FEDERAL PRISON INDUSTRIES, INC. (FPI) INTERIM REVISED DEFINITIONS -- PART I PART I In this document, Federal Prison Industries, Inc. (FPI) announces new interim definitions of three key terms: new product, specific product, and significant expansion of an existing product. The effective date for the interim definitions is March 12, 1997. Last year, FPI published notices in the Federal Register and Commerce Business Daily proposing revisions to the definitions of "specific product," "new product" and "significant expansion of production" for use with the FPI expansion guidelines. The Federal Register notice was printed on August 7, 1996. The Commerce Business Daily notice was printed on September 20, 1996. Each notice asked interested parties to review the revised definitions and submit comments on the proposed revisions to FPI. FPI received submissions from the following individuals and organizations: U.S. Representative Mac Collins (Georgia, 3rd District); The American Defense Preparedness Association; The Business and Institutional Furniture Manufacturers Association; Trussbilt, Inc.; The Coalition for Government Procurement; The American Apparel Manufacturers Association; Tennessee Apparel Corporation; Furniture By Thurston; and The Quarters Furniture Manufacturers Association FPI wishes to thank each of the respondents for taking the time to submit their comments. Many of the submissions included suggestions which FPI has incorporated into the revised definitions. Also among the submissions were several comments helpful to FPI in understanding potential implications of the proposed revised definitions. Some of these comments led FPI to adjust its original proposal. For the purposes of this notice, FPI has separated all the comments we received into one of four groups: 1) Ideas, recommendations or suggestions FPI has adopted in the revised definitions; 2) Ideas, recommendations or suggestions with which FPI respectfully disagrees and has not adopted in the revised definitions; 3) Comments that are more relevant to other aspects of FPI's operations, such as issues concerning mandatory source; and 4) Comments which are vague, broad or general in nature. Such comments do not make a specific point, making it difficult for FPI to address. Below is a summary of all comments received by FPI. In many instances, similar comments from multiple parties have been combined. Also included are some of FPI's responses, where appropriate. I) IDEAS, RECOMMENDATIONS OR SUGGESTIONS FPI HAS ADOPTED The following are ideas, recommendations or suggestions provided by commenters which FPI found useful or constructive, and incorporated, in whole or in part, into the revised expansion definitions. A commenter noted FPI's initial announcement stated "FPI announces revised definitions of two key terms: new product and specific product." However, "significant expansion of production" is also revised. FPI acknowledges the oversight, and has reflected this correction in the new announcement. This notice refers to all three revised definitions. Commenters suggested FPI defer issuing the new definitions, raising the possibility Congress may require FPI to modify the terms again, resulting in another revision in a short period of time. The commenter stated a delay in issuing the definitions would permit interested parties to take up Rep. McCollum's offer to discuss FPI's operations and regulations next year. FPI appreciates the willingness to accept Rep. McCollum's invitation. Nonetheless, the current definitions present a myriad of problems that need to be addressed. With the commenter's suggestion in mind, FPI is publishing the new definitions as an "interim rule." This will allow time for experience and encourage comments during its implementation. A commenter suggested amending the provision dealing with cases of extreme public exigency, where FPI would be empowered with the authority to increase production without penalty when asked to do so. The commenter advised that FPI explicitly state that its production levels are temporary, and will not be used as the baseline for future calculations of what is deemed a significant expansion of production. FPI has incorporated such language into the revised definitions. Several commenters objected to the provision allowing FPI to supply new items of limited duration or volume. The commenters felt this provision did not allow for sufficient private industry input, would be detrimental to small businesses who sell to the Federal government and did not provide adequate safeguards to prevent FPI from misuse of the provision. FPI recognizes the concerns raised by the commenters and has withdrawn the provision from the revised definition. Commenters suggested the definitions should not eliminate an item's predominant material of manufacture as a determinant of whether an item is a separate specific product. FPI agrees, and notes the new definitions do not make such an elimination. Rather, the predominant material "will not ordinarily" be a factor in determining whether an item is a separate specific product. FPI did not mean to imply the predominant material of manufacture is not an important consideration, only that in most cases, it would not result in an item being deemed a separate specific product. An item's predominant material will always be considered, and unless deemed to be significant, will not typically result in a distinction for a separate specific product. A commenter suggested that FPI state its sales goals in units, not dollars. FPI appreciates the suggestion and will attempt to include production information on units where feasible, as well as dollars, for impact studies. The nature of some of FPI's work makes stating production goals in units difficult. It should be noted that in past impact studies, FPI has attempted to differentiate between inflation and real growth in projecting the corporation's future sales and market share. Several commenters suggested FPI revise the provision relating to announcements in the Commerce Business Daily (CBD). One commenter argued it was an undue burden on small business owners to have to check the CBD every day. Another suggested the time period in which interested parties may submit comments should be lengthened beyond 10 days. FPI acknowledges there may be difficulties associated with checking the CBD, especially for a small business. We appreciate the comments, and have amended the revised definitions so that they now allow 21 days for interested parties to comment. Regarding submissions from interested parties in response to the CBD announcements referenced in the prior paragraph, a commenter disagreed with the restriction on submissions stating that comments related to market share and/or the impact resulting from such a production decision would not ordinarily be considered relevant to whether an item should be considered a new product. FPI recognizes the importance that data relating to a reasonable share of the market has to the expansion process. FPI appreciates the comment and agrees to modify the provision so that all information will be considered. The contested reference in the provision has been deleted. A commenter expressed approval of the provision to have FPI make CBD announcements for items FPI does not consider to be a new product, but which an affected party may reasonably construe to be a new product. The commenter noted the purpose of the revision is to give private industry an added level of input into such decisions made by FPI. The commenter regarded this as "a very constructive approach and again will build a great deal of trust and goodwill between FPI and the private sector." FPI appreciates the acceptance of this provision. A commenter noted the revised definitions will not require FPI to initiate the guidelines process when FPI's market share increases as a result of factors other than an increase in FPI's production. The commenter recognized that "asking FPI to continually track its market share for every product is a burdensome job." The commenter suggested that industry be encouraged to track market size and be allowed to petition FPI's Board of Directors for production relief in the event that a significant reduction in the size of the market can be demonstrated. FPI appreciates the comment and concludes that the new definitions do allow for such action on the part of members of the private sector. Commenters questioned whether the new significant expansion definition would allow FPI to increase production until it captures 25% of the market before it triggers the expansion process as long as FPI makes only incremental increases. FPI acknowledges that while the circumstances described are theoretically possible, we do not believe it is very likely. First, such a scenario would only occur over a several year period, since any sales increase over 10% would lead to an FPI examination of market share, and trigger the guidelines process if FPI exceeded the 15% and 20% market share thresholds. As a result of the elapsed time, any impact would be minimized. As a potential safeguard against such a scenario, FPI has encouraged potentially affected industriesto petition the Board if they believe that FPI growth is having an adverse impact on their particular industry. This encourages the industry to monitor FPI growth, via annual sales and market share reports published by FPI, in conjunction with their own market data, and bring their concerns to the Board's attention, as circumstances warrant. A commenter suggested changing the provision on cases where FPI's sales inadvertently or insubstantially exceed authorized levels. The commenter suggested strengthening the language regarding FPI's obligation to adjust its sales levels if the corporation exceeds its authorized sales levels. FPI has amended the language accordingly. II) IDEAS, RECOMMENDATIONS OR SUGGESTIONS WITH WHICH FPI RESPECTFULLY DISAGREES AND HAS NOT ADOPTED Though the following comments were not incorporated into the revised guidelines, FPI wishes to emphasize its appreciation for the careful review by all commenters in providing their submissions. In the interest of making this process as visible and open to public scrutiny as possible, FPI has included its reasons for choosing not to accept the following ideas, recommendations or suggestions. Most of the comments with which FPI disagrees and has not adopted deal with the availability of data under the current definitions or the proposed use of 4-digit Federal Supply Class (FSC) codes as the primary basis for determining a "specific product." Commenters questioned whether there really is unavailability of data under the current definitions. Commenters suggested the procurement data sought by FPI is already collected by GSA's Special Item Numbers (SINs). FPI respectfully disagrees with both comments. The current definitions make use of the Standard Industrial Classification (SIC) system's 7-digit item codes. The government does not collect Federal procurement data by 7-digit SIC codes. Rather, Federal purchases are categorized by the FSC system. FPI also reiterates the limitations of GSA's SIN data. GSA does not have schedules for every industry in which FPI operates. Also, through research for past impact studies, FPI has found that while information from GSA's schedules provide an important piece of the Federal market puzzle, data from the schedules do not reflect all Federal buys, and often fail to include large segments of the Federal market. Regarding the FSC system, commenters felt an FSC code would be too broad and encompass too many separate items to be validly considered a specific product. Commenters also expressed concern over the revised definitions allowing FPI to combine FSC codes where multiple codes comprise a single industry. Commenters contended that in such instances, FPI's true impact would be severely understated. FPI recognizes these concerns and agrees that in some instances, FSC categories are too broad to be accurate measure of an item's Federal market. However, the revised definitions make provisions for such cases. The new definitions state, "FPI will announce in the CBD its intent to produce any item that could reasonably be construed to be a new product, regardless of the fact that such an item falls in the same 4-digit category as an item that FPI is currently making, or has made within the recent past, and is not considered by FPI to be sufficiently different from an existing item to be considered a new product. Moreover, borderline cases will be announced in the CBD in order to allow for the full public scrutiny." The new definitions also state, "In some instances, an item may be considered separate from another product in the same 4-digit FSC category, if its function differs substantially." Regarding the combination of FSC codes, it is incumbent upon FPI to be as accurate as possible in determining its impact on the private sector. When an industry's operations encompass multiple FSC codes, FPI is obligated to combine the codes in the effort to measure the corporation's true impact. Further, FPI's authorizing legislation directs FPI to guard against placing an undue burden on any single industry, not individual companies. FPI believes the industry involvement guidelines process addresses concerns that the use of FSC codes would allow FPI to expand in a few limited items without seeming to have an impact on the industry as a whole. Under both the current and new definitions, the guidelines process provides ample opportunity for public comment and input, so that FPI's Board of Directors can be made aware of particular situations that may create undue impact on private industry. Beyond the principal objections mentioned above, commenters raised other questions regarding the new definitions. One commenter stated they lack confidence in a system which, by FPI's admission, does not "develop a simple, single principle that can be applied in every situation to determine when to delete unrelated items from a 4-digit FSC category and when to combine categories." FPI recognizes the desire for a "one size fits all" approach. However, in the absence of a viable alternative, we believe the revised guidelines offer a fair, reasonable and logical set of standards to examine FPI's growth. A commenter questioned the use of 4-digit SIC codes as a secondary determinant for a specific product, in those instances where there are multiple items within a single FSC code. The commenter felt 4-digit SICs do not represent any substantial protection beyond the FSC codes. The commenter asserted that specific product distinctions are found at the 7-digit SIC level. As mentioned earlier in this section, limitations of the SIC system were one of many factors leading to the revision of the definitions. FPI's initial notice proposing the revised definitions discussed the difficulties FPI has experienced with SIC codes, the primary problem being the lack of available data. For this reason, the new definitions will not be based upon the SIC system. Instead, the 4-digit SIC code will be used as a secondary determinant for a specific product. In such cases, cross-referencing the 4-digit SIC codes against the FSC codes will allow FPI to more accurately separate items that should be considered a separate "specific product." Several comments touched on the provision concerning FPI announcements in the CBD regarding the planned production of items that may reasonably be considered a new product. One commenter doubted that a heightened effort by FPI would provide any meaningful restraint. The new definitions have FPI make such announcements when an item may be reasonably construed to be a new product. In cases which are questionable, FPI will err on the side of announcing in the CBD in order to allow for full public scrutiny. In addition, the new rules would provide much greater visibility to these decisions and determinations than is afforded under the current guidelines. A commenter questioned how the new rule helps FPI meet its mission of "diversification so that no single industry shall be forced to bear an undue burden of competition?" FPI believes the new definitions are a significant step forward in meeting this objective. Among the primary benefits of the revised definitions is that they are aimed toward measuring FPI's impact on an industry. The corporation's authorizing legislation states that FPI is to operate so that no single industry is forced to bear an undue burden of competition. Most private vendors competing for Federal business offer an array of different items across the industry in which they operate. Most producers of office furniture do not limit themselves to just credenzas. They offer tables, desks, bookcases, etc. Suppliers of shirts may also produce pants, coveralls, etc. One commenter stated FPI's commitment to report in the CBD all items which could reasonably be construed to be a separate specific product will be the determinant of FPI's good faith. The commenter stated that if FPI faithfully observes this commitment by announcing its intent considerably more liberally than is required and treats comments objectively (i.e., acts in favor of both FPI and the private sector about 50% of the time) industry will likely gain confidence in the process. FPI appreciates the commenter's trust in our ability to faithfully and accurately fulfill the requirements of this provision. Yet the fair treatment of comments received from the private sector does not automatically translate into a quota system whereby the finding will be in the private sector's favor 50% of the time. FPI commits that the Board of Directors will decide each case on its own merits, regardless of any other such decisions. FPI points out that the revised definitions will have FPI "announce in the CBD its intent to produce any item that could reasonably be construed to be a new product." FPI's commitment to make such announcements considerably more often than is required is beyond the letter of the revised definitions. However, in seeking to build good faith with the private sector, FPI will attempt to fulfill this additional requirement. Objections were raised to the provision reading "Items that are essentially the same product, or those that are variations of an existing FPI product....would not be subject to announcement of any kind." Commenters felt FPI is unable to make such distinctions without industry's assistance. FPI respectfully disagrees with this suggestion. FPI has the technical and engineering knowledge to accurately determine when items are essentially the same or are variations of an existing FPI product. FPI currently makes these determinations under the existing expansion guidelines. A commenter suggested "new product" be defined as a "specific product which FPI has not produced within the last three years." FPI respectfully disagrees with this suggestion. The nature of some Federal purchases is cyclical, so that items bought in large amounts one year, may be purchased in very small quantities, if at all, for three or four years thereafter. FPI believes defining a "new product" as a "specific product FPI has not produced within the past three years" is overly restrictive, and the five year figure is reasonable and more consistent with Federal buying patterns. Commenters felt the revised "significant expansion" definition would greatly affect what FPI can do without initiating the guidelines process. One commenter expressed opposition to any planned expansion of FPI's production without significant industry input. FPI believes a primary benefit of the new "significant expansion" definition is that it clarifies exactly what is "significant" by changing the measure from

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