Congress of the United States

House of Representatives

Washington, DC 20515

May 10, 1909

Office of the General Counsel
Federal Bureau of Prisons
ATTN: Rules Unit
HOLC Building - Room 754
320 First Street. N.W.
Washington, DC 20534

Dear Sir or Madam:

Enclosed are our comments on the proposed revision to Part 302 of title 28, Code of Federal Regulations, pertaining to the operations of Federal Prison Industries, Inc. (FPI), which were initially published for public comment on January 7, 1999 (64 Fed. Reg. 1082). The comment period was extended on March 10, 1999 (64 Fed. Reg.11821).

This proposed comprehensive regulation is described by FPI as a codification of "existing standards and procedures utilized to accomplish FPI's mission.," We see the proposed rule as an attempt to substantially expand FPI's statutory authority by imparting the force and effect of law through the rule-making process to various policy pronouncements by FPI's Board of Directors and FPI's career management staff.

For example, the proposed regulation purports to -

• grant FPI unlimited, permanent authority to sell services in the commercial.
  market, free of even the modest restraints imposed by Attorney General Reno
  when she authorized implementation only on a pilot basis;
• make FPI a mandatory source supplier (subcontractor) to Federal prime contractors, when FPI lacks any statutory authority to act a subcontractor; and
• grant FPI's career management staff unilateral authority to initiate
  production of new individual products or expand production of existing
  products through unreasonably elastic definitions of what constitutes a "specific
  product", a "new product", and "a significant expansion of an existing product",
  foreclosing any opportunity for public participation afforded by the Board of
  Directors' approval process mandated by FPI's authorizing statute.

Overall the proposed rule seeks to drastically subordinate the mandate of its authorizing statute "to reduce to a minimum competition with private industry or free labor" in order to maximize work opportunities for Federal inmates,.
This proposed rule requires fundamental redrafting. Further, it may be prudent to suspend action on the rule until the Congress acts on legislation that fundamentally reforms FPI's authorizing statute. We will be introducing an improved version of the "FEDERAL PRISON INDUSTRIES COMPETITION IN CONTRACTING ACT OF 1999".

Similar substantive and procedural comments were expressed by representatives of organized labor and a broad array of the business groups during a hearing conducted by the Subcommittee on Oversight and Investigations of the House Committee on Education and the Workforce on April 21, 1999. We are informed by staff that similar views were even more unequivocally communicated by representatives of organized labor and the business community during a day-long meeting convened by FPI's Chief Operating Officer on April 7, 1999.

Given the fundamental concerns being expressed about the proposed rule, we would urge, in the strongest possible terms, that if action is not suspended, it should only be reissued as a proposed rule, after redrafting in response to the comments received. To maximize public participation, the comment period should not be less than 60 days. Further, FPI should give notice in the COMMERCE BUSINESS DAILY, its usual medium for public announcements, that the revised regulatory proposal has been issued for another round of public comment.

Sincerely,

Peter Hoekstra
Member of Congress

Barney Frank
Member of Congress

Carolyn B. Maloney
Member of Congress

Mac Collins
Member of Congress

Enclosure

Proposed Rule
Federal Prison Industries, Inc.
Published for public comment on January 7, 1999

CO M M E N T S

General Comments

1. While described as a codification of "existing standards and
procedures utilized to accomplish FPI's mission", the proposed rule would
actually substantially expand FPI's statutory authority by imparting the
force and effect of law through the rule-making process to various prior
policy announcements by FPI's Board of Directors and FPI's career
management staff.

2. Overall the proposed rule seeks to drastically subordinate the
mandate of FPI's authorizing statute "to reduce to a minimum competition
with- private industry or free labor" in order to maximize work
opportunities for Federal inmates.

3. Without any statutory authority seeks to make FPI a mandatory supplier (subcontractor) to Federal prime contractors and their private
sector subcontractors and suppliers at any tier.

4. Seeks to grant FPI's career management staff unilateral authority to initiate production of new individual products or expand production of existing products through unreasonably elastic definitions of what constitutes a "specific product", "new product", and a "significant expansion of an existing product", effectively foreclosing any opportunity
for public participation afforded by the Board of Directors' approval process mandated by 18 U.S.C. 4122(b).

5. Without any explicit authority seeks to grant FPI the status of a "preferential source", permitting FPI to sell services to Federal agencies on a non-competitive basis foreclosing commercial vendors any opportunity to compete.

6. Purports to have unlimited authority to offer inmate provided services in the commercial market.

Proposed Section 302.11 (Provision of services to the commercial market) should be -

(a) deleted, given that Attorney General Reno only authorized implementation on a non-permanent ("pilot program") basis;

(b) deleted, given the inadequate legal justification provided by the Office of Enforcement within the Criminal Division;

(c) modified to voluntarily apply protections for law-abiding workers required of State or local prison industry programs when selling inmate-made products commercially under the authority of the Prison Industry Enhancement (PIE) Program, including:

(i) prohibition on displacing non-inmate workers;

(ii), prohibition on impairing "existing contracts for services"; and

(iii) paying "wages at a rate which is not less than that paid for work of a similar nature in the locality in which the work is to be performed", but not less than the minimum wage prescribed by the Fair Labor Standards Act; or

(d) modified to voluntarily apply proposed Section 302.17 (industry involvement guidelines), as modified in response to public comments, to:

(i) categories of inmate-furnished services currently being provided by FPI to various Federal agencies,

(ii) FPI staff proposals to offer a new type of service, or

(iii) expand the number of inmate-labor hours to a type of service currently being furnished to Federal agency customers.

7. Coverage in Government-wide Federal Acquisition Regulation (FAR) -

To the extent that the proposed regulation seeks to specify the manner in which Federal buying agencies acquire products or services from FPI, the Office of Federal Procurement Policy Act requires modifications to FAR Part 8.6 (Acquisition from Federal Prison Industries, Inc.), which would be drafted with the direct participation of the Federal buying agencies.

Specific Comments

PURPOSE AND SCOPE [Proposed Section 302.1]

Proposed Section 302.1 sets forth FPI's mission statement. It states that FPI's mission is to employ and provide skills training to the greatest practical number of inmates . . . that minimizes, to the extent feasible, potential impact on private business." (emphasis added).

This section of the proposed regulations is not in consonance with FPI's authorizing statute. It seeks to subordinate the statutory objective "to reduce to a minimum competition with private industry or free labor" to the statutory objective to "provide employment for the greatest number of . . . inmates". Further, it fails to give any recognition to the fact that any expansion of FPI work opportunities for Federal inmates deprives work opportunities from law-abiding workers as well as business opportunities for firms who are subjected to unfair competition in the Government procurement market due to FPI's mandatory source status.

DEFINITIONS [Proposed Section 302.2].

DEPARTMENTS OR AGENCIES OF THE UNITED STATES

Proposed Section 302.2(c) seeks to extend FPI's mandatory source status and other preferences in the Federal procurement process to the non-appropriated fund activities of the Executive Branch agencies, most notably the system of exchanges operated by the Military Services and the Defense Commissary Agency, which operate as quality-of-life benefits to members of the Armed Services (active, reserve, and retired) and their families.

Such an expansion of the reach of FPI's mandatory source status cannot be accomplished through unilateral regulatory action, without an amendment to FPI's authorizing statute. The proposed Section 303.2(c) should be modified.

INMATE PRODUCT

Proposed Section 302.2(d) seeks to extend FPI's mandatory source status to products that are simply assembled by inmates from finished components purchased by FPI, rather than products that are manufactured, to some specified percentage, through actual inmate labor. The proposed regulation fails to define a pivotal term in FPI's authorizing statute "prison-made products". The proposed regulation should be revised to specify a minimum amount of direct inmate labor content before a product can be designated a "prison-made product".

SERVICES

Proposed Sec. 302.2(g) fails to provide a clear and workable definition of the term "services", especially in light of the attempt to accord the status of a "prison-made product" to a product that is simply assembled from finished components produced outside of any Federal correctional institution. The proposed definition relies extensively on examples of what FPI considers to be providing a service, in contrast to an activity that involves "a manufacturing process" resulting in a "new product". One of the examples of a "service" cited is "equipment assembly". This example of a "service" seems in direct conflict with the previously discussed definition of "inmate product", as one resulting from the simple assembly of a new product from procured components. Other cited examples of services are "rebuilding" "engine accessories", "vehicular components", and "forklifts". Yet, each of these examples would employ manufacturing procedures and processes that produce a functionally equivalent rebuilt engine or vehicle component that would be recognized as a service under the proposed definition, simply because the
resulting product is not a "new product".

PRODUCTS. SUPPLIES AND COMMODITIES

Proposed Sec. 302.2(h) would make the terms "products", "supplies" and "commodities" interchangeable without elsewhere providing any definition of these terms. FPI's authorizing statute accords a mandatory source status only to "products". A precise definition of "products" is clearly needed. Similarly, a definition of "commodities" is required, since this term generally encompasses a broad array of non-manufactured materials, including agricultural products, minerals, and fuel sources, such as coal. FPI's mandatory source does not apply to commodities of this type. Without definitions of the terms "commodities" and "products", the proposed regulation should not define the terms as interchangeable.

BOARD OF DIRECTORS: ROLES AND RESPONSIBILITIES

[Section 302.3].

Proposed Section 302.3(b) specifies the general responsibilities of FPI's Board of Directors. Except for Section 303.3(b)(5) ["Assure that there is a fair and adequate means for review of the impact of FPI on the private market"], this section and the entire regulation is silent with respect to the statutory provisions in FPI's authorizing statute clearly intended to limit FPI's unfair competition on law-abiding workers and the businesses that employ them. For example, Section 4122(b)(1) of title 18, United States Code directs that [FPI's] board of directors ". . . so operate the prison shops that no single private industry shall be forced to bear an undue burden of competition from the products of prison workshops, and to reduce to a minimum competition with private industry or free labor."

Proposed Section 302.3 should be expanded to reflect that as a Government corporation, FPI's Board of Directors is also responsible for assuring compliance with the requirements of Chapter 91 of title 31, United States Code, pertaining to Government corporations.

CHIEF EXECUTIVE OFFICER: ROLES AND RESPONSIBILITIES

[Proposed Section 302.4].

Proposed Section 302.4 establishes the position of FPI's Chief Executive Officer (CEO) and vests it in the person who serves as Director of the Federal Bureau of Prisons. It also specifies the responsibilities of FPI's CEO. FPI's authorizing statute vests the authority to "operate the prison shops" in FPI's Board of Directors. While the Board has the authority to establish the position of CEO and delegate to such officer its executive functions, the proposed regulation should be modified to comport with the statute.

CHIEF OPERATING OFFICER: ROLES AND RESPONSIBILITIES

[Proposed Section 302.5] ,

Proposed Section 302.4 establishes the position of FPI's Chief Operating Officer (COO) and vests it in the person who serves as an unspecified Assistant Director of the Federal Bureau of Prisons. It specifies that the COO is "responsible for the day to day management of the affairs of the Corporation" and "to perform all duties and make all decisions, except where authority has been retained by the Board of Directors or the Chief Executive Officer." As with the CEO, FPI's authorizing statute makes no mention of a Chief Operating Officer. Rather, the authorizing statute states that FPI ". . . shall be administered by a board of six directors . . .". As with the position of CEO, the Board of Directors has the authority to establish the position COO and delegate to such officer appropriate corporate operational management authority.-- The proposed regulation should be modified to comport with the statute.

OMBUDSMAN [Proposed Section 302.6]

Proposed Section 302.6 seeks to establish the general responsibilities and organizational placement of the Ombudsman, a position previously created by the Board of Directors. The Ombudsman's principal function is "to achieve improved relations with the private sector" and to communicate the concerns and recommendations of the private sector directly to the Board of Directors. In addition, the Ombudsman reviews appeals by a Federal buying agency of an FPI denial of the agency's request to bypass FPI's mandatory source status and solicit offers from commercial sources (referred to as a waiver request). The agency's initial waiver request is considered and acted upon by the FPI commodity division responsible for the product for which the waiver. is being requested. The proposed rule also suggests that the Ombudsman provides "a mechanism for resolving [Federal agency] customer issues , which is subsequently described only as making "recommendations to the Chief Operating Officer".

As a member FPI's senior management, reporting to the Chief Operating Officer, the Ombudsman's organizational placement creates serious organizational conflict - of - interest problems. It also casts a very dark shadow over the assertion in the proposed regulation that the Ombudsman's exercises "independent authority" with respect to hearing agency appeals of denied waiver requests.

If the Ombudsman plays a role in the resolution of performance disputes between FPI and a Federal agency regarding the quality of FPI's delivered product, the timeliness of FPI's deliveries, or any post-award price increases, the proposed regulations should be modified to specify these responsibilities of the Ombudsman and make more specific whether the authority is merely advisory or more decisional, similar to that exercised with respect to reviewing denials of mandatory source waiver requests.

To provide a truly independent review authority with respect to denials of mandatory source waiver requests and hearing performance disputes, these functions should be vested by FPI's Board of Directors- in an entity outside of FPI and the Federal Bureau of Prisons. A possible alternative might be a special master appointed by the Chief Judge of the Department of Transportation Board. of Contract Appeals, which handles contract disputes for the Department of Justice under interagency agreement.

MEETINGS [Proposed Section 302.7]

Proposed Section 302.7 should be modified to reflect that the Board of Directors will discuss and take action in open session with respect to the adoption of resolutions and making determinations regarding staff proposals' to produce a new product or to substantially expand production of a previously approved product, pursuant to section 4122(b)(4) of title 18, United States Code.

Proposed Section 302.7 should be further modified to require that a complete record of each meeting of the Board (including teleconferences) be made and transcribed, and that such transcripts be promptly made available for public inspection along with the Board's agenda and all documents utilized by the Board in conducting the business of the meeting.

Proposed Section 302.7 should be further modified to alter the title to "Board of Directors: meetings and public access to meeting records."

INMATE EMPLOYMENT LEVELS [Proposed Section 302.8]

Like proposed Section 302.1, proposed Section 302.8(a) fails to reflect the equality between the statutory objective of FPI's employing the greatest number of inmates and minimizing, to the maximum practicable extent, the unfair competition on law-abiding workers and the firms that employ them. Rather, it too seeks to accord greater weight to the objective of inmate employment and denigrate the statutory objective "to reduce to a minimum competition with private industry or free labor". (See comments pertaining to proposed Section 302.1)

Proposed Section 302.8(a) makes reference to an Executive Order as well as FPI's authorizing statute (Chapter 307 of title 18, United States Code). An appropriate citation to the executive order should be provided. Prior to the enactment of FPI's authorizing statute, FPI operated under the authority of Executive Order No. 6917 (December 11, 1934).

MANDATORY SOURCE[Proposed Section 302.9].

Nature and Scope of Mandatory Source Status

Proposed Section 302.9(a) states that ". . . FPI is the mandatory source of products for all Federal departments, agencies, and all other Government institutions of the United States . . .". This overstates the reach of FPI's mandatory source status in a number of ways. For example, FPI mandatory source status does not apply to the Legislative Branch or any of its instrumentalities. Even within the Executive Branch, the reach of FPI's mandatory source status is not as sweeping as purported. For example, Executive agencies can meet their needs for products by utilizing excess products in the hands of other Executive agencies before turning to FPI (See, FAR Part 8.001). The U.S. Postal Service, the largest non - Defense agency within the Executive Branch, was exempted by Congress in 1980 as part of its authorizing statute.

Intragovernmental Transfers Exempt from FAR

Proposed Section 302.9(b) maintains that Federal agency acquisitions of products ' from FPI are exempt from the rules contained in the Government-wide Federal Acquisition Regulation (FAR), which is generally applicable to the Federal procurement of products from the private sector. This is based upon the classification of Federal agency acquisitions from FPI as intragovernmental transfers rather than procurement contracts. The proposed regulation cites as authority a legal opinion issued on September 13, 1993 by the Office of Legal Counsel of the Department of Justice, entitled APPLICATION OF THE FEDERAL ACQUISITION REGULATIONS TO PROCUREMENT FROM FEDERAL PRISON INDUSTRIES.

In proposed Section 302.9(d), FPI cites a 1939 Comptroller General decision, 18 Comp. Gen. 627 (1939), as also supporting the proposition that Federal agency acquisitions from FPI are intragovernmental transfers not purchases. In reaching a decision regarding whether a waiver should have been obtained before $51.45 worth of wiping rags were purchased from a commercial source, the Comptroller General cited extensively from a 1932 Attorney General's opinion, 33 Op. Atty. Gen. 327. The Attorney General's opinion offered an interpretation of transactions made between Federal agencies and the workshops operated directly by the Federal Bureau of Prisons, prior to the creation in 1934 of Federal Prison Industries, Inc., as an independent wholly-owned Government Corporation, administered by a six-person Board of Directors, appointed by the President. Given the questionable persuasive authority provided by these two 1930s - vintage decisions, FPI's 1999 regulatory proposal should be modified.

With respect to the 1993 Office of Legal Counsel, it only made explicit that Federal agency acquisitions made from FPI pursuant its mandatory source status under 18 U.S.C. 4124(a) were exempt from the FAR (except for FAR Part 8.6, pertaining to purchases from FPI). The FAR exemption does not extend to other sales such as services which are not covered by FPI's mandatory source status. This further supports the recommendation that the proposed regulation should be modified.

Asserted Duty for Agencies to Solicit FPI for Products

Proposed Section 302.9(c) purports to impose an affirmative duty on a Federal buying agency to contact FPI if the agency has a need for a product within one of the "categories of. products" listed in FPI's Schedule of Products, which the proposed regulation describes as "a general, though not an exhaustive, list of all the categories of products and services available . . . from FPI". In contrast, FPI's authorizing statute requires FPI to "publish a catalog of all products and services which it offers for sale", which "shall be updated periodically to the extent necessary to ensure that the information in the catalog is complete and accurate. (18 U.S.C. 4124(d)) (emphasis added). The proposed regulation should be modified to comport with FPI's authorizing statute.

Prohibition on a Buying Agency Comparing FPI's Pricing, Delivery Schedule or Product Performance to commercial sources

Proposed Section 302.9(d) would prohibit a buying agency from conducting any form of market research to compare an FPI offered :product against products offered by private sector sources with respect to pricing, delivery schedule, or the ability of the competing products to best meet the agency's mission requirements. This proposed limitation is contrary to provisions of FPI's authorizing statute. Pursuant to 18 U.S.C. 4124(a), a Federal agency is only required to purchase an FPI product, if three conditions are met. First, the FPI product must meet the buying agency's "requirements", that is possess the performance capabilities that best meet the mission needs of the buying agency. Second, the FPI product must be "available", that is, be deliverable in time to meet the agency's mission needs. And, third, that the price charged by FPI does not exceed a "current market price", a pricing standard unique to FPI that will be addressed in the comments relating to proposed Section 302.16 (Pricing).

If the FPI-offered product fails to meet the mission needs of the agency in terms of performance or time of delivery, or the offered price exceeds "a current market price", the buying agency must apply to FPI for a waiver of its mandatory source status pursuant to FAR Part 605 (Clearances). Proposed Section 302.9(d) would essentially prohibit a buying agency from collecting the information essential to make these statutorily authorized determinations. FPI is attempting to foreclose the potential public embarrassment flowing from a buying agency being able to demonstrate that multiple private sector vendors can readily provide substantially superior commercial products, substantially more quickly, and at substantially lower prices.

Attempted Expansions of FPI's Mandatory Source Status

Proposed Section 302.9(f) seeks to broaden the reach of FPI's mandatory source status to agency procurements of construction services. Modern construction procurement techniques frequently require the contractor to deliver a fully-equipped facility ready for use upon occupancy, commonly referred to as "turn-key construction". The proposed regulation asserts that FPI's mandatory source status, unless unilaterally waived by FPI, requires the agency to separately obtain FPI-offered products, such as quarters or office furniture, from FPI and then furnish them to the construction prime contractor.

FPI's mandatory source status does not extend to the procurement of services, including construction services. The reach of FPI's mandatory source status is not changed simply because the contract for the procurement of the construction services may concurrently require the furnishing of ancillary products of a type offered by FPI. The practical implications of this proposal would result in FPI reviewing every construction contract solicitation (or a solicitation for other types of service contracting) to determine if performance might require the use of any type of product produced by FPI. Such an incredible intrusion into, and disruption of, the Federal construction procurement process would have to be based upon explicit statutory authority, which is simply not provided by FPI's authorizing statute.

Similarly, proposed Section 302.9(f) asserts that FPI's mandatory source status applies if products of the type offered by FPI are included among the products specified in a solicitation to supply an array of items, referred to as a "consolidated procurement". It would appear that the proposed regulation contemplates that the buying agency would be required to remove these FPI-offered items from the solicitation requirement and obtain them directly from FPI. Again, this would require FPI review of all contract solicitations for such consolidated supply procurements. These types of consolidated requirements-type contracts are becoming more common as the Federal Government tries to avoid the costs associated with the storage and distribution of items of supply by piggy-backing on commercial distribution systems. The various Prime Vendor Program contracts of the Defense Logistics Agency are an example of an innovative contracting technique that would be impaired if this proposed expansion of FPI's mandatory source status is permitted to become effective. This provision of the proposed regulation should be deleted.

Claimed Authority as a Mandatory Subcontract Supplier

Proposed Section 302.9(g) claims that "FPI's status as a mandatory source extends to contractors when they provide products for Government use." It would seek to require a buying agency to include a solicitation provision requiring a prime contractor (and presumptively subcontractors at any tier) to utilize FPI as the source for any type of FPI product. authorized for sale by FPI's Board of Directors. It also purports to authorize Government contractors (and presumptively subcontractors at any tier) to use FPI as a source for any FPI-offered service as well as so called "non-mandatory products". (See, proposed Section 302.10 and the associated comments).

FPI lacks any statutory authority to furnish any type of product or service to a Government prime contractor (or a subcontractor at any tier). FPI's authorizing statute, which provides the basis for FPI's FAR-based mandatory source status, covers only products furnished directly to a Federal agency.

On the contrary, FPI is statutorily prohibited from selling products in the commercial market (18 U.S.C. 1761(a)). Contracts between a Government prime contractor and its subcontract supplier are private commercial contracts. FPI lacks any authority to interfere in the contractual relationships between a prime contractor and its various subcontractors and suppliers.

Notably, FPI has repeatedly sought statutory authority to function as a subcontractor on Federal prime contracts. It has never been granted.

In the absence of statutory authority, FPI has unilaterally determined that it has the authority to do so on the basis of an World War II-era Attorney General's opinion (40 Op. Atty. Gen. 207 (1942). This authorization for FPI to act as a subcontractor was justified by the Attorney General on the basis of the need to mobilize the Nation's total productive capacity in support of the war effort. Yet, even during World War 11, the authority to act as a subcontractor was permitted only when the prime contractor (or a private subcontractor at any tier) could not find any commercial supplier capable of meeting the need. Even if this Attorney General's Opinion is deemed have continued validity, despite the end of World War 11, it is unlikely that any Government prime contractor or subcontractor could certify that no source other than FPI is capable of fulfilling the subcontract requirement.

On July 22, 1998, FPI was granted authority to offer services in the commercial market under certain circumstances. While we believe that this claimed authority lacks any adequate statutory foundation, it could encompass offering inmate-furnished services to a Government prime .contractor (and presumptively subcontractors at any tier). (See, proposed Section 302.11 and the associated comments).

PROVISION OF PRODUCTS AS NON-MANDATORY SOURCE

[Proposed Section 302.10]

Proposed Section 302.1(a) specifies the manner in which FPI believes it may offer products if it chooses not to exercise its mandatory source status. The proposed regulation asserts that FPI may produce and sell a "new product" without obtaining the approval of FPI's Board of Directors, if: (i) FPI is merely responding to a Federal buying agency's solicitation; (ii) the sales are made "on a competitive basis"; and (iii) FPI has "in no way relied upon its status as a mandatory source." Next, the regulation states that once any such "new product" is "produced", that is, sold competitively, the product "will not be added to the Schedule [of Products] as a mandatory source item". Finally, the proposed regulation asserts that "whatever share of the market FPI acquires on a competitive basis will be deemed to be a reasonable share of the market."

First, FPI is to be commended for acknowledging that it may voluntarily waive its mandatory source status and compete for its Federal agency sales for whole classes its products. Such action should be taken with respect to all products and services offered by FPI.

Nonetheless, other elements of proposed Section 302.10(a) cannot be accomplished through unilateral regulatory action, but will require amendments to FPI's authorizing statute. For example, 18 U.S.C. 4122(b)(4) requires approval of the Board of Directors before FPI can produce ADy "new product". Similarly, under current law, only the FPI Board of Directors may specify the level of FPI product sales which it determines does not exceed the statutory limitation of a "reasonable share of the market .

Proposed Section. 302.10(b) seeks to include within the proposed new category of "non-mandatory, products" those products whose production has been approved by the Board of Directors, but which -ara sold pursuant to FPI's asserted "preferential source" status (set forth in proposed Section 302.12 (Preferential source)). As currently written Subsection (b) of proposed Section 302.10 operates as an exception to Subsection (a). Proposed Section 302.10(b) would permit FPI to avoid the competitive procurement procedures seemingly mandated by proposed Section 302.10(a) and conduct the sale on a non-competitive basis by simply invoking its purported "preferential source" status. This new category of products should be deleted.

As described in the subsequent comments to proposed Section 301.12 (Preferential source), we believe that FPI's asserted "preferential source status cannot be created through unilateral regulatory action, but would require an amendment to FPI's authorizing statute.

PROVISION OF SERVICES TO THE COMMERCIAL MARKET

[Proposed Section 302.11]

Proposed Section 302.11 seeks to authorize FPI to sell services furnished by Federal inmates in the commercial market without any limitation except those that might be imposed by FPI's Board of Directors. This proposed unlimited authorization to offer commercially inmate furnished services fails to reflect even the limitations imposed by the Attorney General. More fundamentally, we believe that the legal memorandum does not provide an adequate legal justification for the sale of inmate-furnished services and should not be implemented. The 22 July 1998 memorandum of the Assistant Attorney General for Administration, entitled "Sale of Services by Federal Prison Industries, Inc. (FPI) in the Commercial Market", placed two significant limitations on this newly claimed authority. First, FPI was to "[i]nitiate the program as a pilot". Second, FPI was to "concentrate its commercial services efforts on performing service work which is currently being performed in a foreign location." The proposed regulation fails to reflect either of these modest limitations imposed by Attorney General Reno.

The claimed authority to sell inmate-furnished services in the commercial market is based on a February 1998 legal memorandum issued by a special counsel in the Department of Justice's Criminal Division. - The memorandum held that commercial sales of inmate-furnished services is not prohibited by the 1935 statutory prohibition on the sale of inmate furnished products in interstate or foreign commerce (18 U.S.C. 1761). The supporting analysis, prepared by FPI's General Counsel, is grounded on the legislative history of the 1935 statute, which focused on the unfair competition from inmate-furnished products, but did not discuss inmate furnished services. The analysis ignores the business reality that today's diverse service economy simply did not exist in 1935. It also ignores more than 60 years of practice by FPI and the various state prison industry programs, during which they consistently avoided as illegal any attempt to offer inmate-furnished services in the commercial market.

The determination that the prohibitions of 18 U.S.C. 1761(a) do not apply to services will likely have a profound impact on the prison industry programs of states and local government. Previously, any commercial sales by these prison industry programs had to be conducted pursuant to the Prison Industry Enhancement (PIE) Program, a statutory exception to the prohibition contained in 18 U.S.C. 1761(a). Coincidently, a proposed rewrite of the guidelines for the PIE Program, published in the Federal Register on July 7, 1998, adopts the position that PIE Program restrictions only apply to the sale of inmate produced products. A State or local prison industry program is now free to sell services in the commercial marketplace without adhering to even the limited restrictions currently applicable-to a PIE Program operation intending to sell inmate made products. These include: (i) a numerical ceiling on the number of PIE Program projects (now 50); (ii) certification by the Director by DOJ's Bureau of Justice Assistance (BJA) before initiating a PIE Program operation specified in the application; (iii) regular reporting to BJA by each individual PIE Program operation; (iv) prohibition on displacing non - inmate workers; (v) prohibition on employing inmate labor "in skills, crafts or trades in which there is a surplus of available gainful labor in the locality"; (vi) prohibition on impairing "existing contracts for services"; and (vii) consultation with organized labor before making application to BJA for approval of a proposed PIE Program operation.

During a 7 August 1998 meeting with Rep. Peter Hoekstra (MI-2nd) and staff to Rep. Barney Frank (MA-4th), Rep. Mac Collins (GA-3rd), and Rep. Carolyn B. Maloney (NY14th) to announce FPI's commercial services initiative, FPI's; Chief Operating Officer was unequivocally informed that any implementation of the initiative would be considered fundamentally flawed if it failed to include protections for law-abiding workers, which were substantively identical to those applicable to the PIE Program. FPI's Chief Operating Officer gave assurances that such protections would be included in FPI's implementation.

FPI's announced implementation plans for the commercial services initiative have so far failed to include even the limited protections of the PIE Program.

On the contrary, FPI has even granted itself the authority to extend the reach of the commercial services initiative beyond the scope approved by Attorney General Reno, namely those services "currently being performed in a foreign location". On December 24, 1998, FPI published a notice in the Commerce Business Daily (CBD) announcing its intentions regarding the initial implementation, targeted for "Spring of 1999

FPI's CBD announcement stated that they were seeking commercial business partners interested in utilizing inmate labor to furnish services in four categories. The first category, "Category 1: Repatriation of jobs", is described as "[w]ork that is currently being performed outside the United States that a prospective partner would be willing to return to the U.S." The second category, "Category II: Labor Shortage", is described as industries, such as the high technology sectors, which have "recognized labor shortages" causing companies to "outsource to foreign countries" or seek "additional work visas . . . to fill available domestic jobs." The third category, "Category III: New Requirements", is described as "[n]ew work that a company . . . intends to contract . . . outside the United States." (emphasis added). The fourth category, "Category IV: Current Inmate Work", is vaguely described as [w]ork of the type "currently performed" for "nonfederal agencies" by "non-Federal Bureau of Prisons inmates (such as District of Columbia inmates)".

While FPI's CBD announcement confidently asserts that sale of inmate labor to provide services in these categories "would not adversely impact domestic labor", no concrete safeguards for law-abiding workers or the firms that employ them are included. It only notes that "[a]ppropriate language may be developed for partnerships which will require FPI and a prospective partner to certify jointly, or individually, that the partnership will not adversely impact domestic labor or businesses." (emphasis added).

PREFERENTIAL SOURCE[Proposed Section 302.12]

Proposed Section 302.12(a) seeks to establish FPI as a "preferential source" for products, whenever FPI chooses to offer a product to a Federal agency without asserting its mandatory source status. Proposed Section 302.12(b) seeks to establish FPI as a "preferential source" for services.

After seeking to accord FPI the newly created status of "preferential source", the proposed regulation then tries to authorize a Federal buying activity to purchase products and services from FPI without using otherwise applicable competitive procurement procedures mandated by statute and implemented through the Government-wide FAR. FPI lacks the authority to grant such an exemption unilaterally by regulation.

FPI's status as a "mandatory source" for items of supply (products) is, itself, the creation of the FAR, established as a workable means of implementing the direction in FPI's authorizing statute. Section 4124(a) of title 18, United States Code, states that purchases shall be made from FPI, if certain conditions are met, namely that FPI's product meets the buying agency's needs as to performance, can be timely delivered, and FPI's price does not exceed a "current market price".

While according to FPI the status of a mandatory source for products, the FAR does not accord to FPI the status of a "preferential source . Similarly, the FAR does not contain any exemption from the competition requirements of FAR Part 6 (Competition Requirements), because the purchase of service is being made from FPI.

In proposed Section 302.9(d), FPI asserts that its sales to the Federal agencies are intragovernmental transfers and not purchases by procurements contract, citing a 1939 decision of the Comptroller General of the United States (18 Comp. Gen. 627). FPI asserts that as an intragovernmental transfer rather than a-procurement contract, Federal agency purchases from FPI are not subject to the FAR. In proposed Section 302.9(b), FPI also cites a legal opinion, entitled Application of the Federal Acquisition Regulations to Procurement from Federal Prison Industries, issued on the Assistant Attorney General for the Office of Legal Counsel, on September 13, 1993. This legal opinion unequivocally holds that FPI is not subject to the FAR (except the FAR provisions relating to FPI (FAR Subpart 8.6)), with respect to products being sold being sold pursuant to 18 U.S.C. 4124(b). The legal opinion provides no interpretation regarding the procedures through which a Federal agency may buy services from FPI and obviously, is silent, with respect to the new category of "non-mandatory source" products, which the proposed Section 302.10 seeks to create.

If proposed Section 302.10 (Provision of. products as a non- mandatory source) and 302.12 were to become effective as proposed, FPI will have succeeded in granting itself a preference that is equal to its
mandatory source status with respect to ' any product or service required by the various Federal agencies. Private sector competitors would be foreclosed from having the chance to compete for a contract to meet any agency need for any type of product or service, which FPI provided or even believed that it could provide. The limited protections provided to the private sector by the statutory requirements that the Board of Directors to approve a new product (or a substantial expansion of a currently approved product) and determine a reasonable share of the market could simply be bypassed whenever FPI's career management staff found it expedient.

ESCAPE-PROOF" GUARANTEE [Proposed Section 302.13]

Proposed Section 302.13 states that "FPI is committed to the complete and continual satisfaction of its customers." It generally describes the warranty offered, its - so-called " Escape- Proof" guarantee.

The protection offered a Federal agency by FPI's warranty is illusory, given the extraordinary authority granted to FPI with respect to any dispute with its Federal agency customer. Unlike any other supplier to the Government, FPI, rather than the buying agency, decides whether FPI's performance meets the buying agency's needs.

Under 18 U.S.C. 4124(b), any dispute regarding the "price, quality, character, or suitability" of products furnished by FPI are ultimately subject to resolution by a high-level arbitration panel, consisting of the Attorney General, the Administrator of General Services, and the President (delegated to the Director of the Office of Management and Budget), or their representatives. To assure that agency contracting officers are aware of these unique disputes resolution procedures, they are re-stated in FAR Part 8.605(c). Not surprisingly, this cumbersome process has only been used a few times, during the 1930s, according to the GAO.

As previously noted, the extent of the legal limitations on a contracting officer's discretion in dealing with FPI in the same manner as private sector contractors is enunciated in a legal opinion, Application of the Federal Acquisition Regulations to Procurement from Federal Prison Industries, issued on the Assistant Attorney General for the Office of Legal Counsel, on September 13, 1993. A federal agency simply cannot compel FPI, like a private contractor, to meet the agency's requirements regarding: (i) quality of product actually furnished; (ii) the reasonableness of FPI's offered prices (or require FPI to justify any price increase); or (iii) timeliness of products delivered.

If an agency contracting officer invokes the " Escape- Proof" Guarantee, or in any other way challenges the suitability of FPI's performance, the contracting officer knows that, in practical terms, FPI's staff can make the final decision. The proposed regulation should be modified to make explicit that any compliance with the warranty is wholly voluntary by FPI and that any dispute will be decided by FPI, appealable only to the statutorily-specified arbitration panel.

WAIVER POLICY [Proposed Section 302.14)

Proposed Section 302.14(a) states that a buying agency must obtain a waiver from FPI before buying from a commercial source a product-of the type offered in FPI's Schedule of Products.

Like FPI's mandatory source status, FPI's so-called waiver process is a regulatory implementation of 18 U.S.C. 4124(a). FAR Part 8.604 refers to FPI's waiver process as obtaining a "clearance" from FPI. It is referred to as the "waiver process" throughout these comments.

Proposed Section 302.14(b) is a restatement of FAR Part 8.605(c) that waivers will not ordinarily be granted on the basis of price. It expands upon the FAR provision by continuing "where FPI's product does not exceed current market price as determined by FPI". As is subsequently discussed in the comments to proposed Section 302.16 (Pricing), the term "current market price" has a unique meaning based on a 1931 GAO decision. FPI maintains that its price meets the "current market price" standard, if FPI's price does not exceed the highest price that has been offered to: the Government, irrespective of whether any actual Government purchases have been made at that price.

Proposed Section 302.14(d) states that waivers based on delivery schedule will not be granted if FPI's delivery schedule "is consistent with deliveries for comparable products on the Federal Supply Schedule or under standard commercial practices." The proposed regulation seeks to impose a certification requirement on the contracting officer for requiring a delivery schedule quicker than the Federal Supply Schedule. The certification must be supported by a substantiation that a commercial source is actually available to meet the quicker delivery schedule.

Proposed Section 302.14(d) is defective in both legal and practical terms. For example, FPI is without authority to levy a certification requirement on agency contracting officers through its own unilateral regulatory action. Further, this proposed provision is in operational conflict with proposed Section 302.9(d). The latter prohibits a contracting officer from contacting private sector vendors to obtain information, such as whether they can meet the buying agency's required delivery schedule.
Proposed Section 302.9(f) discusses class waivers. It asserts that FPI has "granted a class waiver for supplies that are acquired for use outside the United States when these supplies are both ,manufactured :by and purchased from sources outside the United States." (emphasis added). This proposed provision is in conflict with FAR Part 606(d).

Proposed Section 302.9(g) states that "aesthetics are not unacceptable basis for a waiver."

Generally in Federal procurement, the buying agency, rather than prospective suppliers, exercises broad discretion to specify the agency's needs, unless the agency's statement of needs is determined through the bid protest process to be unreasonably restrictive of competition. While the threat of the disputes provisions of 18 U.S.C. 4124(b) effectively gives FPI the unilateral power to grant or deny an agency waiver request, it is overtly abusive for FPI to propose to restrict even the bases upon which an agency may request a waiver.

Proposed Section 302.9(h) expresses FPI's concern with avoiding the additional unfairness to the private sector associated with FPI exercising its mandatory source status with respect to a Federal agency requirement after the requirement has been announced in the Commerce Business Daily (CBD) as a contracting opportunity. By then, many prospective private sector offerors will have expended some money on assessing whether to make an offer, and others will have expended additional resources in actually preparing an offer, only to see the procurement canceled.

As a solution, FPI states that it will seek to exercise its mandatory source status during the 15-day period between the date on which a contracting opportunity is announced in the CBD and the release of the solicitation, upon which prospective offerors would fashion a response. While FPI's solution demonstrates concern, it is more likely than not to be unworkable. Various procurement reforms enacted since 1994 have tended to accelerate the solicitation process, especially for procurement below the Simplified Acquisition Threshold ($100,000 or less) and for commercial items. Common today are combined announcements/ solicitations, which eliminate the 15-day period between announcement of the contracting opportunity and release of the solicitation. It is odd that the drafters of the proposed regulation would be unaware of this;, since FPI makes frequent use of combined announcements/solicitations with respect to its own procurements of materials and components for use in its operations.

Proposed Section 302.14(i): purports to levy a reporting requirement on Federal agencies whenever they use a commercial source rather than FPI under exigent circumstances pursuant to FAR Part 8.606(a). FAR Part 8.606(a) contains no such reporting requirement. FPI lacks the unilateral authority to impose such a requirement by regulation.

Proposed Section 302.14(j) establishes seven working days as the period within which FPI will take action with respect to a waiver request, "once all information necessary to make a decision is provided to FPI." FPI's purported concern for the mission needs of its Federal agency customers is reflected in this ostensibly prompt response time to agency waiver requests. It is, however, wholly illusory, in light of the previously quoted standard to determine when the clock begins to run.

APPEALS TO WAVIER DENIAL [Proposed Section 302.15]

Proposed Section 302.15 seeks to establish the process by which a Federal agency can request FPI's Ombudsman to review a denial of a waiver request.

This proposed section needs to be* fundamentally reassessed in the context three additional observations. First, proposed Section 302.15, like proposed Section 302.14 (Waiver Process), fails to inform the reader that an agency waiver request is initially considered and decided by the FPI Product Division that would lose the sale if the waiver were granted. Such blatant organizational confIicts - of - interest requires fundamental change in FPI's procedures in the initial consideration of waiver requests. Second, the FPI Ombudsman is afflicted with almost equally debilitating organizational conflicts-of-interest. (See, comments to proposed Section 302.6 (Ombudsman)). Third, some have questioned the authority of the FPI Board of Directors to grant quasi-judicial authority to an FPI officer of its creation without more specific statutory authority. As with so much of FPI's authorizing statute, very little statutory authority has been deemed adequate by FPI's Board of Directors to carry FPI a very long-way in any direction that FPI's career management staff may want to go.

Proposed Section 302.15 also purports to require that [a]II appeals must be made as a matter of first instance to the FPI Ombudsman. Section 4124(b) of title 18, United States 'Code, imposes no such limitation.

PRICING [Proposed Section 302.16]

Proposed Section 302.16(a) acknowledges that by statute FPI's price cannot exceed a "current market price". What follows, in FPI's own proposed language, is admission that FPI is free to overcharge its Federal agency customers. The proposed regulation continues: "Determination of what constitutes the current market price, the methodology employed to determine the current market price, and the conclusion that a product of FPI does not exceed that price is the responsibility of FPI to determine, subject to a dispute under 18 U.S.C. 4124(b)."

This proposed language only omits one key element of FPI's ability to dictate the prices to be paid by FPI's Federal agency customers. Since the term "current market price" is undefined in FPI's authorizing statute, FPI is free to apply a unique meaning from a 1931 GAO decision. FPI maintains that its price meets the "current market price" standard, if FPI's price does not exceed the highest price that has been offered to the Government, even if purchases have been made at that price. See, UNICOR PRODUCTS: FEDERAL PRISON INDUSTRIES CAN FURTHER ENSURE CUSTOMER SATISFACTION (GAO/GGD-86-6) at 4, citing 11 Comp. Gen. 75 (1931).

Proposed Section 302.16(a) also includes a simple reference to the unworkable and unused disputes resolution mechanism specified at 18 U.S.C. .4124(b), which in practical terms gives FPI's career staff the ability to resolve any dispute to FPI's satisfaction (See comments to proposed Section 302-13 (" Escape- Proof" guarantee)).

FPI routinely asserts that it is wholly self-sufficient based on its sales, receiving no appropriated funds. Critics of FPI assert that its "self -sufficiency" is more founded upon its ability to overcharge its agency "customers" for products that fail to provide the "best value" available from commercial products offered by private sector suppliers.

With regard to FPI over-pricing, corroboration is available from a number of sources. On October 11, 1991, the DOD IG issued Audit Report No. 92-005, DOD PROCUREMENTS FROM FEDERAL PRISON INDUSTRIES, in response to a DOD IG HOTLINE allegation. The DOD IG reviewed a sample of FPI contracts, over a seven-year period (FY84 to FY90), to supply electronic and electrical cables to DOD. The audit report found overpricing in 89% of the contracts that average 15%. On October 5, 1998, the DOD IG issued Audit Report No. 99-001, DEFENSE LOGISTICS AGENCY PROCUREMENTS FROM FEDERAL PRISON INDUSTRIES, INC. The DOD IG report is based on a review of 1,786 DLA contracts awarded to FPI and private contractors during FY96 and FY97 for various military specific items, without commercial equivalents, and 87% of them textiles. Even for military textiles, items for which FPI is especially competitive due to its lower labor costs, FPI's prices were still higher than private sector vendors in 42% of the contracts reviewed.

On July 7, 1993, GAO issued Report No. GGD 93-51R, entitled FPI SYSTEMS FURNITURE. In accessing FPI pricing for systems furniture, the GAO compared FPI's pricing with the prices available from commercial vendors through the GSA's Multiple Award Schedule (MAS) Program. FPI's prices were higher than the offered prices of 9 of the 11 commercial systems furniture vendors under the MAS Program. FPI's prices averaged 15% higher than the prices of the three commercial vendors whose sales in 1992 aggregated to 60% of the systems furniture sales under the GSA MAS Program. Further, the three most successful commercial suppliers were not simply "low-end product" vendors. More recently, similar findings regarding furniture product's as well as other products are reported in FEDERAL PRISON INDUSTRIES: INFORMATION ON PRODUCT PRICING (GAO/GGD-98151; August 24, 1998).

Proposed Section 302.16(b) specifies how FPI will evaluate prices offered by commercial suppliers under the GSA Federal Supply Schedules. Most notably, the proposed regulation seeks to establish by regulatory fiat that: "A price established by FPI utilizing one of the methodologies identified in this section fulfills the obligations of a contracting officer to obtain a fair and reasonable price under FAR". In reality, the proposed regulation only provides pretenses of pricing methodologies so that an FPI's determination that its price is a "current market price" will -not appear to be wholly arbitrary, and thus potentially subject to judicial review under the Administrative Procedure Act.

INDUSTRY INVOLVEMENT GUIDELINES PROCEDURES

[Proposed Section 302.17]

Proposed Section 302.17 specifies the procedures to be following by FPI's career management staff, the FPI Board of Directors, and the private sector relating to expansion proposals. Generally, the procedures outlined adhered to the relatively detailed statutory coverage at 18 U.S.C. 4122(b). Substantial modifications to various subsections are nonetheless required, as subsequently described.

Proposed Section 302.17(a) states that FPI will seek to contact private sector parties likely to be impacted by the proposed expansion to obtain information prior to the initial drafting of any market impact study by FPI staff. The proposed regulation should be modified to provide some criteria indicating how FPI staff determines whom to contact.

Further, since FPI's is requesting information from private sector parties, FPI's collection of information request is subject to the requirements of the Paperwork Reduction Act, Chapter 35 of title 44, United States Code, if it is sent to 10 or more persons. Further, FPI's collection of information request should be explicit regarding the purpose for which the information is being collected, namely, to support an FPI staff proposal to FPI's Board of Directors to approve FPI's production of a new product or to substantially expand production of a currently approved product in competition with private sector firms and their law-abiding workers.

Proposed Section 302.17(c) specifies how the market impact will be announced for public comment and the types of information that the FPI staff are seeking in response. The proposed regulation would require that comments on the market impact study are due within 45 days of its being announced in the Commerce Business Daily (CBD). The proposed regulation should be modified to provide not less than 60 days for public comment. One of the less desirable by-products of the recent procurement reform initiatives- is the diminished status of the CBD as the indispensable starting point for learning what the Government is seeking to buy. Simplified acquisition techniques relating to contracting opportunities below the Simplified Acquisition Threshold ($100,000 or less), commercial products, and orders under task-or-delivery-order type contracts are exempt from the usual CBD notice requirements.

Proposed Section 302.17(d) recognizes that FPI may have to rely on trade associations and labor unions to more effectively announce a proposed expansion to the attention of affected parties. Unfortunately, the proposed regulations requires their responses within 45 days. The proposed regulation should be modified to provide not less than 60 days for public comment. Consideration should also be given to contacting such trade associations and labor unions as part of the advance notification process described in proposed Section 302.17(a).

Proposed Section 302.17(e) purports to impose 25-page limit on any public comments. Since FPI lacks the authority to impose such limitation, it should be deleted. In the alternative, the proposed regulation could require the submission of an executive summary with respect to any submission in access of a specified number of pages.

Proposed Section 302.17(g) states that "[a] copy of the written comments submitted in response to the announcement, FPI's responses to the comments, and FPI's final recommendation to the Board of Directors shall be made available to commenters who filed a timely submission." (emphasis added). Since FPI lacks the authority to foreclose public access to the record being used by the FPI Board of Directors to discharge a statutory responsibility in conformity with the Administrative Procedure Act, the proposed regulation should be modified.

Proposed Section 302.17(h) purports to impose a series of limitations on the public comments that may be presented regarding the record that will be utilized by the FPI Board of Directors in exercising its statutory authority to authorize the production of a new product (or substantially expand the production of a currently - approved product), including a 10page size limitation. FPI's career management staff seems bent on limiting the public information available to the members of the Board. The proposed regulation should be substantially revised to eliminate these many limitations that are devoid of any legal basis.

Proposed Section 302.17(i) seeks to require that all final submittals and any request to make an oral presentation during the Board meeting to consider the expansion must be received by FPI not less than fifteen (15) days in advance of the meeting. Given that proposed Section 302.17(g) only binds FPI staff to distribute FPI's final recommendation to the Board (along with FPI's responses to the comments received) only 45-days in advance of the Board meeting, the proposed submission requirement continues the pattern that the FPI staff seems bent on trying to deprive the Board of public comments challenging the recommendation for expansion being advocated by the FPI staff. The proposed regulation should be modified to reduce the submission deadline to no more than three business days prior to the meeting. If the Members of the FPI Board of Directors were subpoenaed to appear before a Congressional committee, a written statement would be due only 48-hours before the time of the hearing. Further, proposed Section 302.17(g) should be modified to require FPI staff to make the enumerated materials available to the public not less than 60days in advance of the Board meeting (rather than 45 days). Further, the proposed regulation should pledge to provide additional time for public consideration if the initial proposal generated comments challenging the fundamental information on which the FPI staff based its expansion recommendation.

Proposed Section 302.17(j) specifies the manner in which the Board of Directors will conduct the hearing to consider a proposed expansion. Again, it is weighted toward limitations regarding the manner and the substance of the information that can be presented to the Board by members of the public. Like many of the other subsections of proposed Subsection 302.17, subsection (j) demands substantial revision. Of particular note is proposed Section 302.17(j)(6) relating to the record of the Board hearing. It should be substantially expanded to reflect the public's right to access to the full record upon which the Board made its decision regarding the proposed expansion.

Proposed Section 302.17(k) recites the responsibilities of the Board of Directors regarding making a decision to authorize the production of a new product or a substantial expansion in production of a currently = approved product. The proposed regulations says that the Board should makes its decision, "employing the criteria spelled out in the relevant statutes, legislative history, and corporate regulations."

This provision should be modified to cite the statutes contemplated and to eliminate the references to "legislative history" and "corporate regulations". Part 302 of title 28, Code of Federal Regulations, is the regulation governing Federal Prison Industries, Inc.

DEFINITIONS AND APPLICATION OF SIGNIFICANT TERMS IN PRODUCT DEVELOPMENT GUIDELINES PROCESS [Proposed Section 302.18]

General comments relating to proposed Section 302.18

Proposed Section 302.18 would specify definitions of key terms: and their application in the process of making decisions relating to FPI's production of a new product or its increased production of an existing product. Unfortunately, many of these so-called definitions have an Alice-in-Wonderland quality devoid of virtually any private sector reality. They appear to be designed to permit FPI to expand exponentially, inconvenienced by only the mildest restraints, yet allowing FPI to claim compliance with the statutory limitations intended to provide real protections to law-abiding workers and the businesses that employ them. After fundamental revision, these- definitions should be incorporated into proposed Section 302.2 (Definitions).

"Specific Product"

Proposed Section 302.18(a) would establish the meaning of the term "specific product". It proposes a distorted definition of "specific product" for the purpose of enabling FPI to group together an array of individual types of items. This distorted definition would enable FPI to argue that it is not taking "more than a reasonable share of the market . . . for a specific product", the limitation imposed by 18 U.S.C. 4122(b)(2), while actually reserving to itself very high percentages of the Federal purchases for many individual items. The proposed regulation would even authorize the Board of Directors to merge two Federal Supply Classifications (FSC) (and the many individual products within each FSC) and declare the., resulting even broader grouping to be a single "specific product". Such a definition of "specific product" could be employed when needed by the Board to find FPI's market share to be reasonable even when FPI's share for many of the individual items may be. well in excess of 50 percent.

Proposed Section 302.18(a) requires fundamental redrafting.

"New Product"

Proposed Section 302.18(b) would establish the meaning of the term "new product". Under the proposed definition, a product would only be designated a "new product", if within the last five years, FPI had not manufactured any product within the broad grouping of products labeled "specific product". If such a definition were to become effective, it could easily be made to operate as a regulatory repealer of the statutory requirement at 18 U.S.C. 4122(b) to obtain FPI Board of Director approval before FPI commences manufacturing of a "new product".

Proposed Section 302.18(b) requires fundamental redrafting.

"'Good Faith' CBD announcements"

Proposed Section 302.18(c) would establish a process for receiving public comments on a decision by FPI staff to initiate production of an item without seeking the approval of the Board of Directors if the FPI staff determines that the item does not meet the proposed definition of "new item". All references to "FPI" should be revised to FPI's Chief Executive Officer or FPI's Chief Operating Officer, so that responsibility is assigned to a specific senior corporate manager rather than to the Corporation generally.

As proposed, a notice would be published in the Commerce Business Daily (CBD) announcing that FPI intends to initiate production of a product which has been determined to be other than a "new product" and soliciting public comments on that determination. The proposed regulation suggests some of the circumstances under which FPI staff would decide whether to publish such an announcement. Commendably, the provision --states that ". . . FPI will resolve any question as to whether to announce in favor of announcement."

Proposed Section 302.18(c)(4) prescribes the types of comments being sought and requires submission of the comments within 21 days after the date of publication of the CBD notice. This comment period should be extended to at least 60 days, given the diminished status of the CBD, as previously discussed. Consideration should also be given to providing direct notification to appropriate business associations and labor unions, in the same manner as is done for expansion proposals requiring Board approval.

Pursuant to proposed Section 302.18(c)(5), each person submitting a comment would be personally notified regarding "whether FPI decides to go through the guidelines process". This is interpreted to mean that a response will be furnished to a commentator only if FPI reverses its.. initial decision and declares the product to be a "new product", the production of which requires prior approval by the FPI Board of Directors. This provision should be revised to require FPI to publish a second CBD notice announcing that, in light of the comments received, it will designate the item to be a "new item" and seek Board approval, or initiate production without such approval. This would be congruent with proposed Section 302.18(c)(6) which grants a right to file an appeal to "any interested party". FPI's announcement to unilaterally initiate production should specify FPI's sales goals for the item during the initial year's production and for at least two subsequent years.

Proposed Section 302.18(c)(6) would grant any interested party the right to file an appeal with the FPI Board of Directors challenging the determination by the FPI staff that the product is not a "new product". Pending a decision by the Board regarding the appeal, FPI would be authorized to proceed with its plans to initiate production of the item, until the Board determines that the proposed production constitutes production of a "new product". Proposed Section 302.17(g) through (j) could be modified to provide procedures for the Board hearing these appeals pursuant to proposed Section 302.18(c)(6).

"Significant expansion of an existing product"

Proposed, Section 302.18(d) would establish a process for determining whether a proposed increase in production of a currently authorized product will be deemed a "significant expansion in production", requiring prior approval by the FPI Board of Directors pursuant to 18 U.S. 3122(b) and the proposed Section 302.17 (Industry involvement guidelines procedures). The proposed regulation sets forth a highly complex multistep process for evaluating the estimated increase in FPI's market share that is expected to result from the proposed production increase. Depending upon FPI's current market share, FPI staff could unilaterally initiate production increases expected to increase FPI's share of the market by between 4.99% and 15%.

Further, it is important to remember that these market share calculations are being made with respect to the proposed distorted definition of "specific product". In accordance with proposed Section 302.18(a), a "specific product" potentially encompasses hundreds of individual items grouped under one (or with Board approval, two) broad Federal Supply Classifications (FSCs). For example, FSC 3750 (Gardening Implements and Tools), a new product line recently approved by FPI's Board of Directors, includes: "Garden Tractors, Walking Type; Lawn Mowers, Powered and Nonpowered; Hedge Trimmers; Lawn Seeders; Fertilizer Spreaders; Gardening Rakes, Forks, Hoes, and Other Garden Tools." (Product and Service Codes Manual; Federal Procurement Data System; December, 1993). Given this proposed definition of "specific product", FPI could readily take (through its mandatory source status) above 50% of the Government market for various individual items, while remaining below 10% with respect to the aggregate Federal purchases for all of the. items encompassed within the FSC.

If proposed Section 302.18 becomes effective without fundamental redrafting, FPI staff will be empowered to initiate expanded production of currently approved items and commence production of new individual product offerings without having to obtain the prior approval of the Board of Directors or engage in the analytical and public participation processes mandated by 18 U.S.C. 4122(b). In practical terms, proposed Section 301.18 will operate as a regulatory repealer of 18 U.S. 4122(b) and renders the protections of proposed Section 302.17 (industry involvement guidelines procedures) as virtually. illusory.

Proposed Section 302.18(d) appears to establish two separate tests for determining whether a proposed expansion of production will be determined to be a "significant expansion" requiring prior approval by the FPI Board of Directors. The relationship between the two tests cannot be discerned.
Under the first test, a production increase will "be deemed a significant product expansion", if: (i) sales for a "specific product" will increase by the greater of "more than 10 percent or $1 million, in any given year"; or (ii) result in any increase in market share, if FPI's market share for the "specific product" already exceeds 25%.

Proposed Section 302.18(d)(2) continues: "When either [of the foregoing] criterion is met, an analysis of the federal government market for the specific product will be conducted and an estimate of FPI's current and projected market share will be developed. The proposed production increase will be evaluated to determine if it will continue to be deemed a 'significant' " production expansion, using a "sliding scale" set forth in the proposed regulation.

As understood, the second test is depicted as follows:

GENERAL COMMENTS ON FPI BUSINESS OPERATIONS

[Proposed Section 302.19]

Proposed Section 302.19 is. an open invitation to any interested party to offer comments at any time regarding the operations of FPI. The comments may be directed to FPI's Chief Operating Officer or the Chairman of the FPI Board of Directors.

Critics of FPI have never questioned FPI's willingness to receive comments. What has been lacking is FPI's apparent ability to even temporarily suspend its total dedication to expanding work opportunities for the swelling Federal inmate population in order to try to understand the concerns of law-abiding workers and the businesses that employ them. Most lacking has been FPI's willingness to offer other than primarily cosmetic remedies, which are most frequently offered only as a response to adverse publicity, actual or prospective.