was issued for comment, Viewpoint Bank, another former credit union, has converted to stock inside a mutual holding company structure. Based on the Viewpoint prospectus and other publicly available information, it appears that senior officials at Viewpoint made more than $1 million in profits on the IPO pop. The bank also set aside $13.9 million in free stock for its employees in the Employee Stock Ownership Plan, and intends to set aside another $7.8 million in free stock for senior officials in its restricted stock plan and another $3.1 million in stock for senior officials in its stock option plan. OTS regulations do not purport to ensure that officials are not enriched, and the disclosure does not suggest that stock plans are unfair or unethical. As discussed above, credit union directors have a fiduciary duty to their members and so should inform their members when they might acquire ownership interests that otherwise belong to their members. NCUA is not the only financial regulator to have recognized the benefits that officials gain in a stock conversion or to raise issues concerning conflicts of interest and fiduciary duties. In 1994, the Board of Directors of the Federal Deposit Insurance Corporation

(FDIC)ordered the publication of a review, authored by several senior members of the FDIC staff, of mutual-to-stock conversions by state nonmember banks. 15 This FDIC review stated that the mutual-to-stock conversion process was “fundamentally flawed.” The review noted that the mutual-to-stock conversion process was designed to recapitalize struggling thrifts, not healthy ones, and that when a healthy thrift converted it typically resulted in a jump, or “pop,” in the value of the stock at the initial public offering (IPO). The review then observed that the vast majority of member-depositors do not subscribe to and obtain the benefit of the IPO because of lack of knowledge, lack of resources, or both. As a result, the review stated, professional depositors and insiders obtain large ownership interests in the value of the IPO and the institution's stock. The FDIC review stated, “[w]e believe that for individuals who control the conversion transaction to lay any claim, in their capacity as managers and trustees, to a portion of the value being transferred creates a conflict of interest.” 16 15 Review of Mutual-to-Stock Conversions of State Nonmember Savings Banks, 59 FR 30357, 30362-63 (June 14, 1994). 16 *Id.* at 30361. The FDIC review proposed a solution that involved issuing stock purchase rights to stakeholders, including depositors. The stakeholder rights would be valued, in the aggregate, at the amount of capital the bank needed, and if the IPO produced additional capital, those stakeholders who had not exercised their stock purchase rights would be given the excess capital. Following publication of the review, the FDIC was inundated with more than 1000 comments from the banking industry. Five months later, the FDIC dropped its proposal with the statement that “[a]ny fundamental re-design of the conversion process should involve the appropriate legislative bodies, Congress or State legislatures.” 59 FR 61233, 61235 (November 30, 1994). These issues of a large IPO pop, tiny participation by member-depositors, and windfalls to senior officials, remain today. *See supra* notes 5 and 10 and the accompanying text on the recent IPO of Viewpoint Bank. The NCUA Board feels it important to also respond to suggestions that this boxed disclosure, or any of the boxed disclosures, lack balance. The FCUA requires membership approval of the conversion, and so the credit union has an incentive to advocate for conversion. In every conversion reviewed by NCUA, the converting credit union has set forth its reasons supporting the conversion at some length in the member notice. NCUA's past experience is that converting credit unions do not, however, want to present to their members the important information in the boxed disclosures. Accordingly, the disclosures, as written, create the balance that would otherwise be lacking. If the directors of a converting credit union believe the information about stock plans is unbalanced, they are free to include whatever accurate information they want in the notices about the perceived benefits of stock plans. Credit unions should explain to members why the conversion and important aspects of the conversion such as stock plans are in the best interests of members. Proposed Boxed Disclosures (General) Several commenters objected to requiring the boxed disclosures be sent only with the three formal notices and not with all written communications, as in the current rule. These commenters believe these disclosures are very important and a converting credit union may mislead members by failing to include this information with other written communications. The boxed disclosure language is designed to accompany the notices to members of the member vote. The disclosure language does not necessarily fit well with other communications, such as communications that precede the adoption of a proposal to convert. Further, NCUA does not want the boards of converting credit unions to use the required disclosures as an excuse not to communicate with their members. Several commenters suggested NCUA prohibit a converting credit union from disputing or refuting the boxed disclosures. Some of these commenters stated the boxed disclosures present facts, not opinion, and should not be subject to interpretation or rebuttal. One of these commenters stated NCUA approval of rebuttals of these required disclosures dilutes the effectiveness of these critical disclosures. This commenter believes attempts to disguise or disclaim federally required disclosures have traditionally resulted in disclosures being held to be defective and legally insufficient. This commenter analogized such rebuttals to allowing a rebuttal to the Annual Percentage Rate

(APR)disclosure required by the Truth-in-Lending Act and Regulation Z. NCUA's disclosures are not analogous to the APR disclosure required by Federal Reserve Board's Regulation Z. The APR calculation is a standardized numerical calculation meant to facilitate comparisons. NCUA wants to encourage communication and discussion, not discourage it. As discussed previously, if a converting credit union wants to make statements about its intent with regard to post-conversion rates or post-conversion stock benefits, it is free to do so. Several commenters felt the disclosure relating to diminution of voting rights following conversion to an MSB should be retained as part of the boxed disclosures. NCUA believes this disclosure is important, and so must be made by the converting credit union in the body of the member notice. Including too much information in the boxed disclosures, however, reduces the probability a member will read and comprehend the disclosures. Accordingly, the final rule does not include this particular disclosure as a boxed disclosure. A few commenters suggested other changes to the disclosures. One commenter that supports the proposed boxed disclosures believes the key language in the disclosures should be capitalized, as in the existing rule. The Board believes the disclosures are adequate without additional capitalization. One commenter suggested an additional disclosure informing members they may contact the appropriate NCUA regional office if they feel officials are not acting in the best interests of members. NCUA believes that members who are dissatisfied with the credit union's actions may use the NCUA complaint process that exists for all member complaints and that no specific notice of that process is necessary. Some commenters suggested the boxed disclosure be expanded to include what those commenters perceive as advantages of the thrift charter over the credit union charter. A converting credit union is free to explain what it believes are the advantages of the thrift charter in the notice to the members. One commenter thought the proposed requirement that the disclosures be placed immediately after the cover letter was “unworkable” because the credit union cannot control what its printer does or how a member opens an envelope. This commenter suggested NCUA only require best efforts in that regard. NCUA disagrees. A converting credit union can control the order in which the documents are placed in the envelope. When members pull out the materials, they will see the cover letter prepared by the directors, and the other documents should be placed in the appropriate order behind that cover letter. Other Required Disclosures (General) The current rule requires a converting credit union to disclose other information about the conversion, and the proposal retained these disclosures, including whether the converting credit union intends to convert to a stock entity; any conversion-related benefits to directors and senior management; and the effect of conversion on products and services, including the effect, if any, of the Qualified Thrift Lender

(QTL)test applicable to federal MSBs. Several commenters stated that disclosure of the intent to convert to a stock institution would violate the confidentiality requirement in § 563b.120 of the OTS regulations. 17 Some of these commenters stated that requiring a credit union to state its conversion intentions would cause these decisions to be fueled by professional investors. 17 12 CFR 563b.120. This section reads as follows: “May I discuss my plans to convert [to a stock institution] with others?

(a)You may discuss information about your conversion with individuals that you authorize to prepare documents for your conversion.

(b)Except as permitted under paragraph

(a)of this section, you must keep all information about your conversion confidential until your board of directors adopts your plan of conversion.

(c)If you violate this section, OTS may require you to take remedial action. For example, OTS may require you to take any or all of the following actions:

(1)Publicly announce that you are considering a conversion;

(2)Set an eligibility record date acceptable to OTS;

(3)Limit the subscription rights of any person who violates or aids a violation of this section; or

(4)Take any other action to assure that your conversion is fair and equitable.” NCUA does not believe its required disclosure violates either the letter or the spirit of the OTS provision at 12 CFR 563b.120. The disclosure requirement does not violate the letter of § 563b.120 because it applies only to the converting institution while it is a credit union, and the OTS rule applies only to the converting institution after it becomes an MSB. Accordingly, the institution can reference its intent before it converts and then remain silent about its further intent after it converts. Moreover, the NCUA disclosure provision does not run afoul of the spirit of the OTS confidentiality provision. If an MSB violates 563b.120, the first element of the cure is for the MSB to make full public disclosure. 12 CFR 563b.120(c)(1). The confidentiality provision is designed to protect against limited disclosure to the benefit of select individuals, such as professional depositors, and to the detriment of the MSB membership as a whole. NCUA's disclosure provision is consistent with this intent because it ensures that all interested parties, including the credit union's membership, are aware of the credit union's intent to go to convert to stock and professional depositors and others with access to inside information will not have an advantage over the credit union's members. NCUA is aware that professional investors can purchase private research predicting which credit unions are likely to convert to MSBs and then to stock banks. Professional depositors already have an information edge over the member-owners of a credit union and it is only proper that the board of a credit union keep its membership informed of its intentions when those intentions could have a fundamental effect on that ownership interest. The Board also notes that the OTS has never informed NCUA that it objects to the NCUA requirement that a converting credit union disclose its intent with regard to a future stock conversion. In 2005, two Texas credit unions converted to MSBs. Their notices to members about the upcoming vote stated their intention, after the MSB conversion, to convert to stock institutions. Following the member vote, these credit unions requested OTS certify the member vote, and OTS issued formal certification orders. OTS Order No. 2005-24 (July 20, 2005) and Order No. 2005-23 (June 29, 2005). These orders state that OTS reviewed the text of the member notices. While the orders criticize some of NCUA's disclosure requirements, neither order mentions the disclosure of intent to convert to stock. The Ballot Most commenters strongly support the proposal that the ballot be sent only with the 30-day notice. These commenters believe members must have time to consider both the advantages and disadvantages of the conversion and to hear what other members have to say about the conversion before deciding how to vote. Several of these commenters also suggested NCUA require that a converting credit union allow a member to change his or her vote anytime up to the close of the special meeting. These commenters cited the balloting rules in Roberts Rules of Order and also those applicable to for-profit companies. Several commenters objected to the requirement that the ballot go only with the 30-day notice, stating this would shorten the time frame for voting and discourage voters from voting. One commenter stated NCUA should not presume that voters need more time to vote absent evidence to the contrary. One commenter suggested a credit union “mail the ballot separately from the 30-day disclosure.” NCUA has carefully considered both sides of this issue. NCUA has heard from members of converting credit unions that they need time, once the membership voting process has been launched, to communicate with one another and to consider their votes. The decision made by most converting credit unions not to allow members to change their votes once cast makes it imperative that the members receive and consider all relevant information before they cast an irrevocable ballot. NCUA wishes to balance the need for an informed vote with the burden on the converting institution. For example, it could be burdensome to allow voters to change their votes up to the close of the special meeting. It would also be a burden on a converting credit union to require all voting be done in person at the special meeting, and that no ballots be sent, or any votes cast, by mail. 18 NCUA believes that the proposed rule strikes the appropriate balance between voters' rights and the burden on the credit union. Accordingly, the final rule retains the requirement that the ballot be sent with the 30-day notice and not earlier. 18 The FCUA is silent on ballot delivery. The FCUA language stating that the credit union “shall submit notice to each of its members * * * 90 days before the date of the member vote” could be interpreted to mean that the member vote must be conducted in person on the date of the vote, with no ballots sent, or votes received, by mail. 12 U.S.C. 1785(b)(2)(C)(i). One commenter noted that the statement on the ballot about loss of credit union membership required by proposed § 708a.4(b)(4)(iii) did not track the corresponding boxed disclosure exactly, because it simply said “bank” and not “mutual savings bank.” The text of the final § 708a.4(b)(4)(iii) tracks the final version of the boxed disclosure. One commenter objected to the proposed rule's limiting information on the ballot to a statement of the conversion proposal under consideration, the board's recommendation, and voting instructions. This commenter believes this constitutes censorship. NCUA disagrees. A converting credit union is free to make its case for conversion in the notice materials and other communications to members. The ballot itself should focus on the mechanics of voting and not include other information that may confuse members and keep them from exercising their voting rights. The FCUA states that “[t]he member vote concerning charter conversion * * * shall be administered by the [NCUA].” 12 U.S.C. 1785(b)(2)(G)(ii). The courts have given a very broad meaning to the word “administer.” 19 NCUA's authority to administer the vote certainly includes the authority to dictate the form of the ballot and its delivery. 19 As one court stated, “[t]he word ‘administer’ is one susceptible of a very broad interpretation * * * [t]o ‘manage’ is to control and direct, to ‘administer,’ to take charge of * * *” *Costonis* v. *Medford Housing Authority,* 343 Mass. 108, 114 (Mass. 1961). Another court analyzing the use of the word “administer” stated that “[t]o administer a decree is to execute it, to enforce its provisions, to resolve conflicts as to its meaning, to construe and to interpret its language.” *United States* v. *Hennen,* 300 F. Supp. 256, 263 (D.C. Nev. 1968). Procedure for Members To Communicate With Each Other at the Member's Expense Most commenters supported the proposal's provisions for facilitating member-to-member contact, including the timing, advance payment amounts, and NCUA review of disputed materials. These commenters generally felt the proposal protected the rights of members to make their views known to other members without delaying the conversion or unduly burdening the credit union. Several comments touched on the proposed amount of the required advance payment (50 cents per member) for hardcopy mailings. A few commenters thought 50 cents was too low. One commenter said the cost of a member mailing was currently closer to one dollar per member. This commenter also suggested the regulation should accommodate changes in costs over time and recommended NCUA specify the advance payment rate in terms of a multiple of the first class postage rate or, alternatively, permit the converting credit union to establish some reasonable rate. Another commenter was also concerned about the “hard coding” of these costs, and suggested credit unions should determine the cost, within reason. Another commenter suggested NCUA set a maximum amount a credit union could seek for cost reimbursement. A few commenters were concerned about the collectability of the remainder of the reimbursement, and one suggested NCUA authorize a credit union to take additional monies, not to exceed the maximum amount, from a member's share accounts. One commenter stated the cost to a member should be based on actual amounts, and not specified in the regulations. One commenter asked if the reimbursable expense included any credit union overhead. First, NCUA would like to clarify that the proposed rule did not require a member to pay the full cost of delivery in advance. Reimbursement is not required in advance, but the member must make an advance on the full reimbursement to ensure the communication is delivered. The credit union and member will subsequently work out the actual cost of delivery. The credit union may not take the remaining monies due out of the member's account unless the member concurs. Second, the Board clarifies that the reimbursable cost only includes direct costs to the credit union. It does not include indirect costs or overhead. For example, if the credit union plans to use internal staff to prepare some or all of the mailing a credit union may not charge the member for staff salary or benefits. The final rule provides for this. Third, NCUA agrees with those commenters suggesting that some advance payment formula adjusting with changes in future prices would be better than a fixed amount, at least for the advance payment on hardcopy mailings. Accordingly, the final rule replaces 50 cents, the proposed fixed amount, with an advance payment calculation using 150% of the first class postage rate on a letter of less than an ounce. The current first class postage rate is 39 cents, and 150% of that, or 58.5 cents, lies between the proposed 50 cents and the one dollar cost that the one credit union commenter suggested would be its total per-member cost of a hardcopy mailing. A few commenters stated that, because of the impact of the bank conversion decision on members and their rights, a credit union should bear the entire cost of the member-to-member communication. These commenters questioned whether the cost of sending the communication might discourage some members from attempting to communicate with other members. Several of these commenters noted that converting credit unions spend large sums of money promoting the conversion and individual members opposed to the conversion cannot raise this kind of money. Some commenters suggested member comments be included with the 90-, 60-, and 30-day notices if received by the credit union before those mailings, citing SEC proxy solicitation requirements. One commenter suggested the credit union could put all member communications in one separate mailing to be sent before the 30-day notice. Another commenter suggested the credit union fund “a reasonable number” of these communications. Another commenter suggested that, if a member could obtain a certain minimum number of member signatures on a petition supporting a communication, the credit union should send it for free. NCUA has carefully considered these comments. Members who only want their comments posted only on the credit union's Web site may do so for free. Other forms of distribution, however, may involve significant credit union resources. Members who feel strongly about delivery of their message to other members should be willing to pay to have it delivered. NCUA did not want all the communications to be sent together in one mailing because that might raise the issue of which communications (e.g., for or against the conversion) would be placed first. The petition idea is interesting, but there are only sixty days between the first notice and the mailing of the ballot, and NCUA is not sure that a petition would work given the time needed to gather and validate signatures. In addition, the idea of having the credit union fund a reasonable number of communications, but not all communications, raises issues such as the definition of “reasonable” and who will select those communications that will be sent for free and which must be paid for. One commenter objected to the proposed communication procedures because of the resources a credit union would have to devote to determining which members have agreed to receive e-mail communications and which communications were not proper. This commenter felt the proposed provisions providing for the posting of comments in the credit union's branches and on its Web sites were sufficient communication methods. NCUA disagrees because such postings are not guaranteed to reach every member. If the member wants a communication delivered directly to other members and is willing to pay for it, the credit union should do it. Credit unions should follow their customary mailing practices for member-to-member communications. For example, if a credit union regularly delivers information or statements with respect to two or more members sharing the same address by delivering a single mailing to those members, referred to as “householding,” then the credit union should follow this same practice for member-to-member communications. The householding method of delivery will reduce the amount of duplicative information that members receive and also lower printing and mailing costs for the credit union and, ultimately, the requestor. One commenter stated that, as between e-mailing and regular mail, the regulation should clarify whether the requestor must select one method or the other, and, if a combination is permitted, how the advance payment is to be calculated. NCUA believes the rule is clear. The member may request that the communication be sent by mail, by e-mail, or both. In the latter case, the member must make both advance payments. Those members that have agreed to accept communications by e-mail will then get the communication by both mail and e-mail. A few commenters were concerned that, if a credit union could not meet the timeline for review and delivery of a communication, postponement of the special meeting unduly burdens the credit union. Another credit union commenter stated that the proposal allowing only seven days to deliver the communication was unrealistic in that it would take at least 14 days to print, stuff, and mail the 90,000 pieces of mail required to reach that credit union's members. The proposed paragraph 708a.4(f)(1) provided that: A converting credit union must mail or e-mail a requesting member's proper conversion-related materials to other members eligible to vote within seven days of receiving such a request if .* * * The Board has considered this and agrees a seven-day delivery standard may be overly burdensome. The final rule deletes the words “within seven days of receiving such a request” from paragraph (f)(1). The final rule retains the requirement, however, that the credit union must deliver the member communication on or before the date members receive the 30-day notice and ballot. There are at least 60 days between the date the 90-day notice is mailed and the date the members receive the 30-day notice. The rule provides that members have 35 days from the date of the 90-day notice to submit any communication requests to a converting credit union. That leaves at least 25 days (60 minus 35) for a credit union to process and deliver a communication. In the event of a disputed communication, NCUA has seven of those 25 days to review the communication, but that still leaves 18 days for a credit union to process and deliver the communication. The Board recognizes this timeline may be demanding, but it is certainly achievable. A large converting credit union should anticipate it may have to deliver several member communications on short notice and plan accordingly in advance of sending the 90-day notice. A few commenters addressed the proposed standard for determining if a particular communication is proper and were supportive of the proposal. A few commenters suggested the required member notices include a statement informing members they may provide materials for distribution to other members. Paragraph 708a.4(f)(9) of the proposed rule requires this, and the final rule retains this provision. One commenter objected to the proposal and analogized such member-to-member communications as junk mail or spam. NCUA disagrees. Communications among members are part of the democratic character of credit unions. One commenter stated that, after a credit union delivers a communication to its members, it should inform the requesting member that the communication has been delivered. NCUA agrees, and the final rule has been modified accordingly. One commenter suggested a group of members might get together to request delivery of a single communication and the rule should specifically permit that. NCUA agrees, and has added a new subparagraph (f)(10) to address that situation. The converting credit union will refer to the group in the manner requested by the group, for example, with a single group name or by listing each member's name individually. One commenter objected to NCUA resolving disputes over the propriety of the communication, stating this would constitute NCUA censorship of the conversion debate. The commenter claims OTS resolves disputes over the communications of MSB members only when requested. NCUA will perform a similar role to OTS. NCUA will only become involved when requested. If there is a dispute, the parties will request NCUA to resolve it, which is the same role OTS plays in MSB communications. NCUA solicited comment on possible alternative methods of communication, including, for example, having the member prepare the communication for mailing, including sealing the envelopes and applying postage, with the credit union itself being responsible only for putting mailing labels on the envelopes and mailing them. NCUA received a few comments on this proposal. Some commenters thought this would put too much burden on a member. A few commenters supported the proposal but only if NCUA reviewed the communication before mailing for proper content. Another commenter thought this approach would reduce the burden on the credit union and the credit union should have the option of requiring the sender to prepare the mailing. After fully considering these options and comments, NCUA concludes that the form of communication as proposed is best, and not the alternatives. One commenter stated NCUA should regulate the content of communications made by those opposed to the conversion in the same manner it regulates the content of communications made by the credit union itself. In fact, the rule provides for NCUA review of comments made by the credit union and comments made through the credit union, regardless of whether those comments are for conversion or against conversion. Accordingly, and except as discussed above, the final rule retains § 708a.4 as proposed. 708a.5 Notice to NCUA The current § 708a.5 requires that converting credit unions notify NCUA of the intent to convert within 90 days of the member vote. The credit union must provide NCUA with copies of the notice and material it has or will send to the members. A state-chartered credit union must provide NCUA with certain information about the laws and regulations it intends to follow with regard to the conversion. The current § 708a.5 also permits a credit union, if it chooses, to provide notice to NCUA more than 90 days before the member vote, and to request a preliminary determination as to the proposed methods and procedures of the conversion. Requirement for Board Certification The proposed rule provided for directors to submit to NCUA a certification of their support for the conversion proposal and plan. Each director who votes in favor of the conversion proposal would have to sign the certification. The certification must include a statement that each director signing the certification supports the proposed conversion and believes that the proposed conversion is in the best interests of the members of the credit union. It must include a description of all materials submitted to the Regional Director with the certification and a statement that these materials are true, correct, current, and complete as of the date of submission. Finally, it must include an acknowledgement that federal law prohibits any misrepresentations or omissions of material facts in connection with the conversion. 18 U.S.C. 1001. Most commenters strongly supported the proposed director certification requirement as written. These commenters think it is important that credit union directors understand their fiduciary obligations. Several commenters noted that, with the financial incentives to convert, the certification helps directors to focus on their fiduciary obligation. Several commenters objected to the certification requirement. Some of these commenters believe it exceeds NCUA's statutory authority to impose such a requirement. Some of them felt the requirement will have the effect of deterring credit union board members from voting in favor of a plan of conversion by increasing the potential for litigation against directors. One of these commenters believed the vast majority of written comments received as part of the advance notice requirement would oppose the conversion process and that this, combined with the certification requirement, would discourage board members from doing what they believe to be in the best interests of the credit union, its members, and the communities it serves. One of these commenters asked why only a conversion vote merits this certification when “other, equally fundamental changes do not,” without identifying what changes are equally fundamental. One commenter stated that NCUA had not offered any evidence that in the past a board has skirted its fiduciary responsibility on this topic. One of these commenters suggests NCUA adopt certification requirements identical to the OTS certification requirements. One commenter objected to the certification but suggested that, if adopted, the reference to 18 U.S.C. 1001 should be expanded to indicate that the title 18 provision only applies to willful and knowing false certifications. The Board has carefully considered these comments. Given the financial incentives to credit union officials in connection with conversion and the need to link the board's conversion due diligence to the interests of the members, the Board believes the certification requirement is both appropriate and necessary. This imposition of this certification requirement is within NCUA's authority, as discussed in the previous section on NCUA's rulemaking authority. The Board has also considered the suggestion that the reference to 18 U.S.C. 1001 be expanded to indicate that the provision only applies to willful and knowing false certifications. The Board has examined similar citations to 18 U.S.C. 1001 used in director certifications submitted to OTS in connection with other charter conversions, and found no use of the words “willful and knowing.” Accordingly, the final rule retains the certification requirement as proposed. Materials Subject to NCUA Review Proposed § 708a.5(b) retained a credit union's right to request NCUA make a preliminary determination regarding the intended methods and procedures applicable to the membership vote. The proposal expands that right to allow a credit union also to request review of all of its proposed notices, including the public notice it intends to publish before the board of directors votes on a conversion proposal. Under the proposal, the NCUA Regional Director will make a determination on the request within 30 calendar days unless more time is required to review the submission or obtain additional information. Virtually all the comments on the proposed expansion of reviewable materials supported the expansion. Accordingly, the final rule retains this provision as proposed. Consultation With State Supervisory Authorities

(SSA)One commenter requested that, for converting state-chartered credit unions, NCUA specifically add a provision to the rule stating it will coordinate with the state supervisory authority on the conversion and conversion process. The Board has added a provision that requires the Regional Director, upon notification from a state-chartered credit union that it has adopted a plan of conversion, to contact and consult with the credit union's SSA. Accordingly, and except as described as above, this final rule adopts § 708a.5 as proposed. 708a.6 Membership Approval of a Proposal To Convert The current § 708a.6 provides that the board of the converting credit union must certify the results of the member vote to NCUA within ten days of the member vote. The board must also certify that the materials actually provided to the members were the same as those previously submitted to NCUA or provide an explanation for any differences. As noted previously, the proposed § 708a.6 included the requirements found in the current § 708a.4 that members must approve the proposal by affirmative vote of the majority of members who vote and the vote must be by secret ballot conducted by an independent entity. Proposed § 708a.6(b) required the board of directors to set a date determining member eligibility to vote. The proposal required the voting date of record be at least one hundred twenty days before the board of directors publishes the § 708a.3 notice of intent to consider conversion. Most commenters agree with the 120-day voting eligibility requirement. No commenters opposed the requirement, although one thought that 30 to 60 days was more appropriate, so as to disenfranchise as few legitimate members as possible. Another commenter thought the eligibility date should be as close to the advance notice date as possible. NCUA agrees with the last commenter. The final rule modifies the voting eligibility requirement to no later than one day before publication of the advance notice. This will still minimize the impact of professional depositors while disenfranchising as few legitimate members as possible. NCUA also solicited comment on whether it should permit electronic voting. Only a few comments addressed this issue. One supporter stated the opportunity to vote electronically must be consistent with the timetable prescribed in the proposed regulations and that integrity of the process must be verified and maintained. Dissenters were generally concerned about the possibility of fraud. Given the general lack of response to this suggestion, the final rule does not authorize electronic voting. Several commenters recommended the rule be amended to prohibit the independent teller from providing interim updates to the credit union on the member vote. These commenters believe the credit union may abuse this information or that the information creates an unfair advantage because the credit union management knows the vote tally while members opposed to the conversion do not. In the alternative, some of these commenters suggest that, if the teller is permitted to make interim voting reports available to credit union officials, then those reports should also be made available to all interested parties. The interim reporting of voting results is not addressed in the proposed rule and so is beyond the scope of this rulemaking. The Board notes that, by requiring the ballot to be sent with the 30-day notice, the final rule mitigates any advantage that may be gained through interim reporting. Accordingly, the final § 708a.6 is adopted as proposed. 708a.7 Certification of Vote on Conversion Proposal Proposed § 708a.7 retained the requirement, currently located in § 708a.6, that the board of directors certify the results of the membership vote to NCUA. No comments were received on this section, and the final rule retains § 708a.7 as proposed. 708a.8 NCUA Oversight of Methods and Procedures of Membership Vote The current § 708a.7 provides that the Regional Director will issue a determination to approve or disapprove a credit union's methods and procedures for the membership vote within 10 calendar days of the receipt of the credit union's certification of the member vote. The proposal lengthened this time period to 30 calendar days and relocated this provision from § 708a.7 to § 708a.8. Based on past NCUA experience, 10 days does not provide adequate time for the Regional Director to review all of the written materials provided to members, particularly if the credit union amended them in the process, and verify all of the information necessary to make the required determination. Section 708a.8(d) of the proposal also contained a new provision permitting a credit union dissatisfied with a Regional Director's determination to appeal to the NCUA Board. Any appeal must be filed by the credit union within 30 calendar days after receipt of the Regional Director's determination. Most commenters supported the proposed changes, including allowing the Regional Director 30 days to approve or disapprove of the methods and procedures of the vote and the proposed appellate process. One commenter objected to the proposed appeal process as illegal. This commenter characterized the appeal as “mandatory,” and stated a mandatory appeal was impermissible under the Administrative Procedures Act (APA), 5 U.S.C. 702 and 704; and *Darby* v. *Cisneros,* 509 U.S. 137 (1993). The Board intends the appeal to be permissive, not mandatory. Both the proposed and final rules state that “[a] converting credit union may appeal the Regional Director's determination * * *” (emphasis added). Accordingly, there is no APA issue. 708a.9 Other Regulatory Oversight of Methods and Procedures of Membership Vote Proposed § 708a.9 retains the requirement, currently located in § 708a.8, that the entity that will regulate the credit union following conversion must verify the vote and may direct that a new vote be taken. NCUA received no comments on this section, and the final rule retains the language as proposed. 708a.10 Completion of Conversion This section retains the provisions in the current § 708a.9 stating that, once the credit union has received the approvals required in the current §§ 708a.7 and § 708a.8, it may complete the conversion. NCUA will then cancel its account insurance and, if it is a federal credit union, its charter. The proposal amends the current rule to require a credit union to complete the conversion transaction within one year of the date of receipt of its approval from NCUA under proposed § 708a.8. Many commenters agreed with this one-year completion window. One commenter suggested that NCUA grant the Regional Director authority to extend this window, upon request of the converting institution, for an additional six months. A few commenters objected to this provision. One of them thought two years was more reasonable. The final rule permits the Regional Director, upon timely request and for good cause, to extend the one-year completion period for an additional six months. This provides additional flexibility to converting credit unions, while still ensuring that the process moves along, that the membership vote will not become stale, and, as discussed in the preamble to the proposed rule, that NCUA can plan for efficient use of its examination resources. Except as discussed above, the final rule retains § 708a.10 as proposed. 708a.11 Limit on Compensation of Officials Proposed § 708a.11 retains the limit on compensation for officials currently found in § 708a.10. NCUA received no comments on this section, and the final rule retains § 708a.11 as proposed. 708a.12 Voting incentives (Proposed: Member Access to Books and Records) The proposed rule included a new provision on member access to the books and records of the converting credit union. The proposal stated that members may request access to the books and records of a converting credit union for purposes such as facilitating contact with other members about the conversion or obtaining copies of documents related to the due diligence performed by the credit union's board of directors. The proposal also stated that FCUs will grant access under the same terms and conditions that a state-chartered for-profit corporation in the state in which the FCU is located must grant access to its shareholders. Some commenters suggested that, in lieu of relying on the state law where the FCU is located, NCUA establish a particular standard for access to member books and records. These commenters noted that state law on records access varies widely from state to state. They also noted that, because of the way state corporation statutes are written, it is possible that a state court may decline to apply state corporate law to an FCU. Some commenters expressed concern about access to certain records, including member names and other sensitive personal information and safety and soundness information. One commenter suggested NCUA specify the kinds of documents members could review, such as the conversion proposal, the board minutes addressing conversion, and related documents. One commenter stated NCUA should require disclosure of all communications between the credit union and “outside promoters of the conversion.” One commenter that supported the provision stated NCUA needed to provide a definition of where an FCU that does business in more than one state is located. One commenter believed access to FCU books and records should be governed by the same law that applies to records access for members of state-chartered mutual savings banks or members of state-chartered nonprofit organizations. One commenter thought it should be made clear that access to books and records does not give members permission to disrupt the normal course of business. The Board has decided not to adopt a regulatory provision on member access to books and records at this time. FCUs should continue to follow existing legal opinions on member access to books and records, including NCUA OGC Legal Opinion 06-0127B (February 6, 2006), located on NCUA's Web site at *http://www.ncua.gov.* Accordingly, the final rule does not adopt § 708a.12 as proposed. Instead, the final § 708a.12 addresses voting incentives. The text of the final § 708a.12 is discussed below. 708a.13 Voting Guidelines Section 708a.11 of the current conversion rule contains some guidelines to assist converting credit unions in conducting their member vote. The current guidelines discuss the interplay between state and federal law affecting the vote, the determination of who is eligible to vote, and the time and place of the special meeting at which the members will cast their ballots. The proposal moved the voting guidelines to § 708a.13. It retained the existing guidance and added additional guidance on the use of voting incentives. Many commenters supported these proposed changes, although many also thought the rule should be amended to specifically prohibit the use of raffles or other voting incentives. Some of these commenters desire a blanket prohibition, while others want to prohibit only those incentives constructed to affect the outcome of a conversion vote or designed to encourage rapid voting (e.g., raffles that are only open to the first 500 voters). Some of the commenters supporting a blanket prohibition feel that voting incentives increase the participation of “casual” or “indifferent” members, while they do not increase the participation of those who “properly regard conversion as a matter of the highest importance.” One commenter stated these incentives are intended to encourage members to vote quickly, before fully discussing the issue with other members. Some of these commenters distinguish the use of raffles in other contexts, stating that, while raffles may be permissible in other contexts, the importance of the charter conversion decision should keep out any mechanism that could skew the fairness of the vote. One commenter also suggested that, in addition to a discussion of voting incentives in the guidelines attached to the rule, NCUA should specifically prohibit any incentives offered to affect the outcome of the vote rather than to encourage participation in the voting process. One commenter thought a credit union should be allowed to conduct raffles as it desired without NCUA oversight. The Board believes voting incentives are not necessarily bad. Still, when incentives are employed, they must be used in a way that does not skew the results of the vote or encourage members to vote before they have time to consider the ramifications of the conversion. After careful consideration, the Board has determined the final rule should include a disclosure requirement in connection with voting incentives. Accordingly, the final § 708a.12 requires that, if a converting credit union offers an incentive to encourage members to participate in the vote, including a prize raffle, every reference to such incentive made by the credit union in a written communication to its members must also state that members are eligible for the incentive regardless of whether they vote for or against the proposed conversion. Members should take the time that they need to consider their vote, and so incentives should not encourage rapid voting. Incentives should be available equally to all who vote, whether by mail or in person at the special meeting. The final guidelines address this. A few commenters believe the statement in the proposed guidelines that “incentive(s) should not be unreasonable in size” is ambiguous and requested clarification. An incentive could be unreasonably large in two different ways. First, the cost of the incentive could be unreasonable in relation to the credit union's net worth. In other words, the cost of the incentive should have a negligible impact on the credit union's net worth ratio. Second, the incentive could be unreasonable if it is so large that it distracts the member from the purpose of the vote. The Board has added additional language to the guidelines to reflect this guidance. Except as discussed above, the final § 708a.13 is adopted as proposed. Also, as discussed above, the final § 708a.12 is retitled and restructured. D. Other Comments and Issues NCUA received other comments not related to any particular section of the rule. Some of these comments were beyond the scope of this rulemaking, including: • A few commenters asked that NCUA review its position that it generally does not become involved in bylaws disputes. These commenters believe NCUA should actively enforce bylaw provisions, particularly as they relate to the conversion process. Some of these commenters stated NCUA often focuses on bylaw issues as part of its examination process. One of these commenters stated the bylaws should be a regulation. • One commenter stated NCUA should create a private right of action for members against directors who violate their fiduciary duties. • Some commenters urged NCUA to require converting credit unions to release their due diligence to the members before they vote. Some of the commenters thought converting credit unions should address how conversion to a mutual is more beneficial than converting directly to a stock based organization and giving member a pro rata share of stock based on their investment in the credit union. • A few commenters suggested NCUA promulgate a rule requiring a converting credit union distribute its capital and surplus in a pro rata distribution to credit union members before converting. As these comments are beyond the scope of this rulemaking, NCUA declines to address them in this final rule. A few commenters suggested NCUA permit credit unions to convert directly to stock banks. A few commenters suggested that, in addition to a conversion rule, NCUA also promulgate a rule on credit union mergers into banks. The FCUA permits credit unions to merge into banks, but a rulemaking specific to those conversions is also beyond the scope of this rulemaking. 12 U.S.C. 1785(b)(1). Several commenters noted the current regulation has no minimum quorum requirement for the member vote and the decision to convert could be made by only a small fraction of the members. These commenters suggested NCUA should require a quorum of a substantial percentage of the membership. The FCUA, however, does not permit the NCUA to establish a quorum requirement for MSB conversions. The FCUA states that membership approval “shall be by affirmative vote of a majority of the members of the insured credit union who vote on the proposal.” 12 U.S.C. 1785(b)(2)(B). Several commenters who objected to the proposed rule felt the proposed rule undermined the corporate business judgment rule. The Board does not agree that anything in the proposed or final rule, which focuses on process and procedures not the substantive decision, undermines the corporate business judgment rule. Many credit unions that convert to MSBs subsequently convert to stock banks in a mutual holding company format. One commenter stated that NCUA “vilifies” the MHC form unjustly. This commenter states that the MHC form allows mutual savings associations to raise additional capital, add branches, and acquire whole businesses, all the while “retaining their mutual ownership structure.” This commenter states “it is hard to find where the NCUA has any experience on this matter to give their views credibility.” The Board believes the conversion to an MHC form presents the directors with conflicts of interest, and the directors' waiver of dividends in favor of minority stockholders and to the detriment of the members of the MHC exemplifies this conflict. Another banking regulator, the FDIC, agrees. The FDIC has expressed its concern over this waiver practice as follows: The Competitive Equality Banking Act of 1987 and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 authorized conversion of mutual savings institutions into federal mutual holding companies, which in turn transfer virtually all their assets and liabilities to new, stock savings institutions, part of whose stock is acquired by subscribers in the conversion, with the majority retained by the mutual parent. This structure has the benefit of permitting converting institutions to raise only the amount of new capital they actually need. It has, however, in our view, potential for even a higher level of insider abuse than in standard conversions. We note that many newly formed mutual holding companies propose to refuse dividends declared by their operating subsidiary—with no corresponding change in their percentage ownership of the subsidiary as dividends flowed to its minority stockholders. It seems to us that this could constitute a breach of fiduciary duty on the part of the trustees—which would be particularly acute were the trustees significant stockholders of the subsidiary * * * As our suggested form of standard conversion would eliminate the need to raise excessive amounts of capital, we believe use of the mutual holding company structure should be discouraged in future conversions. 20 20 Review of Mutual-to-Stock Conversions of State Nonmember Savings Banks, 59 FR 30357, 30362-63 (June 14, 1994). *See supra* note 11 and accompanying discussion. The Board understands the FDIC, as a matter of past and present policy, does not approve MHC conversions of state nonmember banks unless the converting institution agrees not to waive dividends in favor of minority stockholders. In this regard, the FDIC policy differs from the policy OTS applies to federal MHC conversions. Conversions in Process at the Time This Final Rule Becomes Effective A few commenters asked about how conversions in process, if any, will be affected by this rulemaking. The Board intends that credit unions in the process of conversion, to the extent it is reasonable for them to do so, comply with the provisions of this final rule. If compliance with a particular provision of the rule, however, would impose a significant burden on the credit union by requiring it to repeat something it has already done, it need not comply with that provision of the rule. For example, if, on the date this rule is published in the **Federal Register,** the board of directors of a converting credit union has already adopted a conversion proposal, it need not give advance notice nor adopt the conversion proposal again. It must, however, provide public notice as soon as possible that it has adopted a conversion proposal. Similarly, if, on the date that this rule is published in the **Federal Register,** a credit union has already adopted a conversion proposal and mailed the 90-day notice, it need not redo that notice nor comply with the member-to-member communication procedures in the final rule. The Board anticipates that a credit union in the process of converting when this rule becomes effective will consult with its Regional Director for further guidance. E. Regulatory Procedures Regulatory Flexibility Act The Regulatory Flexibility Act requires NCUA to prepare an analysis to describe any significant economic impact a proposed rule may have on a substantial number of small credit unions (those under ten million dollars in assets). The Regulatory Flexibility Act requires NCUA to prepare an analysis to describe any significant economic impact a rule may have on a substantial number of small credit unions, defined as those under ten million dollars in assets. This proposed rule amends the procedures an insured credit union must follow to convert to an MSB. Based on past experience with MSB conversions, NCUA believes that, in any given year, it is unlikely there will be any conversions by credit unions with less than ten million dollars in assets. Accordingly, the Board certifies that this final rule will not have a significant economic impact on a substantial number of small credit unions, and, therefore, a regulatory flexibility analysis is not required. Paperwork Reduction Act Part 708a contains information collection requirements currently approved under Office of Management and Budget

(OMB)Control Number 3133-0153. As required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), NCUA has submitted a copy of this proposed regulation as part of an information collection package to the OMB for its review and approval of a revision to Control Number 3133-0153. At the time of this rulemaking, OMB approval is still pending. Executive Order 13132 Executive Order 13132 encourages independent regulatory agencies to consider the impact of their actions on state and local interests. In adherence to fundamental federalism principles, NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies with the executive order. The proposed rule would not have substantial direct effects on the states, on the connection between the national government and the states, or on the distribution of power and responsibilities among the various levels of government. NCUA has determined that this proposed rule does not constitute a policy that has federalism implications for purposes of the executive order. The Treasury and General Government Appropriations Act, 1999—Assessment of Federal Regulations and Policies on Families The NCUA has determined that this rule will not affect family well-being within the meaning of section 654 of the Treasury and General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 2681 (1998). Small Business Regulatory Enforcement Fairness Act The Small Business Regulatory Enforcement Act of 1996 (Pub. L. 104-121) 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. 5 U.S.C. 551. The Office of Management and Budget has determined that this rule is not a major rule for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996. List of Subjects in 12 CFR Part 708a Charter conversions, Credit unions. By the National Credit Union Administration Board on December 14, 2006. Mary F. Rupp, Secretary of the Board. For the reasons stated above, the NCUA Board revises 12 CFR part 708a as follows: PART 708a—CONVERSION OF INSURED CREDIT UNIONS TO MUTUAL SAVINGS BANKS Sec. 708a.1 Definitions. 708a.2 Authority to convert. 708a.3 Board of directors' approval and members' opportunity to comment. 708a.4 Disclosures and communications to members. 708a.5 Notice to NCUA. 708a.6 Membership approval of a proposal to convert. 708a.7 Certification of vote on conversion proposal. 708a.8 NCUA oversight of methods and procedures of membership vote. 708a.9 Other regulatory oversight of methods and procedures of membership vote. 708a.10 Completion of conversion. 708a.11 Limit on compensation of officials. 708a.12 Voting incentives. 708a.13 Voting guidelines. Authority: 12 U.S.C. 1766, 12 U.S.C. 1785(b). § 708a.1 Definitions. As used in this part: *Clear and conspicuous* means text in bold type in a font size at least one size larger than any other text used in the document (exclusive of headings), but in no event smaller than 12 point. *Credit union* has the same meaning as insured credit union in section 101 of the Federal Credit Union Act. *Federal banking agencies* have the same meaning as in section 3 of the Federal Deposit Insurance Act. *Mutual savings bank* and *savings association* have the same meaning as in section 3 of the Federal Deposit Insurance Act. *Regional director* means the director of the NCUA regional office for the region where a natural person credit union's main office is located. For corporate credit unions, *regional director* means the director of NCUA's Office of Corporate Credit Unions. *Senior management official* means a chief executive officer, an assistant chief executive officer, a chief financial officer, and any other senior executive officer as defined by the appropriate federal banking agencies pursuant to section 32(f) of the Federal Deposit Insurance Act. § 708a.2 Authority to convert. A credit union, with the approval of its members, may convert to a mutual savings bank or a savings association that is in mutual form without the prior approval of the NCUA, subject to applicable law governing mutual savings banks and savings associations and the other requirements of this part. § 708a.3 Board of directors' approval and members' opportunity to comment.

(a)A credit union's board of directors must comply with the following notice requirements before voting on a proposal to convert.

(1)No later than 30 days before a board of directors votes on a proposal to convert, it must publish a notice in a general circulation newspaper, or in multiple newspapers if necessary, serving all areas where the credit union has an office, branch, or service center. It must also post the notice in a clear and conspicuous fashion in the lobby of the credit union's home office and branch offices and on the credit union's Web site, if it has one. If the notice is not on the home page of the Web site, the home page must have a clear and conspicuous link, visible on a standard monitor without scrolling, to the notice.

(2)The public notice must include the following:

(i)The name and address of the credit union;

(ii)The type of institution to which the credit union's board is considering a proposal to convert;

(iii)A brief statement of why the board is considering the conversion and the major positive and negative effects of the proposed conversion;

(iv)A statement that directs members to submit any comments on the proposal to the credit union's board of directors by regular mail, electronic mail, or facsimile;

(v)The date on which the board plans to vote on the proposal and the date by which members must submit their comments for consideration, which may not be more than 5 days before the board vote;

(vi)The street address, electronic mail address, and facsimile number of the credit union where members may submit comments; and

(vii)A statement that, in the event the board approves the proposal to convert, the proposal will be submitted to the membership of the credit union for a vote following a notice period that is no shorter than 90 days.

(3)The board of directors must approve publication of the notice.

(b)The credit union must collect member comments and retain copies at the credit union's main office until the conversion process is completed.

(c)The board of directors may vote on the conversion proposal only after reviewing and considering all member comments. The conversion proposal may only be approved by an affirmative vote of a majority of board members who have determined the conversion is in the best interests of the members. If approved, the board of directors must set a date for a vote on the proposal by the members of the credit union. § 708a.4 Disclosures and communications to members.

(a)After the board of directors has complied with § 708a.3 and approves a conversion proposal, the credit union must provide written notice of its intent to convert to each member who is eligible to vote on the conversion. The notice to members must be submitted 90 calendar days, 60 calendar days, and 30 calendar days before the date of the membership vote on the conversion. A ballot must be included in the same envelope as the 30-day notice and only in the 30-day notice. A converting credit union may not distribute ballots with either the 90-day or 60-day notice, in any other written communications, or in person before the 30-day notice is sent. (b)(1) The notice to members must adequately describe the purpose and subject matter of the vote to be taken at the special meeting or by submission of the written ballot. The notice must clearly inform members that they may vote at the special meeting or by submitting the written ballot. The notice must state the date, time, and place of the meeting.

(2)The notices that are submitted 90 and 60 days before the membership vote on the conversion must state in a clear and conspicuous fashion that a written ballot will be mailed together with another notice 30 days before the date of the membership vote on conversion. The notice submitted 30 days before the membership vote on the conversion must state in a clear and conspicuous fashion that a written ballot is included in the same envelope as the 30-day notice materials.

(3)For purposes of facilitating the member-to-member contact described in paragraph

(f)of this section, the 90-day notice must indicate the number of credit union members eligible to vote on the conversion proposal and state how many members have agreed to accept communications from the credit union in electronic form. The 90-day notice must also include the information listed in paragraph (f)(9) of this section.

(4)The member ballot must include:

(i)A brief description of the proposal (e.g., “Proposal: Approval of the Plan Charter Conversion by which (insert name of credit union) will convert its charter to that of a federal mutual savings bank.”);

(ii)Two blocks marked respectively as “FOR” and “AGAINST;” and

(ii)The following language: “A vote FOR the proposal means that you want your credit union to become a mutual savings bank. A vote AGAINST the proposal means that you want your credit union to remain a credit union.” This language must be displayed in a clear and conspicuous fashion immediately beneath the FOR and AGAINST blocks.

(5)The ballot may also include voting instructions and the recommendation of the board of directors (i.e., “Your Board of Directors recommends a vote FOR the Plan of Conversion”) but may not include any further information without the prior written approval of the Regional Director.

(c)An adequate description of the purpose and subject matter of the member vote on conversion, as required by paragraph

(b)of this section, must include:

(1)A clear and conspicuous disclosure that the conversion from a credit union to a mutual savings bank could lead to members losing their ownership interests in the credit union if the mutual savings bank subsequently converts to a stock institution and the members do not become stockholders;

(2)A clear and conspicuous disclosure of how a conversion from a credit union to a mutual savings bank will affect members' voting rights and if the mutual savings bank intends to base voting rights on account balances;

(3)A clear and conspicuous disclosure of any conversion-related economic benefit a director or senior management official will or may receive including receipt of or an increase in compensation and an explanation of any foreseeable stock-related benefits associated with a subsequent conversion to a stock institution or mutual holding company structure. The explanation of stock-related benefits must include a comparison of the opportunities to acquire stock available to officials and employees with those opportunities available to the general membership;

(4)A clear and conspicuous disclosure of how the conversion from a credit union to a mutual savings bank will affect the institution's ability to make non-housing-related consumer loans because of a mutual savings bank's obligations to satisfy certain lending requirements as a mutual savings bank. This disclosure should specify possible reductions in some kinds of loans to members; and

(5)An affirmative statement that, at the time of conversion to a mutual savings bank, the credit union does or does not intend to convert to a stock institution or a mutual holding company structure. (d)(1) A converting credit union must provide the following disclosures in a clear and conspicuous fashion with the 90-, 60-, and 30-day notices it sends to its members regarding the conversion: IMPORTANT REGULATORY DISCLOSURE ABOUT YOUR VOTE The National Credit Union Administration, the federal government agency that supervises credit unions, requires [insert name of credit union] to provide the following disclosures: 1. LOSS OF CREDIT UNION MEMBERSHIP. A vote “FOR” the proposed conversion means you want your credit union to become a mutual savings bank. A vote “AGAINST” the proposed conversion means you want your credit union to remain a credit union. 2. RATES ON LOANS AND SAVINGS. If your credit union converts to a bank, you may experience changes in your loan and savings rates. Available historic data indicates that, for most loan products, credit unions on average charge lower rates than banks. For most savings products, credit unions on average pay higher rates than banks. 3. POTENTIAL PROFITS BY OFFICERS AND DIRECTORS. Conversion to a mutual savings bank is often the first step in a two-step process to convert to a stock-issuing bank or holding company structure. In such a scenario, the officers and directors of the institution often profit by obtaining stock in excess of that available to other members.

(2)This text must be placed in a box, must be the only text on the front side of a single piece of paper, and must be placed so that the member will see the text after reading the credit union's cover letter but before reading any other part of the member notice. The back side of the paper must be blank. A converting credit union may modify this text only with the prior written consent of the Regional Director and, in the case of a state-chartered credit union, the appropriate state regulatory agency.

(e)All written communications from a converting credit union to its members regarding the conversion must be written in a manner that is simple and easy to understand. Simple and easy to understand means the communications are written in plain language designed to be understood by ordinary consumers and use clear and concise sentences, paragraphs, and sections. For purposes of this part, examples of factors to be considered in determining whether a communication is in plain language and uses clear and concise sentences, paragraphs and sections include the use of short explanatory sentences; use of definite, concrete, everyday words; use of active voice; avoidance of multiple negatives; avoidance of legal and technical business terminology; avoidance of explanations that are imprecise and reasonably subject to different interpretations; and use of language that is not misleading. (f)(1) A converting credit union must mail or e-mail a requesting member's proper conversion-related materials to other members eligible to vote if:

(i)A credit union's board of directors has adopted a proposal to convert;

(ii)A member makes a written request that the credit union mail or e-mail materials for the member;

(iii)The request is received by the credit union no later than 35 days after it sends out the 90-day member notice; and

(iv)The requesting member agrees to reimburse the credit union for the reasonable expenses, excluding overhead, of mailing or e-mailing the materials and also provides the credit union with an appropriate advance payment.

(2)A member's request must indicate if the member wants the materials mailed or e-mailed. If a member requests that the materials be mailed, the credit union will mail the materials to all eligible voters. If a member requests the materials be e-mailed, the credit union will e-mail the materials to all members who have agreed to accept communications electronically from the credit union. The subject line of the credit union's e-mail will be “Proposed Credit Union Conversion—Views of Member (insert member name).”

(i)A converting credit union may, at its option, include the following statement with a member's material: On (date), the board of directors of (name of converting credit union) adopted a proposal to convert from a credit union to a mutual savings bank. Credit union members who wish to express their opinions about the proposed conversion to other members may provide those opinions to (name of credit union). By law, the credit union, at the requesting members' expense, must then send those opinions to the other members. The attached document represents the opinion of a member of this credit union. This opinion is a personal opinion and does not necessarily reflect the views of the management or directors of the credit union.

(ii)A converting credit union may not add anything other than this statement to a member's material without the prior approval of the Regional Director.

(4)The term “proper conversion-related materials” does not include materials that:

(i)Due to size or similar reasons are impracticable to mail or e-mail;

(ii)Are false or misleading with respect to any material fact;

(iii)Omit a material fact necessary to make the statements in the material not false or misleading;

(iv)Relate to a personal claim or a personal grievance, or solicit personal gain or business advantage by or on behalf of any party;

(v)Relate to any matter, including a general economic, political, racial, religious, social, or similar cause, that is not significantly related to the proposed conversion;

(vi)Directly or indirectly and without expressed factual foundation impugn a person's character, integrity, or reputation;

(vii)Directly or indirectly and without expressed factual foundation make charges concerning improper, illegal, or immoral conduct; or

(viii)Directly or indirectly and without expressed factual foundation make statements impugning the stability and soundness of the credit union.

(5)If a converting credit union believes some or all of a member's request is not proper it must submit the member materials to the Regional Director within seven days of receipt. The credit union must include with its transmittal letter a specific statement of why the materials are not proper and a specific recommendation for how the materials should be modified, if possible, to make them proper. The Regional Director will review the communication, communicate with the requesting member, and respond to the credit union within seven days with a determination on the propriety of the materials. The credit union must then immediately mail or e-mail the material to the members if so directed by NCUA.

(6)A credit union must ensure that its members receive all materials that meet the requirements of § 708a.4(f) on or before the date the members receive the 30-day notice and associated ballot. If a credit union cannot meet this delivery requirement, it must postpone mailing the 30-day notice until it can deliver the member materials. If a credit union postpones the mailing of the 30-day notice, it must also postpone the special meeting by the same number of days. When the credit union has completed the delivery, it must inform the requesting member that the delivery was completed and provide the number of recipients.

(7)The term “appropriate advance payment” means:

(i)For requests to mail materials to all eligible voters, a payment in the amount of 150% of the first class postage rate times the number of mailings, and

(ii)For requests to e-mail materials only to members that have agreed to accept electronic communications, a payment in the amount of 200 dollars.

(8)If a credit union posts conversion-related information or material on its Web site, then it must simultaneously make a portion of its Web site available free of charge to its members to post and share their opinions on the conversion. A link to the portion of the Web site available to members to post their views on the conversion must be marked “Members: Share your views on the proposed conversion and see other members views” and the link must also be visible on all pages on which the credit union posts its own conversion-related information or material, as well as on the credit union's homepage. If a credit union believes a particular member submission is not proper for posting, it will provide that submission to the Regional Director for review as described in paragraph (f)(5) of this section. The credit union may also post a content-neutral disclaimer using language similar to the language in paragraph (f)(3)(i) of this section.

(9)A converting credit union must inform members with the 90-day notice that if they wish to provide their opinions about the proposed conversion to other members they can submit their opinions in writing to the credit union no later than 35 days from the date of the notice and the credit union will forward those opinions to other members. The 90-day notice will provide a contact at the credit union for delivery of communications, will explain that members must agree to reimburse the credit union's costs of transmitting the communication including providing an advance payment, and will refer members to this section of NCUA's rules for further information about the communication process. The credit union, at its option, may include additional factual information about the communication process with its 90-day notice.

(10)A group of members may make a joint request that the credit union send its materials to other members. For purposes of paragraphs (f)(2) and (f)(3) of this section, the credit union will use the group name provided by the group. § 708a.5 Notice to NCUA.

(a)If a converting credit union's board of directors approves a proposal to convert, it must provide the Regional Director with notice of its intent to convert during the 90 calendar day period preceding the date of the membership vote on the conversion.

(1)A credit union must give notice to the Regional Director of its intent to convert by providing a letter describing the material features of the conversion or a copy of the filing the credit union has made or intends to make with another federal or state regulatory agency in which the credit union seeks that agency's approval of the conversion. A credit union must include with the notice to the Regional Director copies of the notices the credit union has provided or intends to provide to members under §§ 708a.3 and 708a.4. The credit union must also include a copy of the ballot form and all written materials the credit union has distributed or intends to distribute to members. The term “written materials” includes written documentation or information of any sort, including electronic communications posted on a Web site or transmitted by electronic mail.

(2)As part of its notice to NCUA of intent to convert, the credit union's board of directors must provide the Regional Director with a certification of its support for the conversion proposal and plan. Each director who voted in favor of the conversion proposal must sign the certification. The certification must contain the following:

(i)A statement that each director signing the certification supports the proposed conversion and believes the proposed conversion is in the best interests of the members of the credit union;

(ii)A description of all materials submitted to the Regional Director with the notice and certification;

(iii)A statement that each board member signing the certification has examined all these materials carefully and these materials are true, correct, current, and complete as of the date of submission; and

(iv)An acknowledgement that federal law (18 U.S.C. 1001) prohibits any misrepresentations or omissions of material facts, or false, fictitious or fraudulent statements or representations made with respect to the certification or the materials provided to the Regional Director or any other documents or information provided to the members of the credit union or NCUA in connection with the conversion.

(3)A state-chartered credit union must state as part of the notice required by § 708a.5(a) if its state chartering law permits it to convert to a mutual savings bank and provide the specific legal citation. A state-chartered credit union will remain subject to any state law requirements for conversion that are more stringent than those this part imposes, including any internal governance requirements, such as the requisite membership vote for conversion and the determination of a member's eligibility to vote. If a state-chartered credit union relies for its authority to convert to a mutual savings bank on a state law parity provision, meaning a provision in state law permitting a state-chartered credit union to operate with the same or similar authority as a federal credit union, it must:

(i)Include in its notice a statement that its state regulatory authority agrees that it may rely on the state law parity provision as authority to convert; and

(ii)Indicate its state regulatory authority's position as to whether federal law and regulations or state law will control internal governance issues in the conversion such as the requisite membership vote for conversion and the determination of a member's eligibility to vote.

(b)If it chooses, a credit union may seek a preliminary determination from the Regional Director regarding any of the notices required under this part and its proposed methods and procedures applicable to the membership conversion vote. The Regional Director will make a preliminary determination regarding the notices and methods and procedures applicable to the membership vote within 30 calendar days of receipt of a credit union's request for review unless the Regional Director extends the period as necessary to request additional information or review a credit union's submission. A credit union's prior submission of any notice or proposed voting procedures does not relieve the credit union of its obligation to certify the results of the membership vote required by § 708a.6 or eliminate the right of the Regional Director to disapprove the actual methods and procedures applicable to the membership vote if the credit union fails to conduct the membership vote in a fair and legal manner consistent with the Federal Credit Union Act and these rules.

(c)After receiving the notice described in paragraph (a)(3) of this section, the Regional Director will contact and consult with the appropriate State Supervisory Authority. § 708a.6 Membership approval of a proposal to convert.

(a)A proposal for conversion approved by a board of directors requires approval by a majority of the members who vote on the proposal.

(b)The board of directors must set a voting record date to determine member voting eligibility that is at least one day before the publication of notice required in § 708a.3.

(c)A member may vote on a proposal to convert in person at a special meeting held on the date set for the vote or by written ballot filed by the member. The vote on the conversion proposal must be by secret ballot and conducted by an independent entity. The independent entity must be a company with experience in conducting corporate elections. No official or senior management official of the credit union or the immediate family members of any official or senior management official may have any ownership interest in or be employed by the independent entity. § 708a.7 Certification of vote on conversion proposal.

(a)The board of directors of the converting credit union must certify the results of the membership vote to the Regional Director within 10 calendar days after the vote is taken.

(b)The certification must also include a statement that the notice, ballot and other written materials provided to members were identical to those submitted to NCUA pursuant to § 708a.5. If the board cannot certify this, the board must provide copies of any new or revised materials and an explanation of the reasons for any changes. § 708a.8 NCUA oversight of methods and procedures of membership vote.

(a)The Regional Director will review the methods by which the membership vote was taken and the procedures applicable to the membership vote. The Regional Director will determine: if the notices and other communications to members were accurate, not misleading, and timely; the membership vote was conducted in a fair and legal manner; and the credit union has otherwise complied with part 708a.

(b)After completion of this review, the Regional Director will issue a determination that the methods and procedures applicable to the membership vote are approved or disapproved. The Regional Director will issue this determination within 30 calendar days of receipt from the credit union of the certification of the result of the membership vote required under § 708a.7 unless the Regional Director extends the period as necessary to request additional information or review the credit union's submission. Approval of the methods and procedures under this paragraph remains subject to a credit union fulfilling the requirements in § 708a.10 for timely completion of the conversion.

(c)If the Regional Director disapproves the methods by which the membership vote was taken or the procedures applicable to the membership vote, the Regional Director may direct that a new vote be taken.

(d)A converting credit union may appeal the Regional Director's determination to the NCUA Board. The credit union must file the appeal within 30 days after receipt of the Regional Director's determination. The NCUA Board will act on the appeal within 90 days of receipt. § 708a.9 Other regulatory oversight of methods and procedures of membership vote. The federal or state regulatory agency that will have jurisdiction over the financial institution after conversion must verify the membership vote and may direct that a new vote be taken, if it disapproves of the methods by which the membership vote was taken or the procedures applicable to the membership vote. § 708a.10 Completion of conversion.

(a)After receipt of the approvals under § 708a.8 and § 708a.9 the credit union may complete the conversion.

(b)The credit union must complete the conversion within one year of the date of receipt of NCUA approval under § 708a.8. If a credit union fails to complete the conversion within one year the Regional Director will disapprove of the methods and procedures. The credit union's board of directors must then adopt a new conversion proposal and solicit another member vote if it still desires to convert.

(c)The Regional Director may, upon timely request and for good cause, extend the one year completion period for an additional six months.

(d)After notification by the board of directors of the mutual savings bank or mutual savings association that the conversion has been completed, the NCUA will cancel the insurance certificate of the credit union and, if applicable, the charter of a federal credit union. § 708a.11 Limit on compensation of officials. No director or senior management official of an insured credit union may receive any economic benefit in connection with the conversion of a credit union other than compensation and other benefits paid to directors or senior management officials of the converted institution in the ordinary course of business. § 708a.12 Voting incentives. If a converting credit union offers an incentive to encourage members to participate in the vote, including a prize raffle, every reference to such incentive made by the credit union in a written communication to its members must also state that members are eligible for the incentive regardless of whether they vote for or against the proposed conversion. § 708a.13 Voting guidelines. A converting credit union must conduct its member vote on conversion in a fair and legal manner. NCUA provides the following guidelines as suggestions to help a credit union obtain a fair and legal vote and otherwise fulfill its regulatory obligations. These guidelines are not an exhaustive checklist and do not by themselves guarantee a fair and legal vote.

(a)*Applicability of state law.* While NCUA's conversion rule applies to all conversions of federally insured credit unions, federally insured state-chartered credit unions (FISCUs) are also subject to state law on conversions. NCUA's position is that a state legislature or state supervisory authority may impose conversion requirements more stringent or restrictive than NCUA's. States that permit this kind of conversion may have substantive and procedural requirements that vary from federal law. For example, there may be different voting standards for approving a vote. While the Federal Credit Union Act requires a simple majority of those who vote to approve a conversion, some states have higher voting standards requiring two-thirds or more of those who vote. A FISCU should be careful to understand both federal and state law to navigate the conversion process and conduct a proper vote.

(b)*Eligibility to vote.*

(1)Determining who is eligible to cast a ballot is fundamental to any vote. No conversion vote can be fair and legal if some members are improperly excluded. A converting credit union should be cautious to identify all eligible members and make certain they are included on its voting list. NCUA recommends that a converting credit union establish internal procedures to manage this task.

(2)A converting credit union should be careful to make certain its member list is accurate and complete. For example, when a credit union converts from paper recordkeeping to computer recordkeeping, some member names may not transfer unless the credit union is careful in this regard. This same problem can arise when a credit union converts from one computer system to another where the software is not completely compatible.

(3)Problems with keeping track of who is eligible to vote can also arise when a credit union converts from a federal charter to a state charter or vice versa. NCUA is aware of an instance where a federal credit union used membership materials allowing two or more individuals to open a joint account and also allowed each to become a member. The federal credit union later converted to a state-chartered credit union that, like most other state-chartered credit unions in its state, used membership materials allowing two or more individuals to open a joint account but only allowed the first person listed on the account to become a member. The other individuals did not become members as a result of their joint account, but were required to open another account where they were the first or only person listed on the account. Over time, some individuals who became members of the federal credit union as the second person listed on a joint account were treated like those individuals who were listed as the second person on a joint account opened directly with the state-chartered credit union. Specifically, both of those groups were treated as non-members not entitled to vote. This example makes the point that a credit union must be diligent in maintaining a reliable membership list.

(c)*Scheduling the special meeting.* NCUA's conversion rule requires a converting credit union to permit members to vote by written mail ballot or in person at a special meeting held for the purpose of voting on the conversion. Although most members may choose to vote by mail, a significant number may choose to vote in person. As a result, a converting credit union should be careful to conduct its special meeting in a manner conducive to accommodating all members wishing to attend, including selecting a meeting location that can accommodate the anticipated number of attendees and is conveniently located. The meeting should also be held on a day and time suitable to most members' schedules. A credit union should conduct its meeting in accordance with applicable federal and state law, its bylaws, Robert's Rules of Order or other appropriate parliamentary procedures, and determine before the meeting the nature and scope of any discussion to be permitted.

(d)*Voting incentives.* Some credit unions may wish to offer incentives to members, such as entry to a prize raffle, to encourage participation in the conversion vote. The credit union must exercise care in the design and execution of such incentives.

(1)The credit union should ensure that the incentive complies with all applicable state, federal, and local laws.

(2)The incentive should not be unreasonable in size. The cost of the incentive should have a negligible impact on the credit union's net worth ratio and the incentive should not be so large that it distracts the member from the purpose of the vote. If the board desires to use such incentives, the cost of the incentive should be included in the directors' deliberation and determination that the conversion is in the best interests of the credit union's members.

(3)The credit union should ensure that the incentive is available to every member that votes regardless of how or when he or she votes. All of the credit union's written materials promoting the incentive to the membership must disclose to the members, as required by § 708a.12 of this part, that they have an equal opportunity to participate in the incentive program regardless of whether they vote for or against the conversion. The credit union should also design its incentives so that they are available equally to all members who vote, regardless of whether they vote by mail or in person at the special meeting. [FR Doc. E6-21661 Filed 12-21-06; 8:45 am] BILLING CODE 7535-01-P 71 246 Friday, December 22, 2006 Proposed Rules Part IV Department of Health and Human Services Centers for Medicare & Medicaid Services 42 CFR Part 447 Medicaid Program; Prescription Drugs; Proposed Rule DEPARTMENT OF HEALTH AND HUMAN SERVICES Centers for Medicare & Medicaid Services 42 CFR Part 447 [CMS-2238-P] RIN 0938-AO20 Medicaid Program; Prescription Drugs AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS. ACTION: Proposed rule. SUMMARY: This proposed rule would implement the provisions of the Deficit Reduction Act of 2005

(DRA)pertaining to prescription drugs under the Medicaid program. The DRA requires the Secretary of Health and Human Services to publish a final regulation no later than July 1, 2007. In addition, we would add to existing regulations certain established Medicaid rebate policies that are currently set forth in CMS guidance. This rule would bring together existing and new regulatory requirements in one, cohesive subpart. DATES: To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on February 20, 2007. ADDRESSES: In commenting, please refer to file code CMS-2238-P. Because of staff and resource limitations, we cannot accept comments by facsimile

(FAX)transmission. You may submit comments in one of four ways (no duplicates, please): 1. *Electronically.* You may submit electronic comments on specific issues in this regulation to *http://www.cms.hhs.gov/eRulemaking.* Click on the link “Submit electronic comments on CMS regulations with an open comment period.” (Attachments should be in Microsoft Word, WordPerfect, or Excel; however, we prefer Microsoft Word.) 2. *By regular mail.* You may mail written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-2238-P, P.O. Box 8015, Baltimore, MD 21244-8015. Please allow sufficient time for mailed comments to be received before the close of the comment period. 3. *By express or overnight mail.* You may send written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-2238-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850. 4. *By hand or courier.* If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to one of the following addresses. If you intend to deliver your comments to the Baltimore address, please call telephone number

(410)786-7195 in advance to schedule your arrival with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201; or 7500 Security Boulevard, Baltimore, MD 21244-1850. (Because access to the interior of the HHH Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an extra copy of the comments being filed.) Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period. *Submission of comments on paperwork requirements.* You may submit comments on this document's paperwork requirements by mailing your comments to the addresses provided at the end of the “Collection of Information Requirements” section in this document. For information on viewing public comments, see the beginning of the SUPPLEMENTARY INFORMATION section. FOR FURTHER INFORMATION CONTACT: Kimberly Howell,

(410)786-6762 (for issues related to the determination of average manufacturer price and best price). Yolanda Reese,

(410)786-9898 (for issues related to authorized generics). Madlyn Kruh,

(410)786-3239 (for issues related to nominal prices). Marge Watchorn,

(410)786-4361 (for issues related to manufacturer reporting requirements). Gail Sexton,

(410)786-4583 (for issues related to Federal upper limits). Christina Lyon,

(410)786-3332 (for issues related to physician-administered drugs). Bernadette Leeds,

(410)786-9463 (for issues related to the regulatory impact analysis). SUPPLEMENTARY INFORMATION: *Submitting Comments:* We welcome comments from the public on all issues set forth in this rule to assist us in fully considering issues and developing policies. You can assist us by referencing the file code CMS-2238-P and the specific “issue identifier” that precedes the section on which you choose to comment. *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://www.cms.hhs.gov/eRulemaking* . Click on the link “Electronic Comments on CMS Regulations” on that Web site to view public comments. Comments received timely will also be 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. I. Background [If you choose to comment on issues in this section, please include the caption “Background” as the beginning of your comments.] A. Introduction Under the Medicaid program, States may provide coverage of outpatient drugs as an optional service under section 1905(a)(12) of the Social Security Act (the Act). Section 1903(a) of the Act provides for Federal financial participation

(FFP)in State expenditures for these drugs. In order for payment to be made available under section 1903 for certain drugs, manufacturers must enter into a Medicaid drug rebate agreement as set forth in section 1927(a) of the Act. Section 1927 of the Act provides specific requirements for rebate agreements, drug pricing submission and confidentiality requirements, the formula for calculating rebate payments, and requirements for States with respect to covered outpatient drugs. This proposed rule would implement sections 6001(a)-(d), 6002, and 6003 of the Deficit Reduction Act of 2005 (DRA), Pub. L. 109-171 (Feb. 8, 2006). It also would codify those parts of section 1927 of the Act that pertain to requirements for drug manufacturers' calculation and reporting of average manufacturer price

(AMP)and best price, and it would revise existing regulations that set upper payment limits for certain covered outpatient drugs. This proposed rule would also implement section 1903(i)(10) of the Act, as revised by the DRA, with regard to the denial of FFP in expenditures for certain physician-administered drugs. Finally, the proposed rule would address other provisions of the drug rebate program, to the extent those provisions are affected by the DRA. The Medicaid Drug Rebate Program was established by section 4401 of the Omnibus Budget Reconciliation Act of 1990 (OBRA 90), Pub. L. 101-508 (Nov. 5, 1990) and subsequently modified by the Veterans Health Care Act of 1992 (VHCA), Pub. L. 102-585 (Nov. 4, 1992) and the Omnibus Budget Reconciliation Act of 1993, Pub. L. 103-66 (Aug. 10, 1993). These provisions were implemented primarily through the national drug rebate agreement (56 FR 7049 (Feb. 21, 1991)) and other informal program releases, which provide standards for manufacturer reporting and rebate calculations. The statutory changes that affect the provisions of this proposed rule are described below. B. Changes Made by the Deficit Reduction Act of 2005 Section 6001(a) of the DRA amends section 1927(e) of the Act to revise the formula CMS uses to set Federal upper limits

(FULs)for multiple source drugs. Effective January 1, 2007, the upper limit for multiple source drugs shall be established at 250 percent of the average manufacturer price

(AMP)(as computed without regard to customary prompt pay discounts extended to wholesalers) for the least costly therapeutic equivalent. Section 6001(b) of the DRA amends section 1927(b)(3) of the Act to create a requirement that manufacturers report certain prices to the Secretary monthly. It also requires the Secretary to provide AMP to States on a monthly basis beginning July 1, 2006 and post AMP on a Web site at least quarterly. We are aware of concerns that the AMPs released to the States beginning July 1, 2006, will not reflect changes to the definition of AMP made by the DRA and proposed in this rule. While we made the AMPs available to the States beginning July 1, 2006, States should keep these data confidential in accordance with section 1927(b)(3)(D) of the Act. Section 6001(b) of the DRA revises these confidentiality provisions to permit States to use AMP to calculate payment rates; however, these confidentiality amendments are not effective until January 1, 2007. This six-month period will give the States a chance to review the AMP data and revise their systems to address the DRA amendments. Section 6001(c) of the DRA modifies the definition of AMP to remove customary prompt pay discounts extended to wholesalers from the AMP calculation and requires manufacturers to report these customary prompt pay discounts to the Secretary. It requires the Inspector General of the Department of Health and Human Services

(IG)to review the requirements for, and the manner in which, AMP is determined and submit to the Secretary and Congress any recommendations for changes no later than June 1, 2006. Finally, it requires the Secretary to promulgate a regulation that clarifies the requirements for, and the manner in which, AMP is determined no later than July 1, 2007, taking into consideration any IG recommendations. Section 6001(d) of the DRA requires manufacturers to report information on sales at nominal price to the Secretary for calendar quarters beginning on or after January 1, 2007. It also specifies the entities to which nominal price applies. It limits the merely nominal exclusion to sales at nominal prices to the following: A covered entity described in section 340B(a)(4) of the Public Health Service Act (PHSA), an intermediate care facility for the mentally retarded (ICF/MR), a State-owned or operated nursing facility, and any other facility or entity that the Secretary determines is a safety net provider to which sales of such drugs at a nominal price would be appropriate, based on certain factors such as type of facility or entity, services provided by the facility or entity, and patient population. Section 6001(e) of the DRA amends section 1927 of the Act to provide for a survey of retail prices and State performance rankings. These provisions are not addressed in this proposed rule. Section 6001(f) of the DRA makes minor amendments to section 1927(g) of the Act which are self-implementing. Section 6001(g) of the DRA provides that the amendments in section 6001 are effective on January 1, 2007, unless otherwise noted. Section 6002 of the DRA amends section 1903(i)(10) of the Act by prohibiting Medicaid FFP for physician-administered drugs unless States submit the utilization data described in section 1927(a) of the Act. It also amends section 1927 of the Act to require the submission of utilization data for physician-administered drugs. Section 6003(a) of the DRA amends section 1927(b)(3)(A) of the Act to require manufacturers to include within AMP and best price all of its drugs that are sold under a new drug application

(NDA)approved under section 505(c) of the Federal Food, Drug, and Cosmetic Act (FFDCA) when they report AMP and best price to the Secretary. Section 6003(b) of the DRA amends section 1927(c)(1)(C) of the Act to clarify that manufacturers must include the lowest price available to any entity for a drug sold under an NDA approved under section 505(c) of the FFDCA when determining best price. Section 6003(b) also amends section 1927(k) to require that in the case of a manufacturer that approves, allows, or otherwise permits any of its drugs to be sold under an NDA approved under section 505(c) of the FFDCA, the AMP shall be calculated to include the average price paid for such drugs by wholesalers for drugs distributed to the retail pharmacy class of trade. Section 6003(c) of the DRA provides that the amendments made by section 6003 are effective January 1, 2007. The statutory provisions in the DRA that affect the Medicaid Drug Rebate Program, as well as the regulatory provisions we are proposing to implement the program, are discussed in greater detail in the section entitled “Provisions of the Proposed Regulations” below. C. Notice of Proposed Rulemaking Published September 19, 1995 On September 19, 1995, CMS (then the Health Care Financing Administration) published a notice of proposed rulemaking

(NPRM)in the **Federal Register** (60 FR 48442 (Sept. 19, 1995)). The purpose of the 1995 NPRM was to propose regulations pertaining to the Medicaid Drug Rebate Program and to address the national rebate agreement (56 FR 7049 (Feb. 21, 1991)). On August 29, 2003, CMS finalized two of the provisions in the 1995 NPRM through a final rule with comment period (68 FR 51912). These regulations require manufacturers to retain records for data used to calculate AMP and best price for three years from when AMP and best price are reported to CMS. We also provided that manufacturers should report revisions to AMP and best price for a period not to exceed twelve quarters from the quarter in which the data are due. On November 26, 2004, we published final regulations (69 FR 68815) that require a manufacturer to retain pricing data for 10 years from the date the manufacturer reports that data to CMS and for an additional time frame where the manufacturer is the subject of an audit or government investigation. Due to the time that has elapsed since publication of the 1995 NPRM and changes in the prescription drug industry, we do not plan to finalize the other provisions of that proposed rule, and any comments on the 1995 NPRM are outside the scope of this proposed rule. This proposed rule does not address the entire Medicaid Drug Rebate Program, but focuses primarily on the provisions of the DRA that address the Medicaid Drug Rebate Program. II. Provisions of the Proposed Regulations Basis and Purpose of Subpart I—Section 447.500 This subpart would implement specified provisions of sections 1927, 1903(i)(10), and 1902(a)(54) of the Act related to implementation of the DRA. It would include requirements related to State plans, FFP for drugs, and the payment for covered outpatient drugs under Medicaid. In this rule, we also propose to move the existing Medicaid drug provisions in the Federal regulations from subpart F to subpart I of 42 CFR part 447. Definitions—Section 447.502 This section of the rule would include definitions of key terms used in 42 CFR part 447, subpart I. We propose to use definitions from several sources, including the Act, Federal regulations, program guidance, and the national rebate agreement. We invite the public to provide comments on the terms we have chosen to define as well as the proposed definitions described below. *Bona fide service fee* would mean a fee paid by a manufacturer to an entity, that represents fair market value for a bona fide, itemized service actually performed on behalf of the manufacturer that a manufacturer would otherwise perform (or contract for) in the absence of the service arrangement, and that is not passed in whole or in part to a client or customer of an entity, whether or not the entity takes title to the drug. *Brand name drug* would mean a single source or innovator multiple source drug. *Bundled sale* would mean an arrangement regardless of physical packaging under which the rebate, discount, or other price concession is conditioned upon the purchase of the same drug or drugs of different types (that is, at the nine-digit National Drug Code

(NDC)level) or some other performance requirement (e.g., the achievement of market share, inclusion or tier placement on a formulary), or where the resulting discounts or other price concessions are greater than those which would have been available had the bundled drugs been purchased separately or outside the bundled arrangement. For bundled sales, the discounts are allocated proportionately to the dollar value of the units of each drug sold under the bundled arrangement. For bundled sales where multiple drugs are discounted, the aggregate value of all the discounts should be proportionately allocated across all the drugs in the bundle. *Consumer Price Index “ Urban (CPI-U)* would be defined the same as it is in the national rebate agreement, except we would replace “U.S. Department of Commerce” with “U.S. Department of Labor” to reflect that the Department of Labor is now responsible for updating the CPI-U. Therefore, the term CPI-U would mean the index of consumer prices developed and updated by the U.S. Department of Labor. For purposes of this subpart, it would be the CPI for all urban consumers (U.S. average) for the month before the beginning of the calendar quarter for which the rebate is paid. *Dispensing fee* would be defined similarly to how it is defined for the Medicare Part D program in 42 CFR 423.100 in light of some of the parallels of Part D to Medicaid. We are defining this term in order to assist States in their evaluation of factors in establishing a reasonable dispensing fee to pharmacy providers. We note that while we propose to define this term, we do not intend to mandate a specific formula or methodology which the States must use to determine the dispensing fee. The formula is consistent with our regulation that defines estimated acquisition costs which give States flexibility to determine EAC. However, consistent with a recommendation made by the Office of the Inspector General

(OIG)in its report, “Determining Average Manufacturer Prices for Prescription Drugs under the Deficit Reduction Act of 2005,” (A-06-06-00063) May 2006, we encourage States to analyze the relationship between AMP and pharmacy acquisition costs to ensure that the Medicaid program appropriately reimburses pharmacies for estimated acquisition costs. Dispensing fee would be defined as the fee which—

(1)Is incurred at the point of sale and pays for costs other than the ingredient cost of a covered outpatient drug each time a covered outpatient drug is dispensed;

(2)Includes only pharmacy costs associated with ensuring that possession of the appropriate covered outpatient drug is transferred to a Medicaid beneficiary. Pharmacy costs include, but are not limited to, any reasonable costs associated with a pharmacist's time in checking the computer for information about an individual's coverage, performing drug utilization review and preferred drug list review activities, measurement or mixing of the covered outpatient drug, filling the container, beneficiary counseling, physically providing the completed prescription to the Medicaid beneficiary, delivery, special packaging, and overhead associated with maintaining the facility and equipment necessary to operate the pharmacy; and

(3)Does not include administrative costs incurred by the State in the operation of the covered outpatient drug benefit including systems costs for interfacing with pharmacies. *Innovator multiple source drug* would be defined based on the definition in section 1927(k)(7)(A)(ii) of the Act. We would also use the definition from the national rebate agreement. Innovator multiple source drug would mean a multiple source drug that was originally marketed under an original NDA approved by the Food and Drug Administration (FDA). It would include a drug product marketed by any cross-licensed producers or distributors operating under the NDA and a covered outpatient drug approved under an NDA, Product License Approval, Establishment License Approval or Antibiotic Drug approval. We believe this definition is consistent with our understanding of the drug rebate statute and section 6003 of the DRA which includes within the definition those drugs which often receive a certain amount of patent protection and/or market exclusivity. *Manufacturer* would be defined based on the definition in section 1927(k)(5) of the Act and the national rebate agreement. It would also mirror the current definition of manufacturer used by Medicare in the regulations regarding manufacturer's average sales price

(ASP)data. For purposes of the Medicaid program, manufacturer would be defined as any entity that possesses legal title to the NDC for a covered drug or biological product and—

(a)Is engaged in the production, preparation, propagation, compounding, conversion, or processing of covered outpatient drug products, either directly or indirectly by extraction from substances of natural origin, or independently by means of chemical synthesis, or by a combination of extraction and chemical synthesis; or

(b)Is engaged in the packaging, repackaging, labeling, relabeling, or distribution of covered outpatient drug products and is not a wholesaler of drugs or a retail pharmacy licensed under State law.

(c)With respect to authorized generic products, the term “manufacturer” will also include the original holder of the NDA.

(d)With respect to drugs subject to private labeling arrangements, the term “manufacturer” will also include those entities that do not possess legal title to the NDC. *Multiple source drug* is currently defined in Federal regulations at section 42 CFR 447.301. We propose removing the definition from that section and revising the definition to reflect the DRA amendments to section 1927 of the Act. We would define the term multiple source drug to mean, with respect to a rebate period, a covered outpatient drug for which there is at least one other drug product which—

(1)Is rated as therapeutically equivalent. For the list of drug products rated as therapeutically equivalent, see the FDA's most recent publication of “Approved Drug Products with Therapeutic Equivalence Evaluations” which is available at *http://www.fda.gov/cder/orange/default.htm* or can be viewed at the FDA's Freedom of Information Public Reading Room at 5600 Fishers Lane, rm. 12A-30, Rockville, MD 20857;

(2)Is pharmaceutically equivalent and bioequivalent, as determined by the FDA; and

(3)Is sold or marketed in the United States during the rebate period. *National drug code*

(NDC)would be defined as it is used by the FDA and based on the definition used in the national rebate agreement. For purposes of this subpart, it would mean the 11-digit numerical code maintained by the FDA that indicates the labeler, product, and package size, unless otherwise specified in the regulation as being without respect to package size (9-digit numerical code). *National rebate agreement* is described in section 1927 of the Act. Section 1927(b) of the Act outlines the terms of the rebate agreement, including reporting timeframes, manufacturer responsibilities, penalties, and confidentiality of pricing data. We propose that the national rebate agreement would continue to be defined as the rebate agreement developed by CMS and entered into by CMS on behalf of the Secretary or his designee and a manufacturer to implement section 1927 of the Act. *Nominal price* would be defined as it is in the national rebate agreement. We propose incorporating this definition in this rule because it is the standard presently used in the Medicaid program and the Medicare Part B program, and is similar to that used by the Department of Veterans Affairs

(DVA)in administering the Federal Supply Schedule (FSS). Nominal price would mean a price that is less than 10 percent of AMP in the same quarter for which the AMP is computed. *Rebate period* is defined in section 1927(k)(8) of the Act as a calendar quarter or other period specified by the Secretary with respect to the payment of rebates under the national rebate agreement. The Medicaid Drug Rebate Program currently operates using a calendar quarter for the rebate period. While AMPs would be reported monthly for purposes of calculating FULs and for release to States, we can find no evidence in the legislative history of the DRA that Congress intended to change the definition of rebate period. Therefore, we would define rebate period as a calendar quarter. *Single source drug* is defined in section 1927(k)(7)(A)(iv) of the Act as a covered outpatient drug which is produced or distributed under an original NDA approved by the FDA, including a drug product marketed by any cross-licensed producers or distributors operating under the NDA. It is further defined in the national rebate agreement as a covered outpatient drug approved under a Product License Approval, Establishment License Approval, or Antibiotic Drug Approval. We propose to define the term single source drug as it is defined in the statute and the national rebate agreement. Determination of Average Manufacturer Price—Section 447.504 Background Prior to the DRA, section 1927(k)(1) of the Act specified that the AMP with respect to a covered outpatient drug of a manufacturer for a rebate period is the average unit price paid to the manufacturer for the drug in the United States by wholesalers for drugs distributed to the retail pharmacy class of trade after deducting customary prompt pay discounts. The national rebate agreement (56 FR 7049 (Feb. 21, 1991)) further specifies that: • Direct sales to hospitals, health maintenance organizations

(HMOs)and wholesalers, where the drug is relabeled under that distributor's national drug code number, and FSS prices are not included in the calculation of AMP; • AMP includes cash discounts and all other price reductions (other than rebates under section 1927 of the Act), which reduce the actual price paid; • AMP is calculated as net sales divided by the number of units sold, excluding free goods ( *i.e.* , drugs or any other items given away, but not contingent on any purchase requirements), and • Net sales means quarterly gross sales revenue less cash discounts allowed and all other price reductions (other than rebates under section 1927 of the Act) which reduce the actual price paid. Consistent with these provisions, it has been our policy that in order to provide a reflection of market transactions, the AMP for a quarter should be adjusted by the manufacturer if cumulative discounts or other arrangements subsequently adjust the prices actually realized. AMP should be adjusted for bundled sales (as defined above) by determining the total value of all the discounts on all drugs in the bundle and allocating those discounts proportionately to the respective AMP calculations. The aggregate discount is allocated proportionately to the dollar value of the units of each drug sold under the bundled arrangement. Where discounts are offered on multiple products in a bundle, the aggregate value of all the discounts should be proportionately allocated across all the drugs in the bundle. The average unit price means a manufacturer's quarterly sales included in AMP less all required adjustments divided by the total units sold and included in AMP by the manufacturer in a quarter. Provisions of the DRA Section 6001(c)(1) of the DRA amended section 1927(k)(1) of the Act to revise the definition of AMP to exclude customary prompt pay discounts to wholesalers, effective January 1, 2007. Section 6001(c)(3) of the DRA requires the OIG to review the requirements for and manner in which AMPs are determined and recommend changes to the Secretary by June 1, 2006. Section 6001(c)(3) of the DRA requires the Secretary to clarify the requirements for and the manner in which AMPs are determined by promulgating a regulation no later than July 1, 2007, taking into consideration the OIG's recommendations. OIG Recommendations on AMP In accordance with 6001(c)(3) of the DRA, the OIG issued its report, “Determining Average Manufacturer Prices for Prescription Drugs under the Deficit Reduction Act of 2005,” (A-06-06-00063), in May 2006. In this report, the OIG recommended that CMS: • Clarify the requirements in regard to the definition of retail pharmacy class of trade and treatment of pharmacy benefit manager

(PBM)rebates and Medicaid sales and • Consider addressing issues raised by industry groups, such as: ◦ Administrative and service fees, ◦ Lagged price concessions and returned goods, ◦ The frequency of AMP reporting, ◦ AMP restatements, and ◦ Base date AMP. The OIG also recommended that the Secretary direct CMS to: • Issue guidance in the near future that specifically addresses the implementation of the AMP-related reimbursement provisions of the DRA and • Encourage States to analyze the relationship between AMP and pharmacy acquisition cost to ensure that the Medicaid program appropriately reimburses pharmacies for estimated acquisition costs. We address these recommendations as we discuss provisions of this proposed rule in the section below. Definition of Retail Pharmacy Class of Trade and Determination of AMP We recognize that there have been concerns expressed regarding AMP because of inconsistencies in the way manufacturers determine AMP, changes in the drug marketplace, and the introduction of newer business practices such as payment of services fees. We also realize that in light of the DRA amendments, AMP will serve two distinct purposes: For drug rebate liability and for payments. For the purpose of determining drug rebate liability, drug manufacturers would generally benefit from a broad definition of retail pharmacy class of trade which would include entities that purchase drugs at lower prices and which would lower rebate liability. Including these lower prices would decrease the AMP, decreasing manufacturers' rebate liability. The retail pharmacy industry might benefit from a narrow definition of retail pharmacy prices that would be limited to certain higher priced sales given that, in light of the DRA amendments, States might use AMP to calculate pharmacy payment rates. Excluding low-priced sales would increase AMP, increasing, in all likelihood, manufacturers' rebate payments. The pharmacy industry believes that mail order pharmacies and nursing home pharmacies (long-term care pharmacies) pay less for drugs than retail pharmacies ( *e.g.* , independents and chain pharmacies), and thus the inclusion of such prices would lower AMP below the price paid by such retail pharmacies. The statute mandates that, effective January 1, 2007, the Secretary use AMP when computing FULs. For this purpose, we would exclude certain outlier payments (see our discussion in the FULs section for a more complete description of outlier exclusions). The statute also requires that AMP be provided to States monthly and be posted on a public Web site. While there is no requirement that States use AMPs to set payment amounts, we believe the Congress intended that States have drug pricing data based on actual prices, in contrast to previously available data that did not necessarily reflect actual manufacturer prices of sales to the retail pharmacy class of trade. We considered several options to define what prices should be included in AMP. We considered including only prices of sales to retail pharmacies that dispense drugs to the general public ( *e.g.* , independent and chain pharmacies) in retail pharmacy class of trade and removing prices to mail order pharmacies, nursing home pharmacies (long-term care pharmacies), and PBMs. This definition would address the retail pharmacy industry's contentions that an AMP used for reimbursement to retail pharmacies should only reflect prices of sales to those pharmacies which dispense drugs to the general public. The exclusion of prices to mail order pharmacies, nursing home facilities (long-term care facilities), and PBMs would substantially reduce the number of transactions included in AMP. Removal of these prices would simplify AMP calculations for manufacturers because it is our understanding that certain data ( *e.g.* , PBM pricing data) are difficult for manufacturers to capture. In addition, removal of these prices would address differing interpretations of CMS policy identified by the OIG and the Government Accountability Office

(GAO)due to the lack of a clear definition of AMP or specific guidance regarding which retail prices should be included in AMP. However, such a removal would not be consistent with past policy, as specified in manufacturer Releases 28 and 29 ( *http://www.cms.hhs.gov/MedicaidDrugRebateProgram/03_DrugMfrReleases.asp#TopOfPage* ), would likely result in a higher AMP, and would result in an increase in drug manufacturers' rebate liabilities. We also considered not revising the entities included in the retail pharmacy class of trade. However, this would not address the issues identified by the OIG in its report, “Medicaid Drug Rebates: The Health Care Financing Administration Needs to Provide Additional Guidance to Drug Manufacturers to Better Implement the Program,” (A-06-91-00092), November 1992 and GAO in its report “Medicaid Drug Rebate Program—Inadequate Oversight Raises Concerns about Rebates Paid to States,” (GAO-05-102), February 2005. We believe, based in part on the OIG and GAO reports, that retail pharmacy class of trade means that sector of the drug marketplace, similar to the marketplace for other goods and services, which dispenses drugs to the general public and which includes all price concessions related to such goods and services. As such, we would exclude from AMP the prices of sales to nursing home pharmacies (long-term care pharmacies) because nursing home pharmacies do not dispense to the general public. We would include in AMP the prices of sales and discounts to mail order pharmacies. We considered limiting mail order pharmacy prices to only those prices that are offered to all pharmacies under similar terms and conditions. However, given our belief that such prices are simply another form of how drugs enter into the retail pharmacy class of trade, we have decided to maintain these prices in the definition. We note that even were we to incorporate this change, retail pharmacies may not be able to meet the terms and conditions placed on mail order pharmacies to be eligible for some manufacturer price concessions. CMS seeks public comment on the inclusion of all mail order pharmacy prices in our definition of retail pharmacy class of trade for purposes of inclusion in the determination of AMP. We recognize that a major factor contributing to the determination of AMP is the treatment of PBMs. These entities have assumed a significant role in drug distribution since the enactment of the Medicaid Drug Rebate Program in 1990. We are considering how PBM rebates, discounts, or other price concessions should be recognized for purposes of AMP calculations. A GAO report “Medicaid Drug Rebate Program—Inadequate Oversight Raises Concerns about Rebates Paid to States,” (GAO-05-102), in February 2005, indicated that the Medicaid Drug Rebate Program does not clearly address certain financial concessions negotiated by PBMs. The GAO recommended that we issue clear guidance on manufacturer price determination methods and the definitions of AMP and best price, and update such guidance as additional issues arise. The issue regarding PBMs was also addressed in the recently issued OIG report, “Determining Average Manufacturer Prices for Prescription Drugs under the Deficit Reduction Act of 2005,” (A-06-06-00063), in May 2006. In this report, the OIG recommended that we clarify the treatment of PBM rebates. This report says that manufacturers treat rebates and fees paid to PBMs in the calculation of AMP in three different ways. Specifically they found that manufacturers

(1)did not subtract rebates or fees paid to PBMs from the AMP calculation;

(2)subtracted the rebates or fees paid to PBMs; or

(3)subtracted a portion of the PBMs rebates or fees from the AMP calculation. In developing this proposed rule, we considered including all rebates, discounts and other price concessions from PBMs in the determination of AMP. We also considered excluding rebates, discounts and other price concessions from PBMs in the determination of AMP. One of the most difficult issues with PBM discounts, rebates, or other price concessions is that manufacturers contend that they do not know what part of these discounts, rebates, or other price concessions is kept by the PBM for the cost of its activities and profit, what part is passed on to the health insurer or other insurer or other entity with which the PBM contracts, and what part, if any, that entity passes on to pharmacies. Despite the difficulties of including certain PBM rebates, discounts or other price concessions in AMP, excluding all of these price concessions could result in an artificial inflation of AMP. For this reason, we propose to include PBM rebates, discounts, or other price concessions for drugs provided to the retail pharmacy class of trade for the purpose of determining AMP; however, we invite comments on whether this proposal is operationally feasible. As discussed more fully below, we have proposed that PBM rebates and price concessions that adjust the amount received by the manufacturer for drugs distributed to the retail pharmacy class of trade should be included in the calculation of AMP. We acknowledge that manufacturers have a variety of arrangements with PBMs and thus invite comments on all aspects of our proposal as explained below. The rebate agreement defines AMP to include cash discounts and all other price reductions (other than rebates under section 1927 of the Act), which reduce the actual price paid to the manufacturer for drugs distributed to the retail pharmacy class of trade. As noted in Release 28 and reiterated in Release 29, manufacturers have developed a myriad of arrangements whereby specific discounts, chargebacks, or rebates are provided to PBMs which, in turn, are passed on to the purchaser. Those releases recognize that certain prices provided by manufacturers to PBMs should be included within AMP calculations. In accordance with those releases, our position has been that PBMs have no effect on the AMP calculations unless the PBM is acting as a wholesaler as defined in the rebate agreement. We are concerned, however, that this position may unduly exclude from AMP certain PBM prices and discounts which have an impact on prices paid to the manufacturer. We believe that AMP should be calculated to reflect the net drug price recognized by the manufacturer, inclusive of any price adjustments or discounts provided directly or indirectly by the manufacturer. We are interested in comments on this proposal, including the comments on the operational difficulties of including such PBM arrangements within AMP calculations. We recognize that the statute defines AMP as the average price paid to the manufacturer by wholesalers for drugs distributed to the retail pharmacy class of trade; however, in light of our understanding of congressional intent, we believe that the definition is meant to capture discounts and other price adjustments, regardless of whether such discounts or adjustments are provided directly or indirectly by the manufacturer. We invite comments on this definition and whether AMP should be calculated to include all adjustments that affect net drug prices. We acknowledge that there are many PBM/manufacturer arrangements. To the extent manufacturers are offering rebates, discounts, or other price concessions to the PBM that are not bona fide service fees, we propose that these lower prices should be included in the AMP calculations. We request comments on the operational difficulties of tracking these rebates, discounts, or chargebacks provided to a PBM for purposes of calculating AMP and on the inclusion of all such price concessions in AMP. Specifically, we solicit comments on the extent to which CMS should or should not define in regulation which rebates, discounts, or price concessions provided to PBMs should be included in AMP and how best to measure these. Also, we solicit public comment on how these PBM price concessions should be reported to CMS to assure that appropriate price adjustments are captured and included in the determination of AMP. Finally, we request comments on any other issues that we should take into account in making our final decisions. These include, but may not be limited to, possible Federal and State budgetary impacts (our savings estimates assumed no budgetary impacts as generic drugs are rarely, if ever, subject to PBM price adjustments in this context); possible future evolution in industry pricing and management practices (e.g., growth of “preferred” generic drugs); and possible impacts on reimbursement for brand name drugs under Medicaid. We are generally interested in comments on how and to what extent PBMs act as “wholesalers.” We propose to incorporate the explicitly listed exclusions in section 1927 of the Act, and in the national rebate agreement, which are direct sales to hospitals, HMOs/managed care organizations (MCOs), wholesalers where the drug is relabeled under that distributor's NDC and FSS prices. The specific terms we propose to clarify and the proposed clarifications follow. *Retail Pharmacy Class of Trade:* We propose to include in the definition of retail pharmacy class of trade any entity that purchases prescription drugs from a manufacturer or wholesaler for dispensing to the general public (e.g., retail, independent, chain and mail order pharmacies), except as otherwise specified by the statute or regulation (such as, HMOs, hospitals). *PBM Price Concessions:* We proposed to include any rebates, discounts or other price adjustments provided by the manufacturer to the PBM that affect the net price recognized by the manufacturer for drugs provided to entities in the retail pharmacy class of trade. *Customary Prompt Pay Discounts:* Prior to the DRA, neither the statute nor the national rebate agreement defined customary prompt pay discounts. The DRA revises the definition of AMP to exclude customary prompt pay discounts extended to wholesalers; however, it does not revise or define customary prompt pay discounts. We propose to define customary prompt pay discounts as any discount off the purchase price of a drug routinely offered by the manufacturer to a wholesaler for prompt payment of purchased drugs within a specified time of the payment due date. *Treatment of Medicaid Sales:* The OIG recommended that we should address whether AMP should include Medicaid prices of sales; i.e., prices of sales where the end payer for the drug is the Medicaid program. In its May 2006 report, the OIG noted confusion on this issue and recommended that we clarify that these prices of sales are to be included in AMP. It is our position that these sales are included in AMP because they are not expressly excluded in the statute. In this proposed rule, we would also clarify that prices to State Children's Health Insurance Program Title XIX (SCHIP) through an expanded Medicaid program are covered under the provisions of section 1927 of the Act and generally subsumed in Medicaid sales. As a general matter, Medicaid does not directly purchase drugs from manufacturers or wholesalers but instead reimburses pharmacies for these drugs. Therefore, Medicaid sales are determined by the entities that are actually in the sales chain and because Medicaid reimburses pharmacies for drugs for Medicaid beneficiaries, integrated into the chain of sales otherwise included in AMP. In this proposed rule, we would clarify that the units associated with Medicaid sales should be included as part of the total units in the AMP calculation. We have proposed that AMP be calculated to include all sales and associated discounts and other price concessions provided by the manufacturer for drugs distributed to the retail pharmacy class of trade unless the sale, discount, or other price concession is specifically excluded by the statute or regulation or is provided to an entity excluded by statute or regulation. Therefore, we would clarify that rebates paid to States under the Medicaid Drug Rebate Program should be excluded from AMP calculations but that price concessions associated with the sales of drugs in the retail pharmacy class of trade which are provided to Medicaid patients should be included. In this proposed rule, we also propose to clarify how the prices of sales to State Children's Health Insurance Program Title XXI (SCHIP) non-Medicaid expansion programs should be treated. Like the Medicaid program, SCHIP non-Medicaid expansion programs do not directly purchase drugs. Because such programs are not part of the Medicaid program, they are not covered under the provisions of section 1927 of the Act. As with Medicaid sales, these sales are included in AMP to the extent they concern sales at the retail pharmacy class of trade. Therefore, these sales should not be backed out of the AMP calculation to the extent that such sales are included within sales provided to the retail pharmacy class of trade. Rebates and units associated with those sales should also be included in the calculation of AMP. *Treatment of Medicare Part D sales:* We would clarify that the treatment of prices of sales through a Medicare Part D prescription drug plan (PDP), a Medicare Advantage prescription drug plan (MA-PD), or a qualified retiree prescription drug plan for covered Part D drugs provided on behalf of Part D eligible individuals should be included in the AMP calculation. Like the Medicaid program, PDPs and MA-PDs do not directly purchase drugs, but are usually third party payers. As with Medicaid sales, these sales are included in AMP to the extent they are sales to the retail pharmacy class of trade. Therefore, we believe these prices of sales should not be backed out of the AMP. Rebates paid by the manufacturer to the PDP or MA-PD should be included in the calculation of AMP. *SPAP price concessions:* In this proposed rule, we also propose to clarify how the prices to State pharmaceutical assistance programs (SPAPs) should be treated. Like the Medicaid program, PDPs, and MA-PDs, SPAPs do not directly purchase drugs, but are generally third-party payers. As with Medicaid sales, these sales are included in AMP to the extent the sales are to an entity included in the retail pharmacy class of trade. Therefore, we propose that SPAP sales should not be backed out of the AMP calculation. Rebates paid by the manufacturer to the SPAP should be included in the calculation of AMP. *Prices to other Federal Programs:* We propose that any prices on or after October 1, 1992, to the IHS, the DVA, a State home receiving funds under section 1741 of title 38, United States Code, the Department of Defense (DoD), the Public Health Service (PHS), or a covered entity described in subsection 1927(a)(5)(B) of the Act (including inpatient prices charged to hospitals described in section 340B(a)(4)(L) of the PHSA); any prices charged under the FSS of the GSA; and any depot prices (including Tricare) and single award contract prices, as defined by the Secretary, of any agency of the Federal government are excluded from the calculation of AMP. We propose that the prices to these entities should be excluded from AMP because the prices to these entities are not available to the retail pharmacy class of trade. *Administrative and Service Fees:* Current Medicaid drug rebate policy is that administrative fees which include service fees and distribution fees, incentives, promotional fees, chargebacks and all discounts or rebates, other than rebates under the Medicaid drug program, should be included in the calculation of AMP, if those sales are to an entity included in the calculation of AMP. The OIG has noted in its report, “Determining Average Manufacturer Prices for Prescription Drugs under the Deficit Reduction Act of 2005,” (A-06-06-00063), May 2006, that confusion exists about the treatment of fees, such as service fees negotiated between a manufacturer and pharmaceutical distributor. Some believe that these fees should not be included in AMP because the manufacturer does not know if the fees act to reduce the price paid by the end purchasers. Others believe such fees should be included in the calculation, which would reduce AMP because they serve as a price concession. For the same reason as for sales to PBMs, we propose that all fees except fees paid for bona fide services should be included in AMP. We propose that bona fide service fees means fees paid by a manufacturer to an entity, which represent fair market value for a bona fide, itemized service actually performed on behalf of the manufacturer that the manufacturer would otherwise perform (or contract for) in the absence of the service arrangement, and which are not passed in whole or in part to a client or customer of an entity, whether or not the entity takes title to the drug. Medicare Part B also adopted this definition in its final rule with comment period that was published on December 1, 2006 (71 FR 69623-70251) that implemented the ASP provisions enacted in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). We are not proposing to define fair market value. However, CMS invites comments from the public regarding an appropriate definition for fair market value. *Direct Patient Sales:* In response to manufacturers' questions, CMS has stated previously that covered outpatient drugs sold to patients through direct programs should be included in the calculation of AMP. These sales are usually for specialty drugs through a direct distribution arrangement, where the manufacturer retains ownership of the drug and pays either an administrative or service fee to a third party for functions such as the storage, delivery and billing of the drug. Some manufacturers have contended that direct patient sales for covered outpatient drugs sold by a manufacturer through a direct distribution channel should not qualify for inclusion in the calculation of AMP because the Medicaid rebate statute and the national rebate agreement do not address covered outpatient drugs that are not sold to wholesalers and/or not distributed in the retail pharmacy class of trade. We believe that the distributor is acting as a wholesaler and these sales are to the retail pharmacy class of trade. In light of this, we propose in this regulation that these sales and the rebates associated with these sales to patients through direct programs would be included in AMP. CMS invites comments from the public on this proposed policy. *Returned Goods:* Current Medicaid Drug Rebate Program policy is that returned goods are credited back to the manufacturer in either the quarter of sale or quarter of receipt. This has caused difficulty for some manufacturers when these returns have substantially reduced AMP in a quarter or resulted in a negative AMP. In light of these concerns, we propose to exclude returned goods from the calculation of AMP when returned in good faith. CMS considers that goods are being returned in good faith when they are being returned pursuant to manufacturer policies which are not designed to manipulate or artificially inflate or deflate AMP. The Medicare Part B program excludes returned goods from the calculation of ASP. The exclusion of returned goods will allow the manufacturer to calculate and report an AMP that is more reflective of its true pricing policies to the retail pharmacy class of trade in the reporting period. It lessens the administrative burden and problems associated with allocating the returned goods back to the reporting period in which they were sold, as well as eliminating artificially low, zero or negative AMPs that may result from these adjustments. *Manufacturer Coupons:* In this proposed rule, we propose to clarify how manufacturer coupons should be treated. The treatment of manufacturer coupons has been problematic for CMS as well as some manufacturers. In this rule, we propose to include coupons redeemed by any entity other than the consumer in the calculation of AMP. We believe that the redemption of coupons by the consumer directly to the manufacturer is not included in the retail pharmacy class of trade. In this proposed rule, we propose to exclude coupons redeemed by the consumer directly to the manufacturer from the calculation of AMP. CMS invites comments from the public on this proposed policy. *Future Clarifications of AMP:* Based on past comments from the GAO and the OIG and recommendations of the OIG in its May 2006 report on AMP, we believe that we need to have the ability to clarify the definition of AMP in an expedited manner in order to address the evolving marketplace for the sale of drugs. We plan to address future clarifications of AMP through the issuance of program releases and by posting the clarifications on the CMS Web site as needed. Requirements for Average Manufacturer Price To implement the provisions set forth in sections 6001 and 6003 of the DRA related to AMP, we propose a new § 447.504. In § 447.504(a), we propose a revised definition of AMP and clarify that AMP is determined without regard to customary prompt pay discounts extended to wholesalers. In § 447.504(b), we propose to define average unit price. In § 447.504(c), we propose to define customary prompt pay discount. In § 447.504(d), we propose to define net sales. In § 447.504(e), we propose to define retail pharmacy class of trade. In § 447.504(f), we propose to define wholesaler. In § 447.504(g), we would describe in detail the sales, rebates, discounts, or other price concessions that must be included in AMP. In § 447.504(h), we would describe the sales, rebates, discounts, or other price concessions that must be excluded from AMP. In § 447.504(i), we would provide further clarification about how manufacturers should account for price reductions and other pricing arrangements which should be included in the calculation of AMP. Determination of Best Price—Section 447.505 Prior to the DRA, section 1927(c)(1)(C) of the Act provided that manufacturers must include in their best price calculation, for a single source or innovator multiple source drug, the lowest price available from the manufacturers during the rebate period to any wholesaler, retailer, provider, HMO, non-profit entity, or governmental entity within the United States except for those entities specifically excluded by statute. Excluded from best price are prices charged on or after October 1, 1992, to the IHS, the DVA, a State home receiving funds under section 1741 of title 38, United States Code, the DoD, the PHS, or a covered entity described in section 1927(a)(5)(B) of the Act (including inpatient prices charged to hospitals described in section 340B(a)(4)(L) of the PHSA); any prices charged under the FSS of the GSA; any prices used under an SPAP; any depot prices (including Tricare) and single award contract prices, as defined by the Secretary, of any agency of the Federal Government; and prices to a Medicare Part D PDP, an MA-PD, or a qualified retiree prescription drug plan for covered Part D drugs provided on behalf of Part D eligible individuals. The statute further specifies that: • Best price includes cash discounts, free goods that are contingent on any purchase requirement, volume discounts and rebates (other than rebates under section 1927 of the Act), which reduce the price paid; • Best price must be determined on a unit basis without regard to special packaging, labeling or identifiers on the dosage form or product or package; • Best price must not take into account prices that are merely nominal in amount. Consistent with these provisions and the national rebate agreement, it has been our policy that in order to reflect market transactions, the best price for a rebate period should be adjusted by the manufacturer if cumulative discounts or other arrangements subsequently adjust the prices actually realized. Best price should be adjusted for any bundled sale. The drugs in a “bundle” do not have to be physically packaged together to constitute a “bundle,” just part of the same bundled transaction. Section 1927(c)(1)(C)(ii)(I) of the Act specifies that best price must include free goods that are contingent on any purchase requirement. Thus, only those free goods that are not contingent on any purchase requirements may be excluded from best price. Section 103(e) of the MMA modified the definition of best price by excluding prices which are negotiated by a PDP under part D of title XVIII of the Act, by any MA-PD plan under part C of such title with respect to covered part D drugs, or by a qualified retiree prescription drug plan (as defined in section 1860D-22(a)(2) of the Act) with respect to such drugs on behalf of individuals entitled to benefits under part A or enrolled under part B of such title. Section 1002(a) of the MMA modified section 1927(c)(1)(C)(i)(I) of the Act by clarifying that inpatient prices charged to hospitals described in section 340B(a)(4)(L) of the PHSA are exempt from best price. Section 6003 of the DRA amended section 1927(c)(1)(C) of the Act by revising the definition of best price to clarify that the best price includes the lowest price available to any entity for any such drug of a manufacturer that is sold under an NDA approved under section 505(c) of the FFDCA. In accordance with our understanding of congressional intent, in this proposed rule we propose to define best price with respect to a single source drug or innovator multiple source drug of a manufacturer, including any drug sold under an NDA approved under section 505(c) of the FFDCA, as the lowest price available from the manufacturer during the rebate period to any entity in the United States in any pricing structure (including capitated payments) in the same quarter for which the AMP is computed. It continues to be our policy that best price reflects the lowest price at which the manufacturer sells a covered outpatient drug to any purchaser, except those prices specifically exempted by law. We propose to define provider as a hospital; HMO, including an MCO or PBM; or other entity that treats individuals for illnesses or injuries or provides services or items in the provisions of health care. As with the determination of AMP, the DRA does not establish a mechanism to clarify how best price is to be determined should new entities be formed after this regulation takes effect. We believe that we need to have the ability to clarify best price in an expedited manner in order to address the evolving marketplace for the sale of drugs. We plan to address future clarifications to best price through the issuance of program releases and by posting the clarifications on the CMS Web site as needed. Even though the DRA did not require CMS to clarify the requirements for best price, we determined that it is reasonable to propose these provisions in this proposed rule, consistent with long-standing Medicaid Drug Rebate Program policy, the MMA, and our understanding of congressional intent with respect to best price as revised by the DRA. We propose to incorporate the explicitly listed exclusions in section 1927 of the Act, which are prices charged on or after October 1, 1992, to the IHS, the DVA, a State home receiving funds under section 1741 of title 38, United States Code, the DoD, the PHS, or a covered entity described in section 1927(a)(5)(B) of the Act (including inpatient prices charged to hospitals described in section 340B(a)(4)(L) of the PHSA); any prices charged under the FSS of the GSA; any prices paid under an SPAP; any depot prices (including Tricare) and single award contract prices, as defined by the Secretary, of any agency of the Federal Government; and payments made by a Medicare Part D PDP, an MA-PD, or a qualified retiree prescription drug plan for covered Part D drugs provided on behalf of Part D eligible individuals. We propose to codify this policy and require that manufacturers exclude the prices to these entities from best price. Because best price represents the lowest price available from the manufacturer to any entity with respect to a single source drug or innovator multiple source drug of a manufacturer, including an authorized generic, any price concession associated with that sale should be netted out of the price received by the manufacturer in calculating best price and best price should be adjusted by the manufacturer if other arrangements subsequently adjust the prices actually realized. We propose to consider any price adjustment which ultimately affects those prices which are actually realized by the manufacturer as “other arrangements” and that such adjustment should be included in the calculation of best price, except to the extent that such adjustments qualify as bona fide service fees. Consistent with our understanding of congressional intent, we propose that best price be calculated to include all sales, discounts, and other price concessions provided by the manufacturer for covered outpatient drugs to any entity unless the manufacturer can demonstrate that the sale, discount, or other price concession is specifically excluded by statute or is provided to an entity not included in the rebate calculation. To the extent that an entity is not included in the best price calculation, both sales and associated discounts or other price concessions provided to such an entity should be excluded from the calculation. The specific terms we propose to clarify and the proposed clarification follow. The Medicaid drug rebate agreement defines best price, in part, as the lowest price at which the manufacturer sells the covered outpatient drug to any purchaser in the United States. We propose to codify this policy in this proposed rule. *Customary Prompt Pay Discounts:* The DRA revises the definition of AMP to exclude customary prompt pay discounts to wholesalers; however, we can find no evidence in the legislative history of the DRA that Congress intended to change the definition of best price to exclude customary prompt pay discounts. Therefore, we propose in this regulation to include customary prompt pay discounts in best price. *PBM Price Concessions:* We recognize that a major factor contributing to the determination of best price includes the treatment of PBMs. These entities have assumed a significant role in drug distribution since the enactment of the Medicaid Drug Rebate Program in 1990. As noted in Release 28 and reiterated in Release 29, manufacturers have developed a myriad of arrangements whereby specific discounts, chargebacks, or rebates are provided to PBMs which, in turn, are passed on to the purchaser. In such situations where discounts, chargebacks, or rebates are used to adjust drug prices at the wholesaler or retail level, such adjustments are included in the best price calculation. A GAO report, “Medicaid Drug Rebate Program—Inadequate Oversight Raises Concerns about Rebates Paid to States,” (GAO-05-102), in February 2005, indicated that the Medicaid Drug Rebate Program does not clearly address certain financial concessions negotiated by PBMs. The GAO recommended that we issue clear guidance on manufacturer price determination methods and the definitions of AMP and best price, and update such guidance as additional issues arise. The issue regarding PBMs was also addressed in the recently issued OIG report, “Determining Average Manufacturer Prices for Prescription Drugs under the Deficit Reduction Act of 2005,” (A-06-06-00063), in May 2006. In this report, the OIG recommended that we clarify the treatment of PBM rebates. One of the most difficult issues with PBM discounts, price concessions, or rebates is that manufacturers contend that they do not know what part of these discounts, price concessions, or rebates are kept by the PBM for the cost of their activities and profit, what part is passed on to the health insurer or other insurer or other entity with which the PBM contracts, and what part that entity passes on to pharmacies. Despite the difficulties of including certain PBM rebates, discounts or other price concessions in best price, excluding these price concessions could result in an artificial inflation of best price. We propose to include PBM rebates, discounts, or other price concessions for the purpose of determining best price. To the extent manufacturers are offering PBMs rebates, discounts, or other price concessions, these lower prices should be included in the best price calculations. Therefore, where the use of the PBM by manufacturers affects the price available from the manufacturer, these lower prices should be reflected in best price calculations. We acknowledge that there are many PBM/manufacturer arrangements. We believe that PBMs often obtain rebates, discounts, or other price concessions which adjust prices, either directly or indirectly. Unless the fees/discounts qualify as bona fide service fees (which are excluded), the PBM rebates, discounts, or chargebacks should be included in best price. We propose to consider these rebates, discounts, or chargebacks in best price calculations. CMS invites public comment on the inclusion of certain PBM price concessions in the determination of best price. Also, we solicit public comment on how these PBM price concessions should be reported to CMS to assure that appropriate price concessions are captured and included in the determination of best price. We propose to incorporate the explicitly listed exclusions in section 1927 of the Act and in the national rebate agreement. Because best price represents the prices available from the manufacturer for prescription drugs, best price should be adjusted by the manufacturer if other arrangements subsequently adjust the prices actually realized. We propose to consider that any price adjustment which ultimately affects those prices which are actually realized by the manufacturer as “other arrangements” and that such an adjustment should be included in the calculation of best price. The specific terms we propose to clarify and the proposed clarifications follow. *Administrative and Service Fees:* We propose that administrative fees which include service fees and distribution fees, incentives, promotional fees, chargebacks and all discounts or rebates, other than rebates under the Medicaid Drug Rebate Program, should be included in the calculation of best price, if those sales are to an entity included in the calculation of best price. As previously discussed, the OIG has noted in its report, “Determining Average Manufacturer Prices for Prescription Drugs under the Deficit Reduction Act of 2005,” (A-06-06-00063), May 2006 that confusion exists about the treatment of fees, such as service fees negotiated between a manufacturer and pharmaceutical distributor for AMP and best price. We believe that price adjustments which ultimately affect those prices which are actually available from the manufacturer should be included in best price. We propose that manufacturers should include all such fees except bona fide service fees provided at fair market value in the best price calculation. *Treatment of Medicare Part D Prices:* In this proposed rule, we propose to clarify the treatment of prices which are negotiated by a Medicare Part D PDP, an MA-PD, or a qualified retiree prescription drug plan for covered Part D drugs provided on behalf of Part D eligible individuals. We propose that these prices are exempt from the best price. Section 1860D-2(d)(1)(C) of the Act specifically states that “prices negotiated by a prescription drug plan, by an MA-PD plan with respect to covered part D drugs, or by a qualified retiree prescription drug plan (as defined in section 1860D-22(a)(2)) with respect to such drugs on behalf of Part D eligible individuals, shall (notwithstanding any other provision of law) not be taken into account for the purposes of establishing the best price under section 1927(c)(1)(C).” Therefore, while we propose that the prices listed above be included for the purpose of calculating AMP, we propose that prices negotiated by a PDP, an MA-PD, or a qualified retiree prescription drug plan for covered Part D drugs provided on behalf of Part D eligible individuals not be taken into account for the purpose of establishing best price. *Manufacturer Coupons:* In this proposed rule, we propose to clarify how manufacturer coupons should be treated for the purpose of establishing best price. We believe that the redemption of coupons by any entity other than the consumer to the manufacturer ultimately affects the price paid by the entity ( *e.g.* , retail pharmacy). In this rule, we propose to include coupons redeemed by any entity other than the consumer in the calculation of best price. We believe that the redemption of coupons by the consumer directly to the manufacturer does not affect the price paid by any entity whose sales are included in best price. In this proposed rule, we propose to exclude coupons redeemed by the consumer directly to the manufacturer from the calculation of best price. CMS invites comments from the public on this proposed policy. *Medicaid Rebates and Supplemental Rebates:* Section 1927(c)(1)(C)(ii)(I) of the Act and the national rebate agreement provide that any rebates paid by manufacturers under section 1927 of the Act are to be excluded from the calculation of best price. Therefore, we propose to exclude Medicaid rebates from best price. Likewise, we consider rebates paid under CMS-authorized separate (supplemental) Medicaid drug rebate agreements with States to meet this requirement and propose that these rebates be excluded from best price. In accordance with section 1927 of the Act pertaining to the determination of best price and our understanding of congressional intent, we propose a new § 447.505. In § 447.505(a), we would provide a general definition of the term best price. In § 447.505(b), we propose to define provider. In § 447.505(c), we would specify the sales and prices which must be included in best price. In § 447.505(d), we would specify which sales and prices must be excluded from best price. In § 447.505(e), we would further clarify the price reductions and other pricing arrangements included in the calculation of best price. Authorized Generic Drugs—Section 447.506 Under current law, drug manufacturers participating in the Medicaid Drug Rebate Program are required to report the AMP for each covered outpatient drug offered under the Medicaid program and the best price for each single source or innovator multiple source drug available to any wholesaler, retailer, provider, HMO, non-profit entity, or governmental entity with certain exceptions. For purposes of the Medicaid Drug Rebate Program, an authorized generic is any drug product marketed under the innovator or brand manufacturer's original NDA, but labeled with a different NDC than the innovator or brand product. According to our reading of the statute, authorized generics are single source or innovator multiple source drugs for the purpose of computing the drug rebate and are classified based on whether the drug is being sold or marketed pursuant to an NDA. Responsibility for the rebate rests with the manufacturer selling or marketing the drug to the retail pharmacy class of trade. This rule would implement section 6003 of the DRA. We propose to adopt the term “authorized generic” and define this term with respect to the Medicaid Drug Rebate Program, as any drug sold, licensed or marketed under a new drug application approved by the FDA under section 505(c) of the FFDCA that is marketed, sold or distributed directly or indirectly under a different product code, labeler code, trade name, trademark, or packaging (other than repackaging the listed drug for use in institutions) than the listed drug. Section 6003 of the DRA amended section 1927(b)(3)(A) of the Act to include drugs approved under section 505(c) of the FFDCA in the reporting requirements for the primary manufacturer (NDA holder) for AMP and best price. We propose to interpret the language of section 6003 of the DRA to include in the best price and AMP calculations of the branded drugs, the authorized generic drugs that have been marketed by another manufacturer or subsidiary of the brand manufacturer (or NDA holder). We believe that to limit the applicability of this regulation to the sellers of authorized generic drugs would allow manufacturers to circumvent the intent of the provision by licensing rather than selling the rights to such drugs. This is why we propose a broad definition of authorized generic drugs rather than a more narrow definition of such drugs. We propose to require the NDA holder to include sales of the authorized generic product marketed by the secondary manufacturer or the brand manufacturer's subsidiary in its calculation of AMP and best price. We welcome comments on this issue. The secondary manufacturer or subsidiary of the brand manufacturer would continue to pay the single source or innovator multiple source rebate for the authorized generic drug products based on utilization under its own NDC number, as required under current law. We welcome comments on these issues. In § 447.506(a), we would define the term authorized generic drug for the purposes of the Medicaid Drug Rebate Program. In § 447.506(b), we would require the sales of authorized generic drugs that have been sold or licensed to another manufacturer to be included by the primary manufacturer as part of its calculation of AMP for the single source or innovator multiple source drug (including all such drugs that are sold under an NDA approved under section 505(c) of the FFDCA). In § 447.506(c), we would require that sales of authorized generic drugs by the secondary manufacturer that buys or licenses the right to sell the drugs be included by the primary manufacturer in sales used to determine the best price for the single source or innovator multiple source drug approved under section 505(c) of the FFDCA during the rebate period to any manufacturer, wholesaler, retailer, provider, HMO, non-profit entity, or governmental entity within the United States. The primary manufacturer must include in its calculation of best price all sales of the authorized generic drug which have been sold or marketed by a secondary manufacturer or by a subsidiary of the brand manufacturer. Exclusion From Best Price of Certain Sales at a Nominal Price—Section 447.508 Pursuant to the terms of the national rebate agreement, manufacturers excluded from their best price calculations outpatient drug prices below 10 percent of the AMP. The rebate agreement did not specify whether this nominal price exception applied to all purchasers or to a subset of purchasers. Medicaid has used this definition since the start of the Medicaid Drug Rebate Program and Medicare Part B also adopted it in its April 6, 2004 interim final rule with comment period (69 FR 17935) that implemented the ASP provisions enacted in the MMA. It is also similar to the definition of nominal price in the VHCA. We propose to continue to define nominal prices as prices at less than 10 percent of the AMP in that same quarter; however, in accordance with the DRA, we further propose to specify that the nominal price exception applies only when certain entities are the purchasers. Section 6001(d)(2) of the DRA modified section 1927(c)(1) of the Act to limit the nominal price exclusion from best price to exclude only sales to certain entities and safety net providers. Specifically, it excluded from best price those nominal price sales to 340B covered entities as described in section 340B(a)(4) of the PHSA, ICFs/MR, and State-owned or operated nursing facilities. In addition, the Secretary has authority to identify as safety net providers other facilities or entities to which sales at a nominal price will be excluded from best price if he deems them eligible safety net providers based on four factors: the type of facility or entity, the services provided by the facility or entity, the patient population served by the facility or entity and the number of other facilities or entities eligible to purchase at nominal prices in the same service area. Section 340B(a)(4) of the PHSA defines entities covered under that provision. Covered entities include: A federally qualified health center as defined in section 1905(l)(2)(B) of the Act; an entity receiving a grant under section 340A of the PHSA; a family planning project receiving a grant or contract under Section 1001 of the PHSA (42 U.S.C. § 300); an entity receiving a grant under subpart II of part C of title XXVI of the PHSA (relating to categorical grants for outpatient early intervention services for HIV disease); a State-operated AIDS drug purchasing assistance program receiving financial assistance under title XXVI of the PHSA; a black lung clinic receiving funds under section 427(a) of the Black Lung Benefits Act; a comprehensive hemophilia diagnostic treatment center receiving a grant under section 501(a)(2) of the Act; a Native Hawaiian Health Center receiving funds under the Native Hawaiian Health Care Act of 1988; an urban Indian organization receiving funds under the title V of the Indian Health Care Improvement Act, any entity receiving assistance under title XXVI of the PHSA (other than a State or unit of local government or an entity receiving a grant under subpart II of part C of title XXVI of the PHSA), but only if the entity is certified by the Secretary pursuant to section 340B(a)(7) of the PHSA; an entity receiving funds under section 318 of the PHSA (relating to treatment of sexually transmitted diseases) or section 317(j)(2) of the PHSA (relating to treatment of tuberculosis) through a State or unit of local government, but only if the entity is certified by the Secretary pursuant to section 340B(a)(7) of the PHSA; a subsection

(d)hospital (as defined in section 1886(d)(1)(B) of the Act that

(i)is owned or operated by a unit of State or local government, is a public or private non-profit corporation which is formally granted governmental powers by a unit of State or local government, or is a private non-profit hospital which has a contract with a State or local government to provide health care services to low income individuals who are not entitled to benefits under title XVIII of the Act or eligible for assistance under the State plan under this title,

(ii)for the most recent cost reporting period that ended before the calendar quarter involved, had a disproportionate share adjustment percentage (as determined under section 1886(d)(5)(F) of the Act) greater than 11.75 percent or was described in section 1886(d)(5)(F)(i)(II) of the Act, and

(iii)does not obtain covered outpatient drugs through a group purchasing organization or other group purchasing arrangement. We do not believe it necessary to elaborate further on these entities. We propose to define ICF/MR, for purposes of the nominal price exclusion from best price, to mean an institution for the mentally retarded or persons with related conditions that provides services as set forth in 42 CFR 440.150. Additionally, we propose to define nursing facility as a facility that provides those services set forth in 42 CFR 440.155. The statute allows the Secretary to determine other facilities or entities to be safety net providers to whom sales of drugs at a nominal price would be excluded from best price. The Secretary's determination would be based on the four factors noted above established by the DRA. We considered using this authority to expand this exclusion to other safety-net providers. We considered proposing that we use the broader definition of safety net provider used by the Institute of Medicine (IOM). In its report, “America's Health Care Safety Net, Intact but Endangered,” the IOM defines safety-net providers as “providers that by mandate or mission organize and deliver a significant level of healthcare and other health-related services to the uninsured, Medicaid and other vulnerable patients.” We also considered proposing how the Secretary might use the four factors to allow the nominal price exclusion to best price to apply to other safety net providers. However, we believe that the entities specified in the statute are sufficiently inclusive and capture the appropriate safety net providers. Therefore, we have chosen not to propose to expand the entities subject to this provision at this time. Additionally, we believe that adding other entities or facilities would have an undesirable effect on the best price by expanding the entities for which manufacturers can receive the best price exclusion beyond those specifically mandated by the DRA and lowering manufacturer rebates to the Medicaid Program. Because the statute gives the Secretary discretion not to expand the list of entities, we do not propose to do so at this time in this rule. CMS has concerns that despite the fact that the DRA limits the nominal price exclusion to specific entities, the nominal price exclusion will continue to be used as a marketing tool. Historically, patients frequently remain on the same drug regimen following discharge from a hospital. Physicians may be hesitant to switch a patient to a different brand and risk destabilizing the patient once discharged from the hospital. We believe that using nominal price for marketing is not within the spirit and letter of the law. We are considering crafting further guidance to address this issue. CMS invites comments from the public to assist us in ensuring that all aspects of this issue are fully considered. In accordance with the provisions of the DRA, the restriction on nominal price sales shall not apply to sales by a manufacturer of covered outpatient drugs that are sold under a DVA master agreement under section 8126 of title 38, United States Code. We propose a new § 447.508 in which we would specify those entities to which a manufacturer of covered outpatient drugs may sell at nominal price and provide for the exclusion of such sales from best price. Requirements for Manufacturers—Section 447.510 On August 29, 2003, CMS finalized two of the provisions in the 1995 NPRM through a final rule with comment period (68 FR 51912). We required manufacturers to retain records for data used to calculate AMP and best price for three years from when AMP and best price are reported to CMS. We also required manufacturers to report revisions to AMP and best price for a period not to exceed twelve quarters from the quarter in which the data are due. On January 6, 2004, we published an interim final rule with comment period replacing the three-year recordkeeping requirement with a ten-year requirement on a temporary basis (69 FR 508 (Jan. 6, 2004)). We also required that manufacturers retain records beyond the ten-year period if the records were subject to certain audits or government investigations. On November 26, 2004, we published final regulations (69 FR 68815) that require that a manufacturer retain pricing data for ten years from the date the manufacturer reports that period's data to CMS. We propose to move the recordkeeping requirements at § 447.534(h) to § 447.510(f) and revise them by adding the requirement that manufacturers must also retain records used in calculating the customary prompt pay discounts and nominal prices reported to CMS. Existing regulations at § 447.534(i) require manufacturers to report revisions to AMP and best price for a period not to exceed twelve quarters from the quarter in which the data were due. We propose to move this provision to § 447.510(b) and revise it to require manufacturers to also report revisions to customary prompt pay discounts and nominal prices for the same period. In order to reflect the changes to AMP as set forth in the DRA, we propose allowing manufacturers to recalculate base date AMP in accordance with the definition of AMP in § 447.504(e) of this subpart. Base date AMP is used in the calculation of the additional rebate described in section 1927(c)(2) of the Act. This additional rebate is defined as the difference between the quarterly AMP reported to CMS and the base date AMP trended forward using the CPI--U. We propose this amendment so that the additional rebate would not increase due to changes in the definition of AMP. We propose giving manufacturers an opportunity to submit a revised base date AMP with their data submission for the first full calendar quarter following the publication of the final rule. We propose to allow manufacturers the option to decide whether they will recalculate and submit to CMS a base date AMP based on the new definition of AMP or submit their existing base date AMP. We are giving manufacturers this option because we are aware that some manufacturers may not have the data needed to recalculate base date AMP or may find the administrative burden to be more costly than the savings gained. Under section 1927(b)(3)(A) of the Act and the terms of the national rebate agreement, manufacturers that sign the national rebate agreement must supply CMS with a list of all product data (e.g., date entered market, drug category of single source, innovator multiple source, or noninnovator multiple source) and pricing information for their covered outpatient drugs. In accordance with the statute, the rule would require manufacturers to report AMP and best price to CMS not later than thirty days after the end of the rebate period. Section 6001(b)(1) of the DRA amended section 1927(b)(3)(A)(i) of the Act by adding “month of a” before “rebate period.” Section 6003(a) of the DRA restructured section 1927(b)(3)(A)(i) of the Act. The statute, as amended by these provisions, can be read in different ways. One interpretation is that the revisions made by section 6003(a) of the DRA supersede the revisions made by section 6001(b)(1) of the DRA, effectively eliminating the requirement that manufacturers report data to CMS on a monthly basis. However, we do not believe that this reading is the better reading of the statute or consistent with congressional intent. It is unreasonable to presume that Congress would simultaneously establish and render meaningless a new provision of law and we do not propose to adopt this interpretation. Another interpretation is that the revisions made by section 6001(b)(1) of the DRA, when read with the amendments made by section 6003 of the DRA, create a new requirement that AMP, best price, and customary prompt pay discounts be reported on a monthly basis. However, there is no compelling evidence in the legislative history which indicates that Congress intended to change the rebate period from quarterly to monthly. Best price is reported to CMS quarterly for purposes of our calculation of the unit rebate amount for single source and innovator multiple source drugs. While Congress clearly intended that AMPs be reported and disclosed to States on a monthly basis, it did not establish any similar monthly use for best price or customary prompt pay discounts. For these reasons, we propose to interpret section 6001(b) of the DRA to require that manufacturers report only AMP to CMS on a monthly basis beginning January 1, 2007. To implement this provision, we would require in § 447.510(d) that manufacturers must submit monthly AMP to CMS not later than 30 days after each month. We would also require manufacturers to report quarterly AMP, best price, and customary prompt pay discounts on a quarterly basis. We propose that the monthly AMP will be calculated the same as the quarterly AMP, with the following exceptions. The time frame represented by the monthly AMP would be one calendar month instead of a calendar quarter and once reported, would not be subject to revision later than 30 days after each month. Because we recognize that industry pricing practices sometimes result in rebates or other price concessions being given by manufacturers to purchasers at the end of a calendar quarter, if the monthly AMP were calculated simply using sales in that month, these pricing practices might result in fluctuations between the AMP for the first two months and the AMP for the third month in a calendar quarter. In order to maximize the usefulness of the monthly AMP and minimize volatility in the prices, we propose allowing manufacturers to rely on estimates regarding the impact of their end-of-quarter rebates or other price concessions and allocate these rebates or other price concessions in the monthly AMPs reported to CMS throughout the quarter. We considered applying this same methodology to other cumulative rebates or other price concessions over longer periods of time, but are not certain that such rebates or other prices concessions could be allocated with respect to monthly AMP calculations. We invite comments on allowing the use of 12-month rolling average estimates of all lagged discounts for both the monthly and quarterly AMP. We also considered allowing manufacturers to calculate the monthly AMP based on updates of the most recent three-month period (i.e., a rolling three-month AMP). While this methodology may minimize volatility in the data, we believe it would be fairly complex for manufacturers to operationalize. We encourage comments on the appropriate methodology for calculating monthly AMP. Section 6001(b)(2)(C) of the DRA amended the confidentiality requirements at section 1927(b)(3)(D) of the Act by adding an exception for AMP disclosure through a Web site accessible to the public. The statute does not specify that this exception only applies to monthly AMP; therefore, we also propose to make the quarterly AMP publicly available. We note that the quarterly AMP would not necessarily be identical to the monthly AMP due to the potential differences in AMP from one timeframe to the next. Section 6001(d)(1) of the DRA modified section 1927(b)(3)(A)(iii) of the Act by adding a requirement that manufacturers report nominal prices for calendar quarters beginning on or after January 1, 2007 to the Secretary. To implement this provision, we propose to require that manufacturers report nominal price exception data to CMS on a quarterly basis. We further propose that nominal price exception data shall be reported as an aggregate dollar amount which includes all nominal price sales to the entities listed in § 447.508(a) of this subpart for the rebate period. Section 1927(b)(3)(C) of the Act describes penalties for manufacturers that provide false information or fail to provide timely information to CMS. In light of these requirements, we propose to require that manufacturers certify the pricing reports they submit to CMS in accordance with § 447.510. We propose to adopt the certification requirements established by the Medicare Part B Program for ASP in the interim final rule with comment period published on April 6, 2004. Each manufacturer's pricing reports would be certified by the manufacturer's Chief Executive Officer (CEO), Chief Financial Officer (CFO), or an individual who has delegated authority to sign for, and who reports directly to, the manufacturer's CEO or CFO. We propose that all product and pricing data, whether submitted on a quarterly or monthly basis, be submitted to CMS in an electronic format. When the Medicaid Drug Rebate Program was first implemented in 1991, electronic data transfer was one of three data submission options as the use of such electronic media was not yet as commonplace as it is today. Due to the new monthly data reporting requirements and additional quarterly data reporting requirements, we propose to require manufacturers to use one uniform data transmission format to transmit and collect these data. CMS will issue operational instructions to provide additional guidance regarding the new electronic data submission requirements. Aggregate Upper Limits of Payment—Section 447.512 We propose that the existing § 447.331 be revised and redesignated as a new § 447.512. We propose to revise subsection

(a)to clarify that the upper limit for multiple source drugs applies in the aggregate. We also propose to update several cross-references to provisions in subpart I. Upper Limits for Multiple Source Drugs—Section 447.514 We propose that the existing § 447.332 be revised in a new § 447.514. A. Upper Limits for Multiple Source Drugs Existing regulations at 42 CFR 447.331, 447.332 and 447.334 address upper limits for payment of drugs covered under the Medicaid program. We propose to redesignate existing regulations at §§ 447.331, 447.332, and 447.334 as new regulations at §§ 447.512, 447.514, and 447.516, respectively. Existing regulations at § 447.332(a)(1)(i) state that an upper limit for a multiple source drug may be established if all of the formulations of the drug approved by the FDA have been evaluated as therapeutically equivalent in the current edition of the FDA's publication, “Approved Drug Products with Therapeutic Equivalence Evaluations.” Section 1927(e)(4) of the Act, as amended by OBRA 90, expanded the criteria for multiple source drugs subject to FUL reimbursement. Specifically, the statute required CMS to establish an upper payment limit for each multiple source drug when there are at least three therapeutically and pharmaceutically equivalent multiple source drugs, regardless of whether all additional formulations are rated as such. Effective January 1, 2007, the DRA changed the requirement such that a FUL must be established for each multiple source drug for which the FDA has rated two or more products as therapeutically equivalent. Currently, if all formulations of a multiple source drug are identified as A-rated in the FDA's publication, “Approved Drug Products with Therapeutic Equivalence Evaluations,” at least two formulations must be listed in that publication for CMS to establish a FUL for that drug. If all formulations of a multiple source drug are not A-rated, there must be at least three A-rated versions of the drug listed in “Approved Drug Products with Therapeutic Equivalence Evaluations” for CMS to establish a FUL for the drug. If a product meets the FDA criteria described above, we confirm that at least three suppliers (i.e., manufacturers, wholesalers, re-packagers, re-labelers or any other entity from which a drug can be purchased) list the drug in published compendia of cost information for drugs available for sale nationally (e.g., Red Book, First DataBank, or Medi-Span). Then, using these pricing compendia, we select the lowest price (e.g., the average wholesale price, wholesale acquisition cost, or direct price) from among the A-rated formulations of a particular drug and apply the formula described in existing § 447.332 to determine the FUL for that drug. FUL lists and changes to those lists based on the methodology set forth in the statute and regulations are issued periodically through Medicaid program issuances and are posted on the CMS Web site. By the term, “therapeutically equivalent,” we mean drugs that are identified as A-rated in the current edition of the FDA's publication, “Approved Drug Products with Therapeutic Equivalence Evaluations” (including supplements or successor publications). We propose that the FUL will be established, as per section 1927(e)(4) of the Act, only using an “A” rated drug. However, we propose to continue our current practice of applying the FUL to all drug formulations, including those drug versions not proven to be therapeutically equivalent, (e.g., B-rated drugs). We believe it is appropriate to apply the FUL to B-rated drugs in order not to encourage pharmacies to substitute B-rated drugs to avoid the FUL in the case where B-rated drugs would be excluded from the FUL. Current regulation does not prohibit or exclude B-rated drugs from the FUL reimbursement. We propose revising the methodology we use to establish FULs for multiple source drugs based on the modifications made by the DRA. Specifically, sections 6001(a)(3) and

(4)of the DRA changed the definition of multiple source drug established in section 1927(k)(7)(A)(i) of the Act to mean, with respect to a rebate period, a covered outpatient drug for which there is at least one other drug product which is rated as therapeutically equivalent (under the FDA's most recent publication of “Approved Drug Products with Therapeutic Equivalence Evaluations”). Also, section 6001(a)(1) of the DRA changed the requirement for a FUL to be established for each multiple source drug for which the FDA has rated three or more products therapeutically and pharmaceutically equivalent to a requirement for a FUL when the FDA has established such a rating for two or more products. Therefore, we propose in § 447.514(a)(1)(ii) that a FUL will be set when at least two suppliers (e.g., manufacturers, wholesalers, re-packagers, or re-labelers) list the drug in a nationally available pricing compendia (e.g., Red Book, First DataBank, or Medi-Span). Existing regulations at § 447.332(b) specify that the agency's payments for multiple source drugs identified and listed must not exceed, in the aggregate, payment levels determined by applying, for each drug entity, a reasonable dispensing fee established by the agency, plus an amount that is equal to 150 percent of the published price for the least costly therapeutic equivalent (using all available national pricing compendia) that can be purchased by pharmacies in quantities of 100 tablets or capsules (or, if the drug is not commonly available in quantities of 100, the package size commonly listed) or, in the case of liquids, the commonly listed size. Section 6001(a)(2) of the DRA added section 1927(e)(5) to the Act that changed the formula used to establish the FUL for multiple source drugs. Effective January 1, 2007, the upper limit for multiple source drugs shall be established at 250 percent of the AMP (as computed without regard to customary prompt pay discounts extended to wholesalers) for the least costly therapeutic equivalent. The currently reported AMP is based on the nine-digit NDC and is specific only to the product code, combining all package sizes of the drug into the same computation of AMP. We propose to continue to use the AMP calculated at the nine-digit NDC for the FUL calculation. In accordance with the DRA amendments, we will no longer take the individual 11-digit NDC, and thereby the most commonly used package size into consideration when computing the FUL because the currently reported AMP does not differentiate among package sizes. We considered using the 11-digit NDC to calculate the AMP, which would require manufacturers to report the AMP at the 11-digit NDC for each package size and that doing so would offer other advantages to the program for FULs and other purposes. An AMP at the 11-digit NDC would allow us to compute a FUL based on the most common package size as specified in current regulations. We do not believe computing an AMP at the 11-digit NDC would be significantly more difficult than computing the AMP at the nine-digit NDC as the data from each of the 11-digit NDCs is combined into the current AMP. The AMP at the 11-digit NDC would also align with State Medicaid drug payments that are based on the package size. It would also allow us to more closely examine manufacturer price calculations and allow the States and the public to know the AMP for the drug for each package size. It would also allow 340B covered entities, which are entitled to buy drugs at a discount that is in part based on calculations related to AMP, to know what the pricing is for each package size, as 340B ceiling prices are established per package size. Calculating the AMP at the 11-digit NDC level permits greater transparency, and may increase accuracy and reduce errors for the 340B covered entities where prices are established for a package-size product rather than a per unit cost using the product's weighted average AMP. However, the legislation did not change the level at which manufacturers are to report AMP, and we find no evidence in the legislative history that the Congress intended that AMP should be restructured to collect it by 11-digit NDCs. We are proposing to use the currently reported 9-digit AMP for calculating the FUL. Changing the current method of calculating the AMP would require manufacturers to make significant changes to their reporting systems and have an unknown effect on the calculation of rebates in the existing Medicaid Drug Rebate Program. In State Medicaid payment systems that consider a number of different factors in deriving payment rates, we also believe it would offer minimal advantages. Furthermore, we expect that because the AMP is marked up 250 percent, the resultant reimbursement should be sufficient to reimburse the pharmacy for the drug regardless of the package size the pharmacy purchased and that to the extent it does have an impact, it would encourage pharmacies to buy the most economical package size. We specifically ask for comments on the alternative approach of using the 11-digit NDC to calculate the AMP. We will consider comments on the merits of using both approaches in calculating the AMP for the FUL. In computing the FUL, we propose that the monthly AMP submitted by the manufacturer will be used. Using the monthly AMP will provide for the timeliest pricing data and allow revisions to the FUL list on a monthly basis. It will also permit us to update the FULs on a timely basis in accordance with the provisions of section 1927(f)(1)(B) of the Act, wherein the Secretary, after receiving notification that a therapeutically equivalent drug product is generally available, shall determine within 7 days if that drug product should have a FUL. Section 6001(c)(1) of the DRA redefines AMP to exclude customary prompt pay discounts extended to wholesalers. Due to this change in the computation, and the requirement that monthly AMP first be reported as of January 1, 2007, we propose that a FUL update of drugs, using the new methodology first be published when the revised AMPs are available and processed. We propose to adopt additional criteria to ensure that the FUL will be set at an adequate price to ensure that a drug is available for sale nationally as presently provided in our regulations. When establishing a FUL, we propose to disregard the AMP of an NDC which has been terminated. The AMP of a terminated NDC will not be used to set the FUL beginning with the first day of the month after the actual termination date reported by the manufacturer. This refinement may not capture all outlier AMPs that would offset the availability of drugs at the FUL price. It is possible that a product that is not discontinued may be available on a limited basis at a very low price. As a further safeguard to ensure that a drug is nationally available at the FUL price and that a very low AMP is not used by us to set a FUL that is lower than the AMP for other therapeutically and pharmaceutically equivalent multiple source drugs, we propose to set the FUL based on the lowest AMP that is not less than 30 percent of the next highest AMP for that drug. That is to say, that the AMP of the lowest priced therapeutically equivalent drug will be used to establish the FUL, except in cases where this AMP is more than 70 percent below the second lowest AMP. In those cases, the second lowest AMP will be used in the FUL calculation. We propose to use this percentage calculation as a benchmark to prevent an outlier price from determining the FUL, but invite comments as to whether this percentage is an appropriate measure to use. We did consider other options, such as 60 percent below the next highest AMP so that at least drugs of two different manufacturers would be in the FULs group, but we were concerned that this percentage was insufficient to encourage competition where the cost of a particular drug was dropping rapidly. We also considered a test of a drug priced 90 percent below the next lowest priced drug, in line with how we look on nominal prices, as an indicator that the manufacturer was offering this drug on a not-for-profit basis. However, we note that nominal price relates to best price for some sales and it is unlikely a manufacturer would sell all of its drugs at this price. We welcome suggestions about other means to address outliers and whether outliers should be addressed at all. We are proposing an exception to the 30 percent carve-out policy when the FUL group only includes the innovator single source drug and the first new generic in the market, including an authorized generic. In this event, we would not apply the 30-percent rule as we believe the DRA intends that a FUL be set when new generic drugs become generally available so as to encourage greater utilization of a generic drug when the price is set less than its brand name counterpart. We invite comments from the public on all issues set forth in this subpart. We invite suggestions on how best to accomplish the goal of ensuring that the use of AMP in calculating the FUL will ensure that a drug is available nationally at the FUL price. Please submit data supporting your proposal when available. Upper Limits for Drugs Furnished as Part of Services—Section 447.516 We propose that the existing § 447.334 be redesignated as a new § 447.516. State Plan Requirements, Findings and Assurances—Section 447.518 We propose that the existing § 447.333 be redesignated as a new § 447.518. FFP: Conditions Relating to Physician-Administered Drugs—Section 447.520 Prior to the DRA, many States did not collect rebates on physician-administered drugs when they were not identified by NDC number because the NDC number is necessary for States to bill manufacturers for rebates. In its report, “Medicaid Rebates for Physician Administered Drugs” (April 2004, OEI-03-02-00660), the OIG reported that, by 2003, 24 States either required providers to bill using NDC numbers or identified NDC numbers using a Healthcare Common Procedure Coding System (HCPCS)-to-NDC crosswalk for physician-administered drugs in order to collect rebates. Four of the 24 States were able to collect rebates for all physician-administered drugs, both single source and multiple source drugs (one State only collected these rebates from targeted providers). Section 6002 of the DRA added sections 1927(a)(7) and 1903(i)(10)(C) to the Act to require that States collect rebates on certain physician-administered drugs in order for FFP to be available for these drugs. Section 1927(a)(7)(A) of the Act requires that, effective January 1, 2006, in order for FFP to be available, States must require the submission of utilization data for single source physician-administered drugs using HCPCS codes or NDC numbers. (HCPCS codes are numeric and alpha-numeric codes assigned by CMS to every medical or surgical supply, service, orthotic, prosthetic and generic or brand name drug for the purpose of reporting healthcare transactions for claims billing. Physician-administered drugs are assigned alpha-numeric HCPCS codes, and are commonly referred to as J-codes. However, physician-administered drugs are also coded using other letters of the alphabet. For this reason, we will refer to the coding system, HCPCS, as opposed to one set of alpha-numeric codes in our discussion of section 6002 requirements.) If States collect HCPCS codes for single source drugs, they can crosswalk these codes to NDC numbers because most HCPCS codes for single source drugs include only one NDC in order to collect rebates. Section 1927(a)(7)(C) of the Act requires that, beginning January 1, 2007, States must provide for the submission of claims data with respect to physician-administered drugs (both single source and multiple source drugs) using NDC numbers, unless the Secretary specifies that an alternative coding system can be used. The Secretary does not plan to specify an alternative coding system because we believe that NDC numbers are well established in the medical community and provide States the most useful information to collect rebates. Section 1927(a)(7)(B) of the Act requires the Secretary, by January 1, 2007, to publish a list of the 20 multiple source physician-administered drugs with the highest dollar volume dispensed under the Medicaid program. We propose that the list will be developed by the Secretary using data from the Medicaid Statistical Information System and published on the CMS Web site. Section 1927(a)(7)(B)(ii) of the Act (when read with other DRA amendments) requires that, effective January 1, 2008, in order for FFP to be available, States must provide for the submission of claims for physician-administered multiple source drugs using NDC numbers for those drugs with the highest dollar volume listed by the Secretary. We propose, for the purpose of this section, that the term “physician-administered drugs” be defined as covered outpatient drugs under section 1927(k)(2) of the Act (many are also covered by Medicare Part B) that are typically furnished incident to a physician's service. These drugs are usually injectable or intravenous drugs administered by a medical professional in a physician's office or other outpatient clinical setting. Examples include injectables: Lupron acetate for depot suspension (primarily used to treat prostate cancer), epoetin alpha (injectable drug primarily used to treat cancer), anti-emetic drugs (injectable drug primarily used to treat nausea resulting from chemotherapy), intravenous drugs primarily used to treat cancer (paclitaxel and docetaxel), infliximab primarily used to treat rheumatoid arthritis, and rituximab primarily used to treat non-Hodgkin's lymphoma. We believe that some oral self-administered drugs (administered in an outpatient clinical setting), such as oral anti-cancer drugs, oral anti-emetic drugs should also be included in the designation of physician-administered drugs consistent with Part B policy and sections 1861(s)(2)(Q) and

(T)of the Act. Section 1927(a)(7)(D) of the Act allows the Secretary to grant States extensions if they need additional time to implement or modify reporting systems to comply with this section. We are not proposing any criteria for reviewing these extension requests as we expect that most, if not all States will be able to meet the statutory deadlines for collection of NDC numbers on claims. Most States are already collecting rebates for single source drugs that are provided in a physician's office. For multiple source drugs, the States have nearly two years following enactment of the DRA before FFP would be denied for the 20 multiple source drugs specified by the Secretary as having the highest dollar volume. We expect that States will require physicians to submit all claims using NDC numbers, as using multiple billing systems would be burdensome for physicians and States. This will also advantage States because rebates will be collectible on all physician-administered drugs. For States not currently billing manufacturers for rebates on single source drugs, we believe that the Medicare Part B crosswalk may be helpful to crosswalk HCPCS codes to NDC numbers. This crosswalk may be found on the CMS Web site at *http://new.cms.hhs.gov/McrPartBDrugAvgSalesPrice/02_aspfiles.asp.* To implement the provisions set forth in section 6002, we propose a new § 447.520. In § 447.520(a), we would require States to require that claims for physician-administered drugs be submitted using codes that identify the drugs sufficiently to bill a manufacturer for rebates in order for the State to receive FFP. In § 447.520(b), we would require States to require providers to submit claims using NDC numbers. In § 447.520(c), we would allow States that require additional time to comply with the requirements of this section to apply to the Secretary for an extension. III. Collection of Information Requirements Under the Paperwork Reduction Act of 1995 (PRA), 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 the OMB, section 3506(c)(2)(A) of the PRA 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 each of these issues for the following sections of this document that contain information collection requirements: Requirements for Manufacturers (§ 447.510) Proposed § 447.510 states that a manufacturer must report, electronically, product and pricing information to CMS not later than 30 days after the end of the rebate period. In addition, customary prompt pay discounts and nominal prices must be reported quarterly. Detailed information pertaining to the manufacturer's reporting requirements is located under §§ 447.510(a), (b), (c), (d), and (e). The burden associated with these new requirements is the time and effort it would take for a drug manufacturer to gather product and pricing information and submit it to CMS in an electronic format. We estimate that these requirements would affect the approximately 550 drug manufacturers that currently participate in the Medicaid Drug Rebate Program. Our current reporting and recordkeeping hour burden for each manufacturer in the Medicaid Drug Rebate Program is 71 hours per quarter or 284 hours annually. We believe the new reporting requirements will require less than half of this time. Specifically, we believe it would take each manufacturer 31 hours per quarter or 124 hours annually to report additional new information to CMS. The total estimated burden on all drug manufacturers associated with the new requirements under § 447.510 is 68,200 annual hours. Section 447.510(f) requires a manufacturer to retain records for ten years from the date the manufacturer reports data to CMS for that rebate period. The ten-year time frame applies to a manufacturer's quarterly and monthly submissions of pricing data, as well as any revised quarterly pricing data subsequently submitted to CMS. As stated under § 447.510(f)(2), there are certain instances when records must be maintained beyond the ten-year period. While this requirement is subject to the PRA, the retention of quarterly data it is not a new requirement. While this requirement will now also apply to monthly AMP data, we believe a similar set of data is now retained to support the quarterly retention requirement. Therefore, we believe this regulation imposes no additional burden on the drug manufacturer. FFP: Conditions Relating to Physician-Administered Drugs. (§ 447.520) Section 447.520 requires providers, effective January 1, 2007, to submit claims to the State for physician-administered single source drugs and the 20 multiple source drugs identified by the Secretary using NDC numbers. Assuming all States impose this requirement, the burden associated with this requirement is the time and effort it would take for a physician's office, hospital outpatient department or other entity (e.g., non profit facilities) to include the NDC on claims submitted to the State. We estimate this requirement would affect an excess of 20,000 physicians, hospitals with outpatient departments and other entities that would submit approximately 3,910,000 claims annually. We believe this would take approximately 15 seconds per claim. We estimated the cost based on the average annual wage and benefits paid for office and administrative support services in 2006 of $21.14 per hour ( *http://www.bls.gov/news.release/pdf/ecec.pdf* ). The per claim cost would be under 9 cents. Section 447.520(c) allows States requiring additional time to comply with the requirements of this section to apply for an extension. The burden associated with this requirement is the time and effort it would take for each State to apply for a one-time extension. We estimate that it would take five hours for each State to apply for the extension; however, we believe that no State will apply. Therefore, we believe this requirement to be exempt as specified at 5 CFR 1320.3(c)(4). We have submitted a copy of this proposed rule to the OMB for its review of the information collection requirements described above. These requirements are not effective until they have been approved by the OMB. If you comment on these information collection and recordkeeping requirements, please mail copies directly to the following: Centers for Medicare & Medicaid Services, Office of Strategic Operations and Regulatory Affairs, Division of Regulations Development, Attn: Melissa Musotto, [CMS-2238-P], Room C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850; and Office of Information and Regulatory Affairs, Office of Management and Budget, Room 10235, New Executive Office Building, Washington, DC 20503, Attn: Katherine Astrich, CMS Desk Officer, CMS-2238-P, *katherine_astrich@omb.eop.gov.* Fax

(202)395-6974. IV. Response to Comments 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” February 20, 2007, and, when we proceed with a subsequent document, we will respond to the comments in the preamble to that document. V. Regulatory Impact Analysis [If you choose to comment on issues in this section, please include the caption “Impact Analysis” at the beginning of your comments]. A. Overall Impact We have examined the impacts of this rule as required by Executive Order 12866 (September 1993, Regulatory Planning and Review), the Regulatory Flexibility Act

(RFA)(September 19, 1980, Pub. L. 96-354), section 1102(b) of the Act, the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), Executive Order 13132, and the Congressional Review Act (CRA, 5 U.S.C. 804(2)). Executive Order 12866 (as amended by Executive Order 13258, which merely reassigns responsibility of duties) directs 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). We believe this rule will have an economically significant effect. We believe the rule would save $8.4 billion over the next five years ($4.93 billion Federal savings and $3.52 billion State savings as shown in the table below). This figure represents a 5.6 percent reduction in total Medicaid drug expenditures in Federal fiscal years 2007-2011. We consider this proposed rule to be a major rule for purposes of the CRA. State and Federal Savings Over 5 Years [In millions] DRA section and provision FFY Federal State 2007 2008 2009 2010 2011 2007-11 Total savings Section 6001—Federal Upper Payment Limits and Other Provisions Federal $465 $750 $1,075 $1,155 $1,250 $4,695 State 330 535 765 825 890 3,345 Total 795 1,285 1,840 1,980 2,140 8,040 Section 6002—Rebates on Physician-Administered Drugs Federal 18 19 20 22 24 103 State 13 14 15 16 18 76 Total 31 33 35 38 42 179 Section 6003—Authorized Generics in Rebate Best Price Federal 10 25 28 32 36 131 State 7 19 21 24 27 98 Total 17 44 49 56 63 229 Total Savings for FFY Federal 493 794 1,123 1209 1310 4,929 State 350 568 801 865 935 3,519 Total 843 1,362 1,924 2074 2245 8,448 All savings estimates were developed by the Office of the Actuary in CMS. We note that the Congressional Budget Office, in its estimates of the budgetary effects of these provisions of the DRA, reached an almost identical estimate for these years, about $4.8 billion in Federal outlay reduction compared to the CMS estimate of $4.9 billion. Savings estimates for section 6001 of the DRA—FULs and other provisions—were derived from simulations of the new FULs performed using price and utilization data from the Medicaid Drug Rebate Program combined with generic group codes from First DataBank. Percent savings from these simulations were applied to projected Medicaid prescription drug spending developed for the President's fiscal year 2007 budget. Savings were phased in over three years to allow for implementation lags. On the previous chart, the estimate for FFY 2007 through FFY 2010 includes $5 million for the retail price survey. The savings estimates for section 6002 of the DRA—rebates on physician-administered drugs—are based on the 2004 OIG report, “Medicaid Rebates for Physician-Administered Drugs.” A key finding of the report is the amount of additional rebates that could have been collected in 2001 if all States had collected rebates on physician-administered drugs. This amount was then projected forward using historical data (2001-2005) and projections consistent with the 2007 President's Budget forecast for Medicaid spending to develop the total estimated impact. The savings estimates for section 6003 of the DRA—Reporting of authorized generics for Medicaid rebates—are based on the consensus of Medicaid experts and the review of available and relevant data. After estimating the impact of the proposal in the first year of implementation, the total impact was projected using assumptions consistent with the 2007 President's Budget forecast for Medicaid spending as well as adjustments given that the proposal is limited to a subset of the prescription drug market. None of the estimates include Federal or State administrative costs. We believe these costs would be small as they involve changes in work processes rather than new activities. The resulting program savings would be many times these costs. The RFA requires agencies to analyze options for regulatory relief of small businesses and other small entities if a proposed or final rule would have a “significant impact on a substantive number of small entities.” For purposes of the RFA, small entities include small businesses, non-profit organizations, and small governmental jurisdictions. Individuals and States are not included in the definition of a small entity. For purposes of the RFA, three types of small business entities are potentially affected by this regulation. They are small pharmaceutical manufacturers participating in the Medicaid Drug Rebate Program, small retail pharmacies, and physicians and other practitioners (including small hospitals or other entities such as non-profit providers) that bill Medicaid for physician-administered drugs. We will discuss each type of business in turn. According to the Small Business Administration's

(SBA)size standards, drug manufacturers are small businesses if they have fewer than 500 employees ( *http://www.sba.gov/size/sizetable2002.html* ). Approximately 550 drug manufacturers participate in the Medicaid Drug Rebate Program. We believe that most of these manufacturers are small businesses. We anticipate that this rule would have a small impact on small drug manufacturers. The rule would require all drug manufacturers participating in the Medicaid Drug Rebate Program to submit pricing information

(IRFA)for purposes of compliance with the RFA. According to the SBA's size standards, physician practices are small businesses if they have revenues of $9 million or less in 1 year ( *http://www.sba.gov/size/sizetable2002.html* ). Nearly all of the approximately 20,000 physician's practices that specialize in oncology, rheumatology and urology may experience some administrative burden due to new requirements that claims include the NDC for drugs administered by these physicians. These practices would be required to transfer the NDC code for drugs administered by a physician to the electronic or paper claim. We estimate that 3,910,000 claims would be submitted a year. We derived this number by multiplying the 23 million annual Part B claims by the percentage

(17)of Medicare beneficiaries who are also Medicaid beneficiaries. We believe most of the Medicaid beneficiaries who receive physician-administered drugs are also in Medicare. We then assume that it would take 15 seconds per claim. Multiplying 3,910,000 by 15 seconds equals 58,650,000 seconds or 16,292 hours (58,650,000/3600 seconds per hour). We multiplied 16,292 hours by the hourly wage and benefit rate of $21.14 for office and administrative staff published by the Department of Labor, Bureau of Labor Statistics for March 2006 to estimate the annual cost to be $344,000. We divided the total cost of $344,000 by the 3,910,000 claims to estimate the cost per claim would be under 9 cents. Calculated another way, the annual cost per physician practice would be under $20 ($344,000 divided by 20,000 equals about $17). Accordingly, we believe that there is no “significant impact” on these physicians. According to the SBA's size standards, hospitals are small businesses if they have yearly revenue of $31.5 million or less ( *http://www.sba.gov/size/sizetable2002.html* ). As with physician practices, outpatient units of hospitals would need to include NDCs on claims for physician-administered drugs. Outpatient hospital claims for physician-administered drugs are included in the 3,910,000 annual total claims discussed in the previous paragraph. However, we believe that these costs could be reduced or eliminated with a one-time systems change to capture this code in the billing system. In any case, the total cost of this change to hospitals would be small, and we believe that there is no “significant impact” on hospitals. Other small entities such as non-profit providers may also be affected by this provision. We do not have data to quantify how many of the 3,910,000 annual total claims are submitted by these entities. In any case, the cost would be under 9 cents per claim. Section 1102(b) of the Act requires us to prepare an RIA 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 603 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a Core-Based Statistical Area and has fewer than 100 beds. There are approximately 700 small rural hospitals that meet this definition. We do not know how many of these hospitals have outpatient departments. However, we believe that this rule would not have a significant impact on small rural hospitals because the only provision that would affect small rural hospitals is the requirement for those hospitals to include the NDC on bills for drugs administered by physicians in the outpatient department. As the national annual cost of this provision is estimated at $344,000, the impact on small rural hospitals would be minimal. Section 202 of the Unfunded Mandates Reform Act of 1995 also requires that agencies assess anticipated costs and benefits before issuing any rule whose mandates on States and private entities require spending in any one year of $100 million in 1995 dollars, updated annually for inflation. That threshold level is currently approximately $125 million. This proposed rule would mandate that drug manufacturers provide information on drug prices, and that these data be used in calculating FULs. However, our estimate of costs to manufacturers (see next section) falls far below the threshold and we anticipate this rule would save States $3.5 billion over the 5-year period from October 1, 2006 through September 30, 2011. 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 requirement costs on State and local governments, preempts State law, or otherwise has Federalism implications. Since this proposed rule would impose only minimal new administrative burden on States and yield substantial savings to States, we believe that these costs can be absorbed by States from the substantial savings they would accrue. B. Anticipated Effects 1. Effects on Drug Manufacturers As previously indicated, approximately 550 drug manufacturers participate in the Medicaid Drug Rebate program. The rule would require all drug manufacturers participating in the Medicaid Drug Rebate Program to submit pricing information

(AMP)on each of their drug products on a monthly basis. Currently drug manufacturers are required to submit similar information quarterly. In addition, drug manufacturers would be required to submit two additional pricing data elements—customary prompt pay discounts and nominal prices—on each of their drugs on a quarterly basis. We believe that drug manufacturers currently have these data; therefore, the new requirement would not require new data collection. Rather it simply requires that existing information be reported to CMS. For this reason, we believe the burden to be minimal. The estimated startup burden to the manufacturers is $27.5 million for a one-time systems upgrade, or $50,000 for each of the 550 manufacturers that participate in the Medicaid Drug Rebate Program. To estimate the ongoing burden, we expect that the manufacturers would each spend 208 hours annually (114,400 total hours annually) in complying with these requirements. The estimated annual operational expenses are $5.7 million, which is 114,400 total annual hours multiplied by $37.50 per labor hour in wages and benefits, or $4.3 million in labor burden, plus $1.4 million in technical support. In addition, the proposed regulation would affect the level of rebates due from manufacturers. The DRA provides that customary prompt pay discounts be excluded from AMP. This would result in higher AMPs and, consequently, higher rebate payments. We have been told informally by manufacturers that customary prompt pay discounts are generally about two percent. We have found no independent source to confirm this percentage. We also do not know what percent of sales qualify for customary prompt pay discounts. Based on this limited information, we believe that the removal of customary prompt pay discounts would cost manufacturers up to $160 million (2 percent of $8 billion in rebate payments annually). In this proposed regulation, we also would remove sales to nursing home pharmacies from AMP. We have been told by industry representatives that nursing home pharmacies receive larger discounts than other sectors, thus resulting in an increase in AMP. However, because we have no independent data on the cost of drugs to nursing home pharmacies, we cannot quantify the effect of this provision other than to say that we believe it would increase rebates owed by drug manufacturers. 2. Effects on State Medicaid Programs States share in the savings from this rule. As noted in the table above, we estimate five-year State savings of over $3.5 billion. State administrative costs associated with this regulation are minor as States currently pay based on a FUL for drugs subject to that limit, determine their drug reimbursement rates, and collect claims information on physician-administered drugs. 3. Effects on Retail Pharmacies Retail pharmacies would be affected by this regulation, as the law will result in lower FULs for most drugs subject to the limits, thus reducing Medicaid payments to pharmacies for drugs. The revision to the FULs would generally reduce those limits and, thereby, reduce Medicaid payment for drugs subject to the limits. The savings for section 6001 of the DRA reflect this statutory change. The other provisions concerning payment for drugs would provide States two new data points to use to set payment rates. Beginning in January 2007, States may use AMP and retail survey prices in their payment methodologies. The savings for section 6001 of the DRA do not reflect decreases to State payments for drugs not on the FUL list that may result if States change their payment methodologies. The savings to the Medicaid program would largely be realized through lower payments to pharmacies. As shown earlier in this analysis, the annual effect of lower FULs and related changes will likely reduce pharmacy revenues by about $800 million in 2007, increasing to a $2 billion reduction annually by 2011. These reductions, while large in absolute terms, represent only a small fraction of overall pharmacy revenues. According to recent data summarized by the National Association of Chain Drug Stores ( *http://www.nacds.org/wmspage.cfm?parm1=507* ), total retail prescription sales in the United States, including chain drug stores, independent drug stores, supermarket, and mail order, totaled about $230 billion in 2005. Assuming, conservatively, that sales will rise at only five percent a year, 2007 sales would be over $250 billion and 2011 sales well over $300 billion. Thus, the effect of this proposed rule would be to reduce retail prescription drug revenues by less than one percent, on average. Actual revenue losses would be even smaller for two reasons. First, almost all of these stores sell goods other than prescription drugs, and overall sales average more than twice as much as prescription drug sales. Second, pharmacies have the ability to mitigate the effects of the proposed rule by changing purchasing practices. The 250 percent FUL will typically be lower than the prices available to pharmacies only when one or more very low cost generic drugs are included in the calculation. Pharmacies will often be able to switch their purchasing to the lowest cost drugs and mitigate the effect of the sales loss by lowering costs. Although it is clear that the effects will be small on the great majority of pharmacies, whether chain or independent, we are unable to estimate quantitatively effects on “small” pharmacies, particularly those in low-income areas where there are high concentrations of Medicaid beneficiaries. We request any information that may help us better assess those effects before we make final decisions. Because of these uncertainties, we have concluded that this proposed rule is likely to have a “significant impact” on some pharmacies. 4. Effects on Physicians This regulation would affect physician practices that provide and bill Medicaid for physician-administered drugs. This includes about 20,000 physicians as well as hospitals with outpatient departments. The effect on physicians is the same as discussed in section A—Overall Impact above for small businesses because all or nearly all physician offices are small businesses. 5. Effects on Hospitals This regulation would affect hospitals with outpatient departments that provide and bill Medicaid for physician-administered drugs. As discussed above, hospitals with outpatient departments would need to include the NDC on claims for physician-administered drugs. We believe this would need to be done manually or would require a one-time systems change. We believe the cost of adding the NDC to each claim would be minimal. We are not able to estimate the cost to make this change. We also note that CMS has encouraged States to collect information on physician-administered drug claims to enable them to collect rebates. Some States have required that NDCs be included on claims and others are in the process of doing so. We expect that, in the absence of the DRA requirement, the number of States requiring NDCs on these claims would have increased. 6. Effects on Small Business Entities As previously discussed, for purposes of the RFA, three types of small business entities are potentially affected by this regulation. This regulation would affect small pharmaceutical manufacturers participating in the Medicaid Drug Rebate Program, small retail pharmacies, and physicians and other practitioners (including small hospitals or other entities such as non-profit providers). According to the SBA's size standards, we believe that most of the 550 pharmaceutical manufacturers in the Medicaid Drug Rebate Program are small businesses. We previously indicated that this rule impacts drug manufacturers by requiring them to submit pricing information

(AMP)on each of their drug products on a monthly basis with an estimated impact that is minimal. The rule would also increase the amount of drug rebates that manufacturers would pay as a result of removing customary prompt pay discounts and nursing home sales from AMP, which is used in the rebate calculation. The exclusion of customary prompt pay discounts would cost manufacturers up to $160 million (2 percent of $8 billion in rebate payments annually). Additional detail regarding the effects of this proposed rule for the determination of drug prices and calculation of drug rebate liability for drug manufacturers is described in the preamble under “Definition of Retail Pharmacy Class of Trade and Determination of AMP.” We estimate that 18,000 small retail pharmacies would be affected by this regulation. However, we are unable to specifically estimate quantitative effects on small retail pharmacies, particularly those in low income areas where there are high concentrations of Medicaid beneficiaries. We request any information that may help us better assess those effects before we make final decisions. The preamble under “Definition of Retail Pharmacy Class of Trade and Determination of AMP” provides additional information regarding the entities included in the retail pharmacy class of trade and the discounts or other price concessions for drugs provided to the retail pharmacy class of trade. As shown earlier, the annual effect of lower FULs and related changes will likely reduce overall pharmacy revenues by about $800 million in 2007, increasing to a $2 billion reduction annually by 2011. Nearly all of the approximately 20,000 physician practices that specialize in oncology, rheumatology and urology are considered small businesses. The rule would impose some administrative burden on these practices due to new requirements that claims include the NDC for physician-administered drugs. As shown earlier, we believe that the annual cost per claim would be under 9 cents and the annual cost per physician practice would be under $20. Accordingly, we believe that there is no significant impact on these physician practices. We also previously indicated that this rule would not have a significant impact on the operations of small rural hospitals. There are approximately 700 small rural hospitals that meet the small business standard. As previously discussed, small rural hospitals would need to include the NDC on claims for physician-administered drugs through outpatient departments. We do not have data to quantify how many of the overall claims for physician-administered drugs are submitted by these 700 small rural hospitals. In any case, the cost would be under 9 cents per claim. The following chart depicts the number of small entities and the estimated economic impact for each category of small entity affected by this rule. Small entity Number affected by rule Estimated economic impact Pharmaceutical Manufacturers in Medicaid Drug Rebate Program 550 $160 million (2 percent of $8 billion) higher rebates result from removal of customary prompt pay discounts from rebate calculations. Independent cost data not available for excluded nursing home drug sales that are expected to increase rebate cost. Small Retail Pharmacies 18,000 Reduces overall pharmacy revenues by about $800 million in 2007 increasing to $2 billion annually by 2011. Unable to quantitatively estimate effects on small retail pharmacies, particularly in low income areas. Physicians in their Offices, Hospital Outpatient Settings or Other Entities (e.g., Non-profit Facilities) that Specialize in Oncology, Rheumatology and Urology 20,000 Under 9 cents per claim to enter NDC number. About $17 annual cost per physician practice to enter NDC number on claims for physician-administered drugs. Total estimated impact is $344,000. Small Rural Hospitals 700 Minimal impact. C. Alternatives Considered We considered a number of different policies and approaches during the development of the proposed rule. With regard to the definition of AMP, we considered one definition for quarterly AMP and a different definition for monthly AMP. However, we believe the better reading of statute is for AMP to be defined the same way for quarterly or monthly reporting. We also considered redefining the entities included in “retail pharmacy class of trade” for purposes of the definition of AMP. Options considered included whether to include or exclude sales to nursing home pharmacies, PBMs, and mail order pharmacies. We chose to propose to exclude sales to nursing home pharmacies. We considered retaining the current base date AMP rather than allowing manufacturers to recalculate their base date AMP to reflect the revised definition of AMP. However, we decided that retaining the current base date AMP is unwarranted because it would create a financial burden on manufacturers that was not intended by section 6001 of the DRA. We considered several options concerning the timeframe to be covered by the monthly AMP. We considered requiring manufacturers to report the same quarterly AMP three times over the quarter, and reflect any changes to the quarterly AMP vis-a -vis the monthly reports. However, we did not believe that this timeframe would provide useful pricing information to States. We also considered establishing a rolling three-month period for the monthly AMP. While this may yield updated pricing information, we felt this would be too burdensome for manufacturers to implement. We considered proposing to extend the nominal price exclusion from best price to other facilities or entities that the Secretary determines to be safety net providers to which sales of drugs at nominal prices would be appropriate. However, we were concerned that expanding the list of entities eligible for nominal pricing would drive up best price, which would effectively lower the amount of rebates manufacturers pay for Medicaid drugs. We considered using a non-weighted AMP, which is specific to a package size, to establish the FUL. However, we decided to continue to base AMP on all package sizes for each drug. We did not find any indication that the Congress intended to change how package size is used for AMP. Such a change would be burdensome on manufacturers and would have no impact on how States pay for drugs. We considered not making an exception to using the lowest AMP for drugs in a FUL group to establish the upper limit for the group. However, we were concerned that low outlier prices might result in only one drug being available at or near the FUL price and that a sufficient supply of the drug to meet the national Medicaid need may not be available at that price. As discussed extensively earlier in the preamble, we believe that mail order sales and the activities of PBMs are an important part of the wholesale and retail markets for drugs. They reflect the realities of today's marketplace for consumers of prescription drugs. However, there are difficulties in dealing with both segments of the market and we specifically request comments on ways to handle these components of the marketplace. We also welcome comments on any options that would maintain the overall savings of the proposed rule, appropriately encompass the entire retail marketplace, and reduce burden on small pharmacies. D. Other Requirements in the Regulatory Flexibility Act The RFA lists five general requirements for an IRFA and four categories of burden-reducing alternatives. We know of no relevant Federal rules that duplicate, overlap, or conflict with the proposed rule. The preceding analysis, together with the rest of this preamble, addresses all these general requirements. We have not, however, addressed the various categories of burden reduction listed in the RFA as appropriate for IRFAs. These alternatives, such as an exemption from coverage for small entities, establishment of less onerous requirements for small entities, or use of performance rather than design standards, simply do not appear to apply in a situation where uniform payment standards are being established. However, we welcome comments with suggestions for improvements we can make, consistent with the statute, to minimize any unnecessary burdens on pharmacies or other affected entities. E. Accounting Statement As required by OMB's Circular A-4 (available at *http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf* ), in the table below, we have prepared an accounting statement showing the classification of the expenditures associated with the provisions of this proposed rule. This table provides our best estimate of the decreases in Medicaid payments under sections 6001 “ 6003 of the DRA. All expenditures are classified as transfers to the Federal and State Medicaid programs from retail pharmacies and drug manufacturers. Accounting Statement: Classification of Estimated Expenditures, From CY 2007 to CY 2011 [In millions/year] Category Transfers Discount rate (percent) From whom to whom? Federal Annualized Monetized Transfers $957.8 7 Retail Pharmacies and Drug Manufacturers to the Federal Government. 973.6 3 Other Annualized Monetized Transfers 683.8 7 Retail Pharmacies and Drug Manufacturers to the State Governments. 695.1 3 F. Conclusion We estimate savings from this regulation of $8.4 billion over five years, $4.9 billion to the Federal Government and $3.5 billion to the States. Most of these savings result from a change in how the FULs on multiple source drugs are calculated and from a change in how authorized generic drugs are treated for AMP and best price. The majority of the savings would come from lower reimbursement to retail pharmacies. The provision on physician-administered drugs does not change the legal liability of drug manufacturers for paying rebates but would make it easier for States to collect these rebates. While the effects of this regulation are substantial, they are a result of changes to the law. In accordance with the provisions of Executive Order 12866, this regulation was reviewed by the OMB. List of Subjects in 42 CFR Part 447 Accounting, Administrative practice and procedure, Drugs, Grant programs—health, Health facilities, Health professions, Medicaid, Reporting and recordkeeping requirements, Rural areas. For the reasons set forth in the preamble, the Centers for Medicare & Medicaid Services propose to amend 42 CFR chapter IV as set forth below: PART 447—PAYMENTS FOR SERVICES 1. The authority citation for part 447 continues to read as follows: Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 1302). Subpart F—Payment Methods for Other Institutional and Non-institutional Services 2. Section 447.300 is revised to read as follows: § 447.300 Basis and purpose. In this subpart, § 447.302 through § 447.325 and § 447.361 implement section 1902(a)(30) of the Act, which requires that payments be consistent with efficiency, economy and quality of care. Section 447.371 implements section 1902(a)(13)(F) of the Act, which requires that the State plan provide for payment for rural health clinic services in accordance with regulations prescribed by the Secretary. § 447.301 [Removed] 3. Section 447.301 is removed. § 447.331 [Removed] 4. Section 447.331 is removed. § 447.332 [Removed] 5. Section 447.332 is removed. § 447.333 [Removed] 6. Section 447.333 is removed. § 447.334 [Removed] 7. Section 447.334 is removed. 8. Subpart I is revised to read as follows: Subpart I—Payment for Drugs Sec. 447.500 Basis and purpose. 447.502 Definitions. 447.504 Determination of AMP. 447.505 Determination of best price. 447.506 Authorized generic drugs. 447.508 Exclusion from best price of certain sales at a nominal price. 447.510 Requirements for manufacturers. 447.512 Drugs: Aggregate upper limits of payment. 447.514 Upper limits for multiple source drugs. 447.516 Upper limits for drugs furnished as part of services. 447.518 State plan requirements, findings and assurances. 447.520 FFP: Conditions relating to physician-administered drugs. Subpart I—Payment for Drugs § 447.500 Basis and purpose.

(a)*Basis.* This subpart—

(1)Interprets those provisions of section 1927 of the Act that set forth requirements for drug manufacturers' calculating and reporting average manufacturer prices

(AMPs)and that set upper payment limits for covered outpatient drugs.

(2)Implements section 1903(i)(10) of the Act with regard to the denial of Federal financial participation

(FFP)in expenditures for certain physician-administered drugs.

(3)Implements section 1902(a)(54) of the Act with regard to a State plan that provides covered outpatient drugs.

(b)*Purpose.* This subpart specifies certain requirements in the Deficit Reduction Act of 2005 and other requirements pertaining to Medicaid payment for drugs. § 447.502 Definitions. *Bona fide service fees* mean fees paid by a manufacturer to an entity, that represent fair market value for a bona fide, itemized service actually performed on behalf of the manufacturer that the manufacturer would otherwise perform (or contract for) in the absence of the service arrangement, and that are not passed on in whole or in part to a client or customer of an entity, whether or not the entity takes title to the drug. *Brand name drug* means a single source or innovator multiple source drug. *Bundled sale* means an arrangement regardless of physical packaging under which the rebate, discount, or other price concession is conditioned upon the purchase of the same drug or drugs of different types (that is, at the nine-digit National Drug Code

(NDC)level) or some other performance requirement (for example, the achievement of market share, inclusion or tier placement on a formulary), or, where the resulting discounts or other price concessions are greater than those which would have been available had the bundled drugs been purchased separately or outside the bundled arrangement. For bundled sales, the discounts are allocated proportionally to the dollar value of the units of each drug sold under the bundled arrangement. For bundled sales where multiple drugs are discounted, the aggregate value of all the discounts should be proportionately allocated across all the drugs in the bundle. *Consumer Price Index—Urban (CPI-U)* means the index of consumer prices developed and updated by the U.S. Department of Labor. It is the CPI for all urban consumers (U.S. average) for the month before the beginning of the calendar quarter for which the rebate is paid. *Dispensing fee* means the fee which—

(1)Is incurred at the point of sale and pays for costs in excess of the ingredient cost of a covered outpatient drug each time a covered outpatient drug is dispensed;

(2)Includes only pharmacy costs associated with ensuring that possession of the appropriate covered outpatient drug is transferred to a Medicaid recipient. Pharmacy costs include, but are not limited to, any reasonable costs associated with a pharmacist's time in checking the computer for information about an individual's coverage, performing drug utilization review and preferred drug list review activities, measurement or mixing of the covered outpatient drug, filling the container, beneficiary counseling, physically providing the completed prescription to the Medicaid beneficiary, delivery, special packaging, and overhead associated with maintaining the facility and equipment necessary to operate the pharmacy; and

(3)Does not include administrative costs incurred by the State in the operation of the covered outpatient drug benefit including systems costs for interfacing with pharmacies. *Estimated acquisition cost* means the agency's best estimate of the price generally and currently paid by providers for a drug marketed or sold by a particular manufacturer or labeler in the package size of drug most frequently purchased by providers. *Innovator multiple source drug* means a multiple source drug that was originally marketed under an original new drug application

(NDA)approved by the Food and Drug Administration (FDA). It includes a drug product marketed by any cross-licensed producers or distributors operating under the NDA and a covered outpatient drug approved under a product license approval, establishment license approval or antibiotic drug approval. *Manufacturer* means any entity that possesses legal title to the NDC for a covered drug or biological product and—

(1)Is engaged in the production, preparation, propagation, compounding, conversion, or processing of covered outpatient drug products, either directly or indirectly by extraction from substances of natural origin, or independently by means of chemical synthesis, or by a combination of extraction and chemical synthesis; or

(2)Is engaged in the packaging, repackaging, labeling, relabeling, or distribution of covered outpatient drug products and is not a wholesale distributor of drugs or a retail pharmacy licensed under State law.

(3)With respect to authorized generic products, the term “manufacturer” will also include the original holder of the NDA.

(4)With respect to drugs subject to private labeling arrangements, the term “manufacturer” will also include the entity that does not possess legal title to the NDC. *Multiple source drug* means, with respect to a rebate period, a covered outpatient drug for which there is at least one other drug product which—

(2)Is pharmaceutically equivalent and bioequivalent, as determined by the FDA; and

(3)Is sold or marketed in the United States during the rebate period. *National drug code (NDC)* means the 11-digit numerical code maintained by the FDA that indicates the labeler, product, and package size, unless otherwise specified in this part as being without respect to package size ( *i.e.* , the nine-digit numerical code). *National rebate agreement* means the rebate agreement developed by CMS and entered into by CMS on behalf of the Secretary or his designee and a manufacturer to implement section 1927 of the Act. *Nominal price* means a price that is less than 10 percent of the AMP in the same quarter for which the AMP is computed. *Rebate period* means a calendar quarter. *Single source drug* means a covered outpatient drug that is produced or distributed under an original NDA approved by the FDA, including a drug product marketed by any cross-licensed producers or distributors operating under the NDA. It also includes a covered outpatient drug approved under a product license approval, establishment license approval, or antibiotic drug approval. § 447.504 Determination of AMP.

(a)*AMP* means, with respect to a covered outpatient drug of a manufacturer (including those sold under an NDA approved under section 505(c) of the Federal Food, Drug, and Cosmetic Act (FFDCA)) for a calendar quarter, the average price received by the manufacturer for the drug in the United States from wholesalers for drugs distributed to the retail pharmacy class of trade. AMP shall be determined without regard to customary prompt pay discounts extended to wholesalers. AMP shall be calculated to include all sales and associated discounts and other price concessions provided by the manufacturer for drugs distributed to the retail pharmacy class of trade unless the sale, discount, or other price concession is specifically excluded by statute or regulation or is provided to an entity specifically excluded by statute or regulation.

(b)*Average unit price* means a manufacturer's quarterly sales included in AMP less all required adjustments divided by the total units sold and included in AMP by the manufacturer in a quarter.

(c)*Customary prompt pay discount* means any discount off the purchase price of a drug routinely offered by the manufacturer to a wholesaler for prompt payment of purchased drugs within a specified time.

(d)*Net sales* means quarterly gross sales revenue less cash discounts allowed and all other price reductions (other than rebates under section 1927 of the Act or price reductions specifically excluded by statute or regulations) which reduce the amount received by the manufacturer.

(e)*Retail pharmacy class of trade* means any independent pharmacy, chain pharmacy, mail order pharmacy, pharmacy benefit manager (PBM), or other outlet that purchases, or arranges for the purchase of, drugs from a manufacturer, wholesaler, distributor, or other licensed entity and subsequently sells or provides the drugs to the general public.

(f)*Wholesaler* means any entity (including a pharmacy, chain of pharmacies, or PBM) to which the manufacturer sells, or arranges for the sale of, the covered outpatient drugs, but that does not relabel or repackage the covered outpatient drug.

(g)*Sales, rebates, discounts, or other price concessions included in AMP.* Except with respect to those sales identified in paragraph

(h)of this section, AMP for covered outpatient drugs shall include—

(1)Sales to wholesalers, except for those sales that can be identified with adequate documentation as being subsequently sold to any of the excluded entities as specified in paragraph

(h)of this section;

(2)Sales to other manufacturers who act as wholesalers and do not repackage/relabel under the purchaser's NDC, including private labeling agreements;

(3)Sales (direct and indirect) to hospitals, where the drug is used in the outpatient pharmacy;

(4)Sales at nominal prices to any entity except a covered entity described in section 340B(a)(4) of the Public Health Service Act (PHSA), an intermediate care facility for the mentally retarded (ICF/MR) providing services as set forth in § 440.150 of this chapter, or a State-owned or operated nursing facility providing services as set forth in § 440.155 of this chapter;

(5)Sales to retail pharmacies including discounts or other price concessions that adjust prices either directly or indirectly on sales of drugs to the retail pharmacy class of trade;

(6)Discounts, rebates, or other price concessions to PBMs associated with sales for drugs provided to the retail pharmacy class of trade;

(7)Sales directly to patients;

(8)Sales to outpatient clinics;

(9)Sales to mail order pharmacies;

(10)Rebates, discounts, or other price concessions (other than rebates under section 1927 of the Act or as otherwise specified in the statute or regulations) associated with sales of drugs provided to the retail pharmacy class of trade;

(11)Manufacturer coupons redeemed by any entity other than the consumer that are associated with sales of drugs provided to the retail pharmacy class of trade; and

(12)Sales and associated rebates, discounts and other price concessions under the Medicare Part D, Medicare Advantage Prescription Drug Program (MA-PD), State Children's Health Insurance Program (SCHIP), State pharmaceutical assistance programs (SPAPs), and Medicaid programs that are associated with sales of drugs provided to the retail pharmacy class of trade (except for rebates under section 1927 of the Act or as otherwise specified in the statute or regulations).

(h)*Sales, rebates, discounts, or other price concessions excluded from AMP.* AMP excludes—

(1)Any prices on or after October 1, 1992, to the Indian Health Service (IHS), the Department of Veterans Affairs (DVA), a State home receiving funds under 38 U.S.C. 1741, the Department of Defense (DoD), the Public Health Service (PHS), or a covered entity described in subsection (a)(5)(B) of the Act (including inpatient prices charged to hospitals described in section 340B(a)(4)(L) of the PHSA);

(2)Any prices charged under the Federal Supply Schedule

(FSS)of the General Services Administration (GSA);

(3)Any depot prices (including Tricare) and single award contract prices, as defined by the Secretary, of any agency of the Federal Government;

(4)Sales to hospitals (direct and indirect), where the drug is used in the inpatient setting;

(5)Sales to health maintenance organizations (HMOs), including managed care organizations (MCOs);

(6)Sales to long-term care facilities, including nursing home pharmacies;

(7)Sales to wholesalers where the drug is distributed to the non-retail pharmacy class of trade;

(8)Sales to wholesalers or distributors where the drug is relabeled under the wholesalers' or distributors' NDC number;

(9)Manufacturer coupons redeemed by a consumer;

(10)Free goods, not contingent upon any purchase requirement;

(11)Bona fide service fees;

(12)Customary prompt pay discounts extended to wholesalers; and

(13)Returned goods when returned in good faith.

(i)*Further clarification of AMP calculation.*

(1)AMP includes cash discounts, free goods that are contingent on any purchase requirement, volume discounts, PBM price concessions, chargebacks, incentives, administrative fees, service fees, (except bona-fide service fees), distribution fees, and any other discounts or price reduction and rebates, other than rebates under section 1927 of the Act, which reduce the price received by the manufacturer for drugs distributed to the retail pharmacy class of trade.

(2)AMP is calculated as a weighted average of prices for all the manufacturer's package sizes for each covered outpatient drug sold by the manufacturer during a rebate period. It is calculated as net sales divided by number of units sold, excluding goods or any other items given away unless contingent on any purchase requirements.

(3)The manufacturer must adjust the AMP for a rebate period if cumulative discounts, rebates, or other arrangements subsequently adjust the prices actually realized. § 447.505 Determination of best price.

(a)*Best price* means, with respect to a single source drug or innovator multiple source drug of a manufacturer (including any drug sold under an NDA approved under section 505(c) of the FFDCA), the lowest price available from the manufacturer during the rebate period to any entity in the United States in any pricing structure (including capitated payments), in the same quarter for which the AMP is computed. Best price shall be calculated to include all sales and associated discounts and other price concessions provided by the manufacturer to any entity unless the sale, discount, or other price concession is specifically excluded by statute or regulation or is provided to an entity specifically excluded by statute or regulation from the rebate calculation.

(b)For purposes of this section, *provider* means a hospital, HMO, including an MCO or entity that treats or provides coverage or services to individuals for illnesses or injuries or provides services or items in the provisions of health care.

(c)*Prices included in best price.* Except with respect to those prices identified in paragraph

(d)of this section and § 447.505 of this subpart, best price for covered outpatient drugs, includes—

(1)Prices to wholesalers;

(2)Prices to any retailer, including PBM rebates, discounts or other price concessions that adjust prices either directly or indirectly on sales of drugs;

(3)Prices to providers (e.g., hospitals, HMOs/MCOs, physicians, nursing facilities, and home health agencies);

(4)Prices available to non-profit entities;

(5)Prices available to governmental entities within the United States;

(6)Prices of authorized generic drugs;

(7)Prices of sales directly to patients;

(8)Prices available to mail order pharmacies;

(9)Prices available to outpatient clinics;

(10)Prices to other manufacturers who act as wholesalers and do not repackage/relabel under the purchaser's NDC, including private labeling agreements;

(11)Prices to entities that repackage/relabel under the purchaser's NDC, including private labeling agreements, if that entity also is an HMO or other non-excluded entity; and

(12)Manufacturer coupons redeemed by any entity other than the consumer.

(d)*Prices excluded from best price.* Best price excludes:

(1)Any prices on or after October 1, 1992, charged to the IHS, the DVA, a State home receiving funds under 38 U.S.C. 1741, the DoD, the PHS, or a covered entity described in subsection (a)(5)(B) of the Act (including inpatient prices charged to hospitals described in section 340B(a)(4)(L) of the PHSA);

(2)Any prices charged under the FSS of the GSA;

(3)Any prices paid by an SPAP;

(4)Any depot prices (including Tricare) and single award contract prices, as defined by the Secretary, of any agency of the Federal Government;

(5)Any prices charged which are negotiated by a prescription drug plan under Part D of title XVIII, by any MA-PD plan under Part C of such title with respect to covered Part D drugs, or by a qualified retiree prescription drug plan (as defined in section 1860D-22(a)(2) of the Act) with respect to such drugs on behalf of individuals entitled to benefits under Part A or enrolled under Part B of Medicare;

(6)Rebates or supplemental rebates paid to Medicaid States agencies under section 1927 of the Act;

(7)Prices negotiated under a manufacturer's sponsored Drug Discount Card Program;

(8)Manufacturer coupons redeemed by a consumer;

(9)Goods provided free of charge under a manufacturers' patient assistance programs;

(10)Free goods, not contingent upon any purchase requirement;

(11)Nominal prices to certain entities as set forth in § 447.508 of this subpart; and

(12)Bona fide service fees.

(e)*Further clarification of best price.*

(1)Best price shall be net of cash discounts, free goods that are contingent on any purchase requirement, volume discounts, customary prompt pay discounts, chargebacks, returns, incentives, promotional fees, administrative fees, service fees (except bona fide service fees), distribution fees, and any other discounts or price reductions and rebates, other than rebates under section 1927 of the Act, which reduce the price available from the manufacturer.

(2)Best price must be determined on a unit basis without regard to special packaging, labeling or identifiers on the dosage form or product or package, and must not take into account prices that are nominal in amount as described in § 447.510 of this subpart.

(3)The manufacturer must adjust the best price for a rebate period if cumulative discounts, rebates, or other arrangements subsequently adjust the prices available from the manufacturer. § 447.506 Authorized generic drugs.

(a)*Authorized generic drug defined.* For the purposes of this subpart, authorized generic drug means any drug sold, licensed or marketed under an NDA approved by the FDA under section 505(c) of the FFDCA; and marketed, sold or distributed directly or indirectly under a different product code, labeler code, trade name, trade mark, or packaging (other than repackaging the listed drug for use in institutions) than the listed drug.

(b)*Inclusion of authorized generic drugs in AMP.* A manufacturer holding title to the original NDA of the authorized generic drug must include the direct and indirect sales of this drug in its AMP.

(c)*Inclusion of authorized generic drugs in best price.* A manufacturer holding title to the original NDA of an authorized generic drug approved under section 505(c) of the FFDCA must include the price of such drug in the computation of best price for the single source or innovator multiple source drug during the rebate period to any manufacturer, wholesaler, retailer, provider, HMO, non-profit entity, or governmental entity within the United States. § 447.508 Exclusion from best price of certain sales at a nominal price.

(a)*Exclusion from best price.* Sales of covered outpatient drugs by a manufacturer at nominal prices are excluded from best price when purchased by the following entities:

(1)A covered entity described in section 340B(a)(4) of the PHSA,

(2)An ICF/MR providing services as set forth in § 440.150 of this chapter; or

(3)A State-owned or operated nursing facility providing services as set forth in § 440.155 of this chapter.

(b)*Nonapplication.* This restriction shall not apply to sales by a manufacturer of covered outpatient drugs that are sold under a master agreement under 38 U.S.C. 8126. § 447.510 Requirements for manufacturers.

(a)*Quarterly reports.* A manufacturer must report product and pricing information for covered outpatient drugs to CMS not later than 30 days after the end of the rebate period. The quarterly pricing report must include:

(1)AMP, calculated in accordance with § 447.504 of this subpart;

(2)Best price, calculated in accordance with § 447.505 of this subpart;

(3)Customary prompt pay discounts, which shall be reported as an aggregate dollar amount which includes discounts paid to all purchasers in the rebate period; and

(4)Prices that fall within the nominal price exclusion, which shall be reported as an aggregate dollar amount and shall include all sales to the entities listed in § 447.508(a) of this subpart for the rebate period.

(b)*Timeframe for reporting revised AMP, best price, customary prompt pay discounts, or nominal prices.* A manufacturer must report to CMS revisions to AMP, best price, customary prompt pay discounts, or nominal prices for a period not to exceed 12 quarters from the quarter in which the data were due.

(c)*Base date AMP report.*

(1)A manufacturer must report base date AMP to CMS for the first full calendar quarter following [publication date of the final rule].

(2)Any manufacturer's recalculation of the base date AMP must only reflect the revisions to AMP as provided for in § 447.504(e) of this subpart.

(d)*Monthly AMP.*

(1)Monthly AMP means the AMP that is calculated on a monthly basis. A manufacturer must submit a monthly AMP to CMS not later than 30 days after the last day of each prior month.

(2)*Calculation of monthly AMP.* In calculating monthly AMP, a manufacturer may estimate the impact of its end-of-quarter discounts and allocate these discounts in the monthly AMPs reported to CMS throughout the rebate period. The monthly AMP should be calculated based on the methodology in § 447.504 of this subpart, except the period covered will be one month. Further, monthly AMP should be calculated based on the best data available to the manufacturer at the time of submission.

(3)*Prohibition against reporting revised monthly AMP.* In calculating monthly AMP, a manufacturer should not report a revised monthly AMP later than 30 days after each month, except in exceptional circumstances authorized by the Secretary.

(e)*Certification of pricing reports.* Each report submitted under paragraphs

(a)through

(d)of this section must be certified by one of the following:

(1)The manufacturer's Chief Executive Officer (CEO);

(2)The manufacturer's Chief Financial Officer (CFO); or

(3)An individual who has delegated authority to sign for, and who reports directly to, the manufacturer's CEO or CFO.

(f)*Recordkeeping requirements.*

(1)A manufacturer must retain records (written or electronic) for 10 years from the date the manufacturer reports data to CMS for that rebate period. The records must include these data and any other materials from which the calculations of the AMP, the best price, customary prompt pay discounts, and nominal prices are derived, including a record of any assumptions made in the calculations. The 10-year time frame applies to a manufacturer's quarterly and monthly submissions of pricing data, as well as any revised quarterly pricing data subsequently submitted to CMS.

(2)A manufacturer must retain records beyond the 10-year period if both of the following circumstances exist:

(i)The records are the subject of an audit or of a government investigation related to pricing data that are used in AMP, best price, customary prompt pay discounts, or nominal prices of which the manufacturer is aware.

(ii)The audit findings or investigation related to the AMP, best price, customary prompt pay discounts, or nominal price have not been resolved.

(g)*Data reporting format.* All product and pricing data, whether submitted on a quarterly or monthly basis, must be submitted to CMS in an electronic format. § 447.512 Drugs: Aggregate upper limits of payment.

(a)*Multiple source drugs.* Except for brand name drugs that are certified in accordance with paragraph

(c)of this section, the agency payment for multiple source drugs must not exceed, in the aggregate, the amount that would result from the application of the specific limits established in accordance with § 447.514 of this subpart. If a specific limit has not been established under § 447.514 of this subpart, then the rule for “other drugs” set forth in paragraph

(b)applies.

(b)*Other drugs.* The agency payments for brand name drugs certified in accordance with paragraph

(c)of this section and drugs other than multiple source drugs for which a specific limit has been established under § 447.514 of this subpart must not exceed, in the aggregate, payment levels that the agency has determined by applying the lower of the—

(1)Estimated acquisition costs plus reasonable dispensing fees established by the agency; or

(2)Providers' usual and customary charges to the general public.

(c)*Certification of brand name drugs.*

(1)The upper limit for payment for multiple source drugs for which a specific limit has been established under § 447.514 of this subpart does not apply if a physician certifies in his or her own handwriting that a specific brand is medically necessary for a particular recipient.

(2)The agency must decide what certification form and procedure are used.

(3)A checkoff box on a form is not acceptable but a notation like “brand necessary” is allowable.

(4)The agency may allow providers to keep the certification forms if the forms will be available for inspection by the agency or HHS. § 447.514 Upper limits for multiple source drugs.

(a)*Establishment and issuance of a listing.*

(1)CMS will establish and issue listings that identify and set upper limits for multiple source drugs that meet the following requirements:

(i)The FDA has rated two or more drug products as therapeutically and pharmaceutically equivalent in their most current edition of “Approved Drug Products with Therapeutic Equivalence Evaluations” (including supplements or in successor publications), regardless of whether all such formulations are rated as such and only such formulations shall be used when determining any such upper limit.

(ii)At least two suppliers list the drug, which has met the criteria in paragraph (a)(1)(i) of this section, based on all listings contained in current editions (or updates) of published compendia of cost information for drugs available for sale nationally.

(2)CMS publishes the list of multiple source drugs for which upper limits have been established and any revisions to the list in Medicaid program issuances.

(b)*Specific upper limits.* The agency's payments for multiple source drugs identified and listed periodically by CMS in Medicaid program issuances must not exceed, in the aggregate, payment levels determined by applying for each drug entity a reasonable dispensing fee established by the State agency plus an amount established by CMS that is equal to 250 percent of the average manufacturer price (as computed without regard to customary prompt pay discounts extended to wholesalers) for the least costly therapeutic equivalent.

(c)*Ensuring a drug is for sale nationally.* To assure that a drug is for sale nationally, CMS will consider the following additional criteria:

(1)The AMP of a terminated NDC will not be used to set the Federal upper limit

(FUL)beginning with the first day of the month after the actual termination date reported by the manufacturer to CMS.

(2)Except as set forth in paragraph (c)(3) of this section, in establishing the FUL, the AMP of the lowest priced therapeutically and pharmaceutically equivalent drug that is not less than 30 percent of the next highest AMP will be used to establish the FUL.

(3)When the FUL group includes only the innovator single source drug and the first new generic or authorized generic drug enters the market, the criteria in paragraph (c)(2) of this section will not apply. § 447.516 Upper limits for drugs furnished as part of services. The upper limits for payment for prescribed drugs in this subpart also apply to payment for drugs provided as part of skilled nursing facility services and intermediate care facility services and under prepaid capitation arrangements. § 447.518 State plan requirements, findings and assurances.

(a)*State plan.* The State plan must describe comprehensively the agency's payment methodology for prescription drugs.

(b)*Findings and assurances.* Upon proposing significant State plan changes in payments for prescription drugs, and at least annually for multiple source drugs and triennially for all other drugs, the agency must make the following findings and assurances:

(1)*Findings.* The agency must make the following separate and distinct findings:

(i)In the aggregate, its Medicaid expenditures for multiple source drugs, identified and listed in accordance with § 447.514(a) of this subpart, are in accordance with the upper limits specified in § 447.514(b) of this subpart; and

(ii)In the aggregate, its Medicaid expenditures for all other drugs are in accordance with § 447.512 of this subpart.

(2)*Assurances.* The agency must make assurances satisfactory to CMS that the requirements set forth in §§ 447.512 and 447.514 of this subpart concerning upper limits and in paragraph (b)(1) of this section concerning agency findings are met.

(c)*Recordkeeping.* The agency must maintain and make available to CMS, upon request, data, mathematical or statistical computations, comparisons, and any other pertinent records to support its findings and assurances. § 447.520 FFP: Conditions relating to physician-administered drugs.

(a)No FFP is available for physician-administered drugs for which a State has not required the submission of claims using codes that identify the drugs sufficiently for the State to bill a manufacturer for rebates.

(1)As of January 1, 2006, a State must require providers to submit claims for single source, physician-administered drugs using Healthcare Common Procedure Coding System codes or NDC numbers in order to secure rebates.

(2)As of January 1, 2008, a State must require providers to submit claims for the 20 multiple source physician-administered drugs identified by the Secretary as having the highest dollar value under in the Medicaid program using NDC numbers in order to secure rebates.

(b)As of January 1, 2007, a State must require providers to submit claims for physician-administered single source drugs and the 20 multiple source drugs identified by the Secretary using NDC numbers.

(c)A State that requires additional time to comply with the requirements of this section may apply to the Secretary for an extension. (Catalog of Federal Domestic Assistance Program No. 93.778, Medical Assistance Program) (Catalog of Federal Domestic Assistance Program No. 93.773, Medicare—Hospital Insurance; and Program No. 93.774, Medicare—Supplementary Medical Insurance Program.) Dated: August 10, 2006. Mark B. McClellan, Administrator, Centers for Medicare & Medicaid Services. Approved: October 16, 2006. Michael O. Leavitt, Secretary. [FR Doc. 06-9792 Filed 12-15-06; 4:51 pm]

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