October 22, 1999

William E. Kennard, Chairman
Federal Communications Commission
445 12th Street, S.W.
Washington, D.C. 20554

          Re:  Regulatory Flexibility Analysis

Dear Chairman Kennard:

      Last  week, the Office of Advocacy of the  U.S.  Small
Business  Administration ("Advocacy") met with  the  Federal
Communications    Commission    ("Commission")     regarding
obligations  imposed by the Regulatory  Flexibility  Act  of
1980,(1)   as  amended  by  the  Small  Business  Regulatory
Enforcement  Fairness  Act  of  1996,  Subtitle  II  of  the
Contract   with  America  Advancement  Act(2)  (collectively
"RFA").   Advocacy was delighted to accept the  Commission's
invitation to discuss the RFA, issued through its Office  of
Communications  Business  Opportunities  ("OCBO"),  and  was
gratified  at the warm welcome.  Advocacy is pleased  to  be
developing  a productive relationship with OCBO,  which  has
been  responsive  of  late to Advocacy  concerns.   Advocacy
hopes to inaugurate more cooperative efforts with the entire
Commission to achieve full compliance with the RFA.

     The   RFA   is  designed  to  change  the  culture   of
rulemaking,  to assure that the interests of small  business
are considered at all stages of the rulemaking process in  a
substantive way.  Advocacy has commented on inadequacies  in
the  Commission's  regulatory flexibility  analyses.   These
inadequacies  may  arise  from a  misunderstanding  of  this
fundamental purpose of the law and a misconception that  the
RFA is merely a procedural law rather than one that mandates
an analytical process. But through dialogue and patience, we
believe that the Commission and Advocacy can achieve  better
results in the future.
     
     This  letter outlines the requirements of the  RFA  and
summarizes  topics  that Advocacy staff discussed  in  their
meeting  with the Commission staff.  But Advocacy emphasizes
that   what  may  appear  to  be  RFA's  "procedural  hoops"
described    here,   in   fact   outline   the   substantive
considerations the Commission should give to the impact  its
proposed  rules would have on small business,  and  ways  to
minimize that impact.
     
     1.   Initial Regulatory Flexibility Analysis
     
     When  the  Commission  engages in  notice  and  comment
rulemaking,   it   must   prepare  an   initial   regulatory
flexibility  analysis  ("IRFA") to describe  and  study  the
impact  of  the  proposed  rules on small  business.(3)  The
Commission must describe the purpose, objectives, and  legal
basis   for  the  proposed  rule,  and  must  describe   any
conflicting rules.(4)
     
     The Commission also must describe the small entities to
which  a  new rule would apply and estimate their number.(5)
And  the  Commission must "assure that small  entities  have
been   given   an   opportunity  to   participate   in   the
rulemaking".(6)  Since this includes direct notification  of
interested small entities, the Commission should  reach  out
to  industry  participants. (7)The Commission  can  make  no
credible  assessment  of  impact  if  it  does  not  clearly
understand the nature of the parties affected by its  rules.
The  Commission's  data  regarding  the  size  of  regulated
companies  is  often  spotty,  and  the  Commission   rarely
consults other knowledgeable sources to supplement its data.
     
     The  Commission should fit its regulations to the  size
of  the industry participants it regulates, and should avoid
uniform rules that impose disproportionate burdens on  small
businesses  when less burdensome alternatives would  achieve
the same objectives.  The size of the businesses that a rule
affects  is important to determine their ability to shoulder
regulatory   costs.   Small  and  large   entities   possess
different resources.  A large business typically can  absorb
costs easier than a small business.  A burdensome regulation
might   seriously   affect  a  small  business's   decisions
regarding   product   pricing,  employment,   research   and
development,  and other factors that affect competitiveness.
A  costly regulation may unnecessarily drive a small  entity
out  of  business, when, at the risk of being repetitive,  a
less costly regulation would achieve the same objectives.

     The  Commission  must describe cost  factors,  such  as
reporting requirements imposed on small business, as well as
professional  skills  that are necessary  to  compliance.(8)
Ideally,  the IRFA would compare the relative costs  imposed
on  small business to those imposed on large business;  this
would    help   the   Commission   determine    whether    a
disproportionate impact falls on small business.
     
     The  RFA  does  not  instruct the Commission  to  avoid
burdening small business, but it does require the Commission
to  analyze  a  rule's  burdens  and  study  less-burdensome
alternatives that are consistent with regulatory objectives.
(9)This  goal  should  be of particular  importance  to  the
Commission    as   it   seeks   to   maximize    competitive
communications markets.
     
     The  Commission must describe significant  alternatives
that would accomplish a proposed rule's stated purpose while
minimizing  the significant economic impact on a substantial
number  of  small  entities.(10)  This  could  include   not
regulating,  or  exempting  small  businesses  entirely,  or
tiering  the  rules  requirements.  The  RFA  also  requires
discussion   of   four   specific  alternatives:   different
compliance  requirements that take differing resources  into
account,  clarification  and  simplification  of  compliance
requirements,  the  use of performance  rather  than  design
standards,   and  exemption  for  small  business.(11)   The
Commission should seek comment on these alternatives.  Thus,
it  is appropriate for the Commission to include in its IRFA
a   detailed   discussion  of  small  business  impact   and
alternatives,  and not just simply bury a cursory  reference
to small business impact in an abbreviated and uninformative
IRFA.
     
     The  Commission  should  view alternatives  within  the
scope of its regulatory goals, because the RFA's purpose  is
not  to  reduce  burdens on small business per  se,  but  to
reduce  burdens consistent with the purpose  of  a  proposed
rule.(12)  Advocacy recognizes that some  rules  may  affect
small  business, and this is entirely appropriate.  The  RFA
is  not about giving unfair advantage to small business  but
is  about  efficient and balanced rulemaking.  The RFA  does
not  seek preferences for small business, but seeks a  level
playing  field.  The goal should be to avoid  undue  burdens
and  not  to  stifle  competition and innovation.   Advocacy
suggests  identifying alternatives as early as  possible  in
the   rulemaking  process  and  actively  consulting   small
business sector representatives to identify and prioritize a
proposed rule's burdens and benefits.
     
     The  RFA  does  not  define  "significant  impact"   or
"substantial  number" of small entities.  But some  agencies
have  interpreted  "significant impact" as  a  five  percent
effect  on  costs or revenues.(13) And at least  one  agency
interprets  "substantial number" as twenty  percent.(14)  In
any  event,  these terms should prompt Commission  staff  to
think  in an substantive manner about the regulatory  impact
on  small business. Commission rulemakings often affect  all
or nearly all of a particular small business class.  Yet the
Commission   rarely  takes  the  next   critical   step   of
acknowledging the specific impact or discussing whether  the
impact is intended or appropriate.

     2.   Final Regulatory Flexibility Analysis
     
     Analysis  of  public comment or the  Commission's  IRFA
should  enable the Commission to explore whether a  proposed
rule  would  impose a significant burden on small  business.
When it promulgates its final rule, the Commission also must
prepare  a  final regulatory flexibility analysis  ("FRFA"),
and  publish  it  with the final rule.(15) The  FRFA  should
evaluate  the  impact  of the rule  on  small  business  and
analyze  alternatives  that would minimize  any  significant
impact on a substantial number of small businesses.(16)
     
     The  FRFA  should describe and estimate the  number  of
small  businesses  that the rule would  affect.(17)  If  the
Commission cannot provide an estimate of affected  entities,
it  must explain why.(18) As a practical defense in case  of
judicial scrutiny, the Commission should be able to point to
aggressive  efforts  it made to arrive  at  an  estimate  of
affected small businesses.  The Commission should not merely
rely  on  facially  inadequate  internal  data,  but  should
consult outside sources for this information.
     
     The FRFA should address any significant concerns raised
in  comments.(19) It should include a succinct statement  of
the  need  for  and objective of the rule and a  summary  of
significant  issues raised in comments.(20)  The  Commission
should  assess  these  issues and  explain  whether  it  has
modified  its rule, from proposal to final, in  response  to
these  issues.   If it has, the Commission  should  describe
how.(21)  The  Commission  must describe  the  final  rule's
record-keeping  requirements and the  skills  and  resources
necessary to comply with them.(22)
     
     The  FRFA should describe the steps the Commission took
to  minimize  undue  significant economic  impact  on  small
entities   consistent  with  the  rule's  purpose.(23)   The
description of mitigating steps should include a  discussion
of the factual, policy, and legal reasons why the Commission
chose  one  alternative over others.(24) It is  insufficient
for  the  Commission  to  simply state  that  it  chose  one
alternative.    It  must  clarify  its  analysis   of   each
alternative  and articulate significant reasons  for  opting
for  the  rule it chose.  This is not a step the  Commission
routinely takes.
     
     3.   Conclusion
     
     The  IRFA  must be an integral part of the Commission's
work  in addressing problems - not an afterthought -  nor  a
separate  step  in crafting a regulation and  analyzing  its
effectiveness.  The Commission should conduct its regulatory
flexibility  analyses  as  part of  its  overall  rulemaking
process.   The Commission should not prepare a  proposed  or
final  rule and then go back and prepare its IRFA  or  FRFA.
The  Commission  should consider small business  impact  and
alternatives  as  an integral part of its  entire  decision-
making  process.   This analysis should be extensive  enough
that the Commission could prepare the IRFA by reviewing  and
summarizing  ideas  expressed  in  its  notice  of  proposed
rulemaking.  And a FRFA should flow naturally from the  IRFA
and  the  Commission's reflection on opinions  expressed  by
commenting parties.

     We   believe   that  the  Commission  staff's   renewed
attention  to  RFA will lead to heightened awareness  within
the Commission of the impact of rules on small business, and
consideration,  from the very beginning of a rulemaking,  of
possibly  unintended  consequences  that  may  follow   from
regulatory action.  From a practical point of view,
it  will serve the Commission well to assure that its  small
business  analysis  is  properly  reflected  in  the  public
record.
     
     Advocacy  is confident that the cooperative efforts  of
our  two agencies will lead the Commission to consider small
business  impact  as a substantive part  of  its  rulemaking
process.   We urge you to support this effort and lend  your
voice   to  a  serious  Commission  commitment  to  improved
compliance  with RFA.  In this spirit, please feel  free  to
call upon us at any time for assistance in future compliance
with RFA.
     
Respectfully submitted,

Jere W. Glover
Chief Counsel for Advocacy

R. Bradley Koerner
Assistant Chief Counsel for Advocacy

cc:  Commissioner Ness
     Commissioner Furchtgott-Roth
     Commissioner Powell
     Commissioner Tristani
     Francisco Montero

ENDNOTES

1.  Pub. L. No. 96-354, 94 Stat. 1164 (1980)(codified at 5
U.S.C.  601 et seq.).
2.  Pub. L. No. 104-121, 110 Stat. 857 (1996)(codified at 5
U.S.C.  612(a)).
3.  See 5 U.S.C.  603(a).
4.  Id.
5.  See 5 U.S.C.  603(a)(3).
6.  5 U.S.C.  609(a).
7.  See 5 U.S.C.  609(a)(3).
8.  See 5 U.S.C.  603(b).
9.  See 5 U.S.C.  603(a), 603(c).
10. See 5 U.S.C.  603(c).
11. See 5 U.S.C.  603(c)(1)-(4).
12. See 5 U.S.C.  603(c).
13. National Oceanic and Atmospheric Administration and the
Department of Health and Human Services. Congress also
provides examples of "significant economic impact": strong
disincentive to seek capital or capital requirements out of
a business's reach (See 126 CONG. REC. S10938, H24593 (1980)
(SECTION-BY-SECTION ANALYSIS OF THE REGULATORY FLEXIBILITY
ACT)), fine of $500 for noncompliance (Id., H24578), 175
annual hours of record-keeping (Id., S10938), impact less
cost-efficient than other reasonable alternatives (Id.,
H24595), regulatory costs that outweigh benefits.  The House
of Representatives also provides examples in its report on
the RFA.  See 126 CONG. REC. H8467 (1980).
14.  National Oceanic and Atmospheric Administration.  Also,
the  RFA's  legislative history suggests  that  "substantial
number"  could  be  less than half of an affected  class  of
small  business.  See  126 CONG. REC. at  S10941  and  10942
(1980).
15. See 5 U.S.C.  604.
16. See 5 U.S.C.  604(a)(5).
17. See 5 U.S.C.  604(a)(3).
18. Id.
19. See 5 U.S.C.  604(a)(2).
20. See 5 U.S.C.  604(a)(1)-(2).
21. See 5 U.S.C.  604(a)(2).
22. See 5 U.S.C.  604(a)(4).
23. See 5 U.S.C.  604(a)(5).
24. Id.