FTZB Issues Final Rule Revising FTZ Regs (Part III – Public Utility, Uniform Treatment, Etc.)

The final rule, in response to comments received by the FTZB, contains many substantive changes from the proposed rule. Changes from the proposed rule include: (1) a new definition of production which, as in the proposed regulations, replaces the manufacturing/processing concepts from the prior regulations; (2) an entirely new two-stage advance approval process, instead of the proposed elimination of advance approval except in cases of tariff inversion, AD/CV & section 337 proceedings, and scrap or waste; (3) new separate processes for obtaining production authority and subzone designation, as well as a simpler and quicker process for obtaining subzone designation; (4) changes to the public utility and uniform treatment provisions from the proposed rule; and (5) provisions for fines only in cases of late annual reports and uniform treatment violations (i.e., production-related violation fines will only be assessed by U.S. Customs and Border Protection and not the FTZB).

This is Part III of a multi-part series of summaries of the final rule, and highlights the new regulations’ more extensive provisions on public utility and uniform treatment, including provisions to request exemptions from certain uniform treatment requirements, as well as modified zone schedule requirements. (See ITT’s Online Archives 12022903 for Part I (Production Approval) and 12030109 for Part II (Subzone Designation). See future issue for final part of this series of summaries.)

Operation of Zone as a Public Utility

FTZB’s final rule provides new guidance and requirements related to the statutory mandate for the operation of a zone as a public utility. The new regulations limit the fees that grantees may charge zone participants to an amount that covers their costs, plus a reasonable return on investment.

Specifically, the final rule states:

Zone Fees to recover costs. For a zone to be operated as a public utility, all rates and charges for all services or privileges within the zone must be fair and reasonable. A rate or charge (fee) may be imposed on zone participants to recover costs incurred by the grantee for the performance of the grantee function. Fees must be directly related to the service provided by the grantee to the zone participants. Fees may not be tied to the level of benefits derived by zone participants.

According to the FTZB, a grantee may legitimately establish different levels of fees (apportion costs differently) for different categories of zone participants based on certain criteria (e.g., (1) an operator’s square footage of activated FTZ space, (2) the value of the operator’s merchandise admitted to the zone in a given year, (3) whether the operator qualifies as a small business under the Small Business Administration criteria, or (4) whether the operator is in an industry sector targeted for attraction based on community economic development plans), so long as the criteria are applied uniformly to each zone participant.

Grantees Allowed a Reasonable Return. Fees may also incorporate a reasonable return on investment. According to the FTZB, return on investment may take into account past subsidies that a grantee provided to sustain its zone.

Fees Cannot Vary Based on 3rd Party Contracts. Other than the uniform rates and charges assessed by the grantee, zone participants shall not be required (either directly or indirectly) to utilize or pay for a particular provider’s zone-related products or services.

Delayed compliance. The effective date for compliance with the public utility requirements of 15 CFR 400.42 is two years after the date of publication of the final rule (i.e., February 28, 2014).

Uniform Treatment of All Zone Users

FTZB’s final rule also provides new guidance and requirements to implement the statutory mandate for a grantee’s uniform treatment of zone users. The new regulations, among other things, require any divergent treatment to be justifiable to the FTZB, prohibit certain actions by third parties, and allow for the FTZB to issue waivers exempting parties from these prohibitions.

Specifically, the final rule states:

Uniform Treatment with Justifiable Evaluation Criteria. Grantees shall apply uniform treatment in the evaluation of proposals from zone participants. Uniform treatment does not require acceptance of all proposals by zone participants. However, the bases for a grantee’s decision on a particular proposal must be consistent with the uniform treatment requirement.

Given the requirement for uniform treatment under like conditions, for any instance of different treatment of different zone participants, a grantee must be able to provide a documented justification for any difference in treatment to the Executive Secretary upon request.

Product/Service Requirements Prohibited. Treatment of zone participants within a zone (including application of fees) shall not vary depending on whether a zone participant has procured any zone-related product or service or engaged a particular supplier to provide any such service.

Agreements Must be Made in Writing. Any agreement or contract related to one or more grantee function(s) and involving a zone participant (e.g., agreements with property owners, agreements with zone operators) must be in writing.

Prohibited Actions. As prescribed by 15 CFR 400.43(d)(1), to avoid non-uniform treatment of zone participants, persons within key categories (key persons) shall not undertake any of these key functions:

• Action on behalf of a grantee, or making recommendations to a grantee, regarding the disposition of proposals or requests by zone participants pertaining to FTZ authority or activity (including activation by CBP).
• Approval of, or being party to, a zone participant’s agreement with the grantee (or person acting on behalf of the grantee) pertaining to FTZ authority or activity (including activation by CBP).
• Oversight of zone participants’ operations on behalf of a grantee.

Pursuant to 15 CFR 400.43(d)(2), a key person may be: (1) a person that currently engages in, or which has during the preceding 12 months engaged in, offering/providing a zone-related product/service to or representing a zone participant in the grantee’s zone; (2) any person that stands to gain from a person’s offer/provision of a zone-related product/service to or representation of a zone participant in the zone; or (3) any person related² to the third-party/person identified in (1) and (2) above.

Waivers Available for Prohibited Actions. Grantees or key persons listed in 15 CFR 400.43(d)(2) may submit an application requesting that the FTZB issue a waiver exempting them from the prohibition on a specific key function listed in 15 CFR 400.43(d)(1). An application for a waiver must explain in detail how the person falls within a key persons category, and detail the specific key function that would be undertaken by the person.¹ After receipt of the application requesting a waiver, the Executive Secretary may solicit additional information or clarification.

In considering whether to approve an individual application for a waiver, the FTZB will take into account the specific circumstances presented, and the FTZB may also impose conditions, such as an expiration date, on individual waivers. Furthermore, the more significant the requester’s involvement or interest in the undertaking of a key function, the less likely it will be that a waiver will be granted. The FTZB states that a key factor they will consider is whether a grantee’s specific arrangement presents a significant risk that zone users will experience implied pressure to procure a particular private party’s services as a condition of obtaining access to the federal FTZ program.

Parties May Request Determinations on Consistency with Requirements. A grantee or other party may request a determination by the Executive Secretary regarding the consistency of an actual or potential arrangement with the uniform treatment requirements.

Grantees Must Identify Agents Upon Request by Officials The FTZB, Assistant Secretary for Import Administration, or the Executive Secretary may require a zone grantee to identify any person undertaking a zone-related function on behalf of the grantee.

Delayed Effective Date. If, as of April 30, 2012, existing business arrangements do not comply with the (i) written agreement requirement and (ii) the prohibited key functions (performed by key persons) under 15 CFR 400.43(d), such existing arrangements shall be terminated or brought into compliance no later than February 28, 2014.

Zone Participants May Submit Public Utility, Uniform Treatment Complaints

A zone participant may submit to the Executive Secretary a complaint alleging conditions or treatment inconsistent with the public utility and uniform treatment requirements. The FTZB states that it does not intend to penalize on the basis of confidential complaints without disclosing their contents, but instead that confidential complaints may spur an examination of a zone.

Provisions allowing participants to submit complaints to the Executive Secretary objecting to fees are maintained in the new regulations. However, the final rule adds criteria for the FTZB to consider in reviewing these complaints. The primary factor considered in reviewing fairness and reasonableness of fees is the cost of the specific services rendered. The FTZB will also consider any extra costs incurred relative to non-zone operations, including return on investment and reasonable out-of-pocket expenses.

Zone Schedule Requirements Modified

The final rule also moves the zone schedule requirements into a new, separate section (15 CFR 400.44), and makes the following changes, among others, to the requirements:

• Operator information and fees (for zone-specific services) are included in the zone schedule only if the operator has an agreement with the grantee to offer services to the public (fees assessed by or on behalf of the grantee, as well as grantee info, are still otherwise required.)
• A zone may not apply fees or other provisions that were not included on the most recent zone schedule submitted to the FTZB.
• The zone schedule will be posted on the FTZB website. The requirement that the zone schedule be sent to the CBP port director is eliminated.

The compliance date for the new zone schedule requirements is two years after the date of publication of this final rule in the Federal Register (i.e., on or about February 28, 2014.)

¹While the final rule is effective April 30, 2012, sections 400.21-400.23 (Application to establish a zone, Notification for production authority, and Application for production authority, respectively), 400.25 (Application for subzone designation) and 400.43(f) (certain waivers regarding uniform treatment), which contain information collection requirements that have not yet been submitted for OMB review, will be effective at a later date. In addition, the final rule has certain sections (e.g., regarding public utility, uniform treatment, and zone schedules) where compliance must occur no later than two years after the publication date of the final rule.

²Related persons as defined in 15 CFR 400.43 (Uniform Treatment) include: (1) members of a family or members of a household; (2) organizations that are wholly or majority-owned by members of the same family or the same household; (3) an officer or director of an organization and that organization; (4) partners; (5) employers and their employees; (6) an organization and any person directly or indirectly owning, controlling, or holding the power to vote, 20% or more of the outstanding voting stock or shares of that organization; (7) any person that controls any other person and that other person; or (8) any two more persons who directly control, are controlled by, or are under common control with, any person.

(See ITT’s Online Archives 12022730 for summary of FTZB issuance of final rule and webinar series to provide education on the new regulations.

See ITT’s Online Archives 12022109 for initial summary of FTZB final rule. See ITT’s Online Archives 12021744 for summary of OMB approving this final rule, just two days after extending its review.

See ITT’s Online Archives 10123022 (part I), 11010325 (part II), and 11010630 (part III) for multi-part series of summaries of proposed FTZ rule. See also ITT’s Online Archives 11071819 for summary of trade’s comments on the proposed regulations, which supported the underlying goals of the revisions but stated that the proposed rule must be revised, clarified, and made less burdensome.)

FTZB’s unofficial summary of key provisions of the revised regulations, full text of the revised regulations, as well as side-by-side comparison of the final, proposed, and prior regulations are available here.

FTZB contact - Andrew McGilvray (202) 482-2862

ITA Contact - Matthew Walden (202) 482-2963