# Secure Handling of Ammonium Nitrate

A Report in Response to House Report 110-497

Department of Homeland Security National Protection and Programs Directorate

October 2008THIS PAGE INTENTIONALLY LEFT BLANKEXECUTIVE SUMMARY

Section 563 of the Fiscal Year (FY) 2008 Department of Homeland Security (DHS) Appropriations Act (P.L. 110-161) amends the Ho meland Security Act of 2002 and provides the DHS with the authority to “regul ate the sale and transfer of a mmonium nitrate by an ammonium nitrate facility...to prevent the misappropriation or use of amm onium nitrate in an act of terrorism.” The Congress direct ed the National Protection and Pr ograms Directorate to “provide a plan to implement this new pr ovision, including an analysis of the resources required to do so, and a proposal for reallocating funding within the National Protection a nd Programs directorate for doing so.”

In developing this report, the Department reviewed Section 563 requirements, and also conducted an assessment of other DHS and Federal Government security requirements that already cover portions of the ammonium nitrat e (AN) supply chain or deal with identity

verification and have the potential to overlap with the Section 563 program.

For example, DHS reviewed the risk-based implementation activities under the Chemical

Facilities Anti-Terrorism Standa rds (CFATS), which includes re gulation of certain facilities possessing AN, and consulted with the DHS Sc reening Coordination Office (SCO) regarding existing identity verification measures. In addi tion, DHS reviewed United States Coast Guard (USCG); Transportation Security Administrati on (TSA); and Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) regulations im pacting AN security. For instance, USCG has imposed security requirements on AN as a “Cer tain Dangerous Cargo.” Under the Maritime Transportation Security Act (MTSA), USCG has also imposed security requirements on vessels transporting AN and on certain faci lities using, storing, manufactur ing or distribut ing AN. TSA performs threat assessments on transporters of AN who require a hazardous materials endorsement to transport AN, and ATF regulates the manufacture, importation, distribution and storage of certain AN explosive mixtures.

The Department concludes that the implementati on of Section 563 could re sult in a significant regulatory burden on individual Americans. In particular, this burden potentially affects the

livelihood of American farmers who are unable to acquire AN as a fertilizer for their crops. Given the wide-ranging impact of Section 563 requirements, the Department strongly

recommends careful considera tion, including additiona l research and public exploration of certain key issues, before moving forward w ith a rulemaking that could impact hundreds of

thousands of individual AN selle rs and users. The Department believes that the following

factors should be considered:

• Current implementation of CFATS is addres sing a prioritized nu mber of larger AN production and distribution facilities in the AN supply chain. There are 711 preliminarily tiered high-risk facilities with AN at or over scre ening threshold quantities.

• Development and implementation of Section 563 requirements will be resource-intensive and will force trade-offs with key implementation activities planned under CFATS

program.

• Based upon the Department’s experience, implementing this statute wi ll provide a limited security benefit focused on a single chemical of interest at a high resource cost.

i• It will be extremely difficult to ensure cons istent execution of the program’s requirements as certain activities, su ch as the verification of buyer identity at the point of sale, are dependent upon the thousands of end poi nts in a very distributed system.

• Further, as the Department has experience d with several programs that implement requirements to screen individuals and verify identities, measures not initially identified as program requirements have had to be adde d (increasing both time and cost) in order to ensure that key program requirements are not easily circumvented and the intended security benefit is achieved.

The Department is currently engaging with the Na tion’s agri-businesses to better understand the implications of the impacts of the CFATS program on that community and to inform further CFATS implementation activity and Section 563 re gulation development. As a result, the Department encourages the adoption of and is pl anning to execute a phased approach to address Section 563 requirements:

Phase 1

• Continued CFATS implementation, including ag ribusiness engagement and revised Top Screen submissions by that community. This will likely result in additional AN facilities falling under the CFATS program.

• Adjustment of the Chemical Security Asse ssment Tool as necessary (develop portal for AN registrations).

• Issue an Advance Notice of Proposed Rule making (ANPRM), soliciting comment on the best way to address the requi rements of Section 563 and implementation options, and:

o The issue of fee authority for this new program.

o There continues to be debate concerni ng the detonability of AN at certain

concentrations. The ANPRM would seek co mment as to research being done in

this area.

Phase 2

• Rulemaking for Section 563 requirements (no tice, comments, issuance of Final Rule).

• Science & Technology Directorate commences a st udy to determine if the detonability of

AN can be reduced with the introduction of a ny type of additive, without reducing its

effectiveness as a fertilizer.

In summary, the Department is committed to improving chemical security, including the security of AN, across the Nation. Following additional engagement with the Nation’s agri-businesses and issuance of the ANPRM, DHS will be able to produce a more prudent and efficient regulation that is not duplicative of existing re gulatory programs, take s into account lessons learned from existing DHS identify verification initiatives, and incorporate s appropriate input from stakeholders through the comment process. The Department looks forward to working with Congress to improve security in this area.

ii

## Contents

Executive Summary ........................................................................... i

Introduction .................................................................................... 1

Background ..................................................................................... 3 I. History .................................................................................. 4 II. Chemistry of Commercial Ammonium Nitrate ................................. 5 III. The Ammonium Nitrate Supply Chain ........................................... 5

The Chemical Facility Anti-Terrorism Standards ....................................... 8

I. Ammonium Nitrate Under CFATS ................................................ 9

II. Review of Treatment of A mmonium Nitrate End-Users Under CFATS ... 10

III. Risk-Based Performance Standards ............................................... 11

Section 563: Secure Handling of Ammonium Nitrate Act ............................. 12 I. Population of Regulated Community .............................................. 14 II. Analysis of Cost of Regulatory Activities ......................................... 17

Conclusion ........................................................................................ 33

iii

### INTRODUCTION

Section 563 of the Fiscal Year (FY) 2008 Department of Homeland Security (DHS) Appropriations Act (P.L. 110-161) amends the Ho meland Security Act of 2002 and provides the DHS with the authority to “regul ate the sale and transfer of a mmonium nitrate by an ammonium nitrate facility...to prevent the misappropriation or use of amm onium nitrate in an act of terrorism.” The Congress direct ed the National Protection and Pr ograms Directorate to “provide a plan to implement this new pr ovision, including an analysis of the resources required to do so, and a proposal for reallocating funding within the National Protection a nd Programs directorate for doing so.”

In developing this report, the Department reviewed Section 563 requirements, and also conducted an assessment of other DHS and Federal Government security requirements that already cover portions of the ammonium nitrat e (AN) supply chain or deal with identity verification and have the pot ential to overlap with the Section 563 program.

For example, DHS reviewed the risk-based implementation activities under the Chemical

Facilities Anti-Terrorism Standa rds (CFATS), which includes re gulation of certain facilities possessing AN, and also consulted with the DHS Screening Coordination Office (SCO) regarding existing identit y verification measures. In additi on, DHS has reviewed United States Coast Guard (USCG); Transportation Security Ad ministration (TSA); and Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) regulati ons impacting AN security. For instance, the USCG has imposed security requirements on AN as a “Certain Dangerous Cargo,” regulates vessels transporting AN, and regulat es security at ports receiving vessels with AN. Pursuant to the Maritime Transportation Security Act, (MTSA), the USCG also enforces security requirements over facilities located adjacent to th e water, including facilities that may store, manufacture, use or distribute AN. TSA performs threat assessments on transporters of AN who require a hazardous materials endorsement to transport AN, 1 and ATF regulates the manufacture, importation, distribution and storage of certain AN explosive mixtures. 2

The Department concludes that the implementati on of Section 563 could re sult in a significant regulatory burden on individual Americans. In particular, this burden potentially affects the

livelihood of American farmers who are unable to acquire AN as a fertilizer for their crops. Given the wide-ranging impact of Section 563 requirements, the Department strongly

recommends careful considera tion, including additiona l research and public exploration of certain key issues, before moving forward w ith a rulemaking that could impact hundreds of

thousands of individual AN selle rs and users. The Department believes that the following

factors should be considered:

• Current implementation of CFATS is addres sing a prioritized nu mber of larger AN production and distribution fac ilities in the AN supply chain.

1 49 CFR § 1572.5; 49 CFR § 383.141.

2 71 Fed. Reg. 56,555 (Sept. 27, 2006) (listing “ammonium nitrate explosive mixtures” as regulated “explosive materials”).

1• Development and implementation of Secti on 563 requirements will be expensive and

resource intensive and will force trade-offs with key implementation activities planned under CFATS program.

• Based upon the Department’s experience, implementing this statute wi ll provide a limited security benefit focused on a single chemical of interest at a very high resource cost.

• It will be extremely difficult to ensure cons istent execution of the program’s requirements as certain activities, su ch as the verification of buyer identity at the point of sale, are dependent upon the thousands of end poi nts in a very distributed system.

• Further, as the Department has experience d with several programs that implement requirements to screen individuals and verify identities, measures not initially identified as program requirements have had to be adde d (increasing both time and cost) in order to ensure that key program requirements are not easily circumvented and that the intended security benefit is achieved.

• The issue of fee authority for this new progr am should be discussed with the Congress, and potentially noticed for comment in an Advance Notice of Proposed Rulemaking (ANPRM).

• There continues to be debate concerning the de tonability of AN at cer tain concentrations. This new program could be informed by resear ch into whether there is a concentration that would represent a security enhancem ent without limiting AN’s effectiveness as currently used in commerce. Again, this is an issue that could be noticed for

comment in an ANPRM.

• As further detailed in this report, the Depart ment is currently engaging with the country’s agricultural community to better understand the implications of the impacts of CFATS program on that community, to inform furthe r CFATS implementation activity. The data gathered in support of CFATS might also lend itself to better informing the development of rulemaking for this new program, as the agricultural community is a major consumer

of AN.

Accordingly, and with the intent of satisfying Congr ess’s request, this report discusses: (1) the chemistry of AN, the AN value chain, and secu rity issues surrounding AN in commerce; (2) the Department’s existing efforts to regulate the security of certain AN facilities by way of the CFATS; and (3) the requirements found within Section 563, potent ial options to satisfy those congressional requirements, and the associat ed cost estimates related to each option.

2

### BACKGROUND

AN is a chemical that exists in multiple co ncentrations and physical forms, and each concentration or form may have different securi ty implications. The Department is primarily concerned with AN when used as an explosive an d/or as a fertilizer, which can then be mixed with fuel oil to create an explosive mixtur e known as Ammonium Nitr ate/Fuel Oil (ANFO). Both of these forms (i.e., explosive and fertilizer coupled with liquid fuel oil) in the hands of terrorists have the potential to be detonated, causing catastro phic impacts on human health, safety, national security, the econom y and critical infrastructure.

AN is used domestically as a fertilizer and as an explosive. Primarily, AN is used as a fertilizer and is commonly found in agricultu re-related operations nationwide and, given the availability of small-scale packaging (e.g., 50-pound bags), is su sceptible to theft and misuse in making an improvised explosive device (IED). The fertil izer industry was proactive in developing a voluntary “know-your-customer” program in conjunction with the ATF, known as the “America’s Security Begins With You” campa ign, following the 1995 attack on the Alfred P. Murrah Federal Building in Oklahoma City, Oklahoma.

As an explosive, AN is used commercially (i n the mining industry, for example) and can be stolen and detonated by terrorist s. This form of AN is regulated by both the ATF, which addresses the regulation of explosives, 3 and the Department of Transportation (DOT), which regulates explosives for the purpose of preventing incidents during transportation. 4 DOT also has issued Hazardous Material Regulation 232 (HM232) requiring security plans for facilities that ship and transportation providers that carry regulated hazardous ma terials. This would include several forms of AN including the high explosive and the fertilizer.

In addition to the ATF and DOT regulations, DHS regulates AN in severa l fashions. TSAhas broad authority over security of all modes of transporta tion, spanning from point of entry to point of exit. These authorities are found primarily in the Aviation and Transportation Security Act of 2001, which explicitly covers th e transportation of cargo (suc h as AN). In addition to enumerating specific authorities, the statute broa dly allows TSA to “exercise such other powers, relating to transportation security as th e Under Secretary considers appropriate.” 5 With respect to AN, TSA exercises its author ity by performing threat assessme nts on truck drivers who must receive a hazardous materials endorsement to transport AN. 6

USCG also regulates AN in several fashions. Under MTSA 7 the USCG has authority to regulate security both aboard maritime vessels and at fac ilities located in, under or adjacent to any waters subject to the jurisdictio n of the United States. Through MTSA, the USCG regulates the security of many vessels transporting AN, as well as th e security at many facilities using, storing, manufacturing and/or distributing AN. The USCG additionally has regulations specific to AN’s

3 71 Fed. Reg. 56,555 (listing “ammonium nitrate explosive mixtures” as regulated “explosive materials”).

4 49 CFR Parts 106, 107, 110, and Parts 171 through 180.

5 49 U.S.C § 114(f)(15).

6 49 CFR § 1572.5; 49 CFR § 383.141.

7 33 CFR Parts 101-106.

3transportation 8 and requires written permission from the Captain of the Port before AN may be

loaded on or unloaded from a vesse l at any waterfront facility. 9

USCG also has designated AN as a “Certain Da ngerous Cargo”. Based on this designation, vessels carrying AN on water bodies other than ce rtain portions of inland rivers must submit a Notice of Arrival prior to arrival in port. 10 The required notice must contain information including the name of the vessel’s owner and opera tor, names of the last five ports or places visited, the amount of AN onboard, and personal information (e.g., full name, date of birth, nationality) for each crewmember onboard. Owners and operators of U.S. flag vessels carrying AN (or other dangerous cargoes) in bulk must have, and must operate in compliance with, a USCG approved vessel security pla n. Likewise, owners and operato rs of facilities that receive vessels carrying AN in bulk must have and operate in compliance with a USCG approved facility security plan.

The Department will do its best to work with its s ecurity partners to ensure that any requirements established pursuant to Section 563 are harmonized with the existing regulations impacting AN security.



### I. History

Over the years, AN fertilizer mixed with fuel oi l has been used as an explosive in terrorist attacks, both domestically and internationally. The Murrah Federal Building attack in Oklahoma City claimed the lives of 167 individuals and demonstrated firsthand how AN could be misused to perpetrate deadly terrorist attacks. In a ddition to the Murrah Building attack, the Provisional Irish Republican Army used AN as part of its London bombing campaign in the early 1980s. More recently, AN was used in the 1998 East Af rican Embassy bombings and in the November 2003 bombings in Istanbul, Turkey. Additionally, since the events of 9/11, stores of AN have been confiscated during raids on terrorist sites around the world, including Canada, England, India and the Philippines.

It is important to note that fertilizer-grade AN is not explosive in and of it self and has never been used in a terrorist attack. Rather, terroris t attacks that employ AN-based explosives use AN mixed with a fuel oil of some kind. While pure, or “straight,” AN with a sufficient concentration of nitrates can be used as an explosives precurs or, there is no scientific consensus regarding the detonability of straight AN. The minimum quan tity (i.e., critical mass) of straight AN required for detonation, the size of conventional explosive charge (i.e., booster) necessary to detonate straight AN, and the actual yiel d (i.e., how much explosive en ergy arises) from a straight AN detonation are all currently unknown but are being researched. The Department is currently funding an ongoing study at Sandia National Laboratory to answer these questions. Preliminary results suggest that straight AN can be di fficult to detonate with any reliability.

8 49 CFR § 176.410.

9 49 CFR § 176.415. See also 33 CFR Part 126 (regulating the handlin g of AN at waterfront facilities, and establishing penalties for handling AN without a permit); 46 CFR § 148.01-7 (regulating the bulk shipment of AN).

10 33 CFR Part 160, Subpart C.

4The Intelligence Community is in agreement that terrorist organizations have and will likely continue to use explosives, incl uding AN-based explosives, in futu re terrorist attacks. While preventing the misappropriation and misuse of AN on American soil could mitigate national risk, AN is only one of many chemicals that are suscep tible to and suitable for misuse by terrorists. Regulating the AN supply chain for security is complicated both by the fact that AN has legitimate and important uses across the count ry and around the world and because terrorists’ tactics continue to change and evolve over time.



### II. Chemistry of Commercial Ammonium Nitrate

In addition to its common use as a fertilizer, AN is a widely used industrial chemical. It is used in the manufacture of plastics and pharmaceutical s. As discussed above, in the hands of a terrorist, AN can be used to produce a field-expe dient (improvised) explosive when mixed with fuel oil. ANFO, the explosive, is also manuf actured for legitimate purposes, including use in mining and construction. The terrorist vers ion of ANFO has been successfully employed by terrorists in London, Istanbul, Oklahoma City a nd many other places. Given AN’s history, the

ease with which it can be converted into an ex plosive, and the prevalence of AN in commerce, the Department has designated AN as a “Chemical of Interest” (COI) within the Department’s new risk-based CFATS regulation.

Industrial-grade AN is used in commercial explos ive manufacturing. It generally contains not less than 33 percent nitrogen. All major AN pr oduction facilities nati onwide produce AN at or greater than 23 percent nitrogen concentration by weight. Cons equently, the Department views the 23 percent threshold as the appropriate base line for AN because it is the industry standard and, therefore, the concentration most typical ly found in commerce and thus most accessible by

terrorists. Given that there is no scientific consensus as to when AN becomes ineffective as a weapon precursor, the Department chose 23 perc ent nitrogen by weight as the concentration level at which AN in solid form is regulated as a COI under CFATS. That decision was supported by the Federal Bureau of Investiga tion’s (FBI) Bomb Data Center, as well as by extensive interagency vetting, wh ich included the U.S. Department of Agriculture (USDA). It was also consistent with public comment on dr aft Appendix A to the CFATS, which set the screening threshold quantitie s of chemical of intere st under the program.



### III. The Ammonium Nitrate Supply Chain

The AN product supply chain may be described as comprising five primary components:

• Manufacturers and importers – companies that manufacture AN domestically, or import foreign-manufactured AN from overseas (or, alternatively, domestic AN that has been exported, repackaged overseas and then brought back to the United States);

• Packagers – companies that market AN whol esale in both packaged form (sacks are most common) and bulk fo rm to distributors;

5• Distributors – companies that warehous e packaged AN and sell it wholesale to

individual retail outlets. Many distributors are part of a retailing company;

• Retailers – companies engaged in traditional retail sales supporting agriculture, and cooperative operations that buy goods for use in agriculture at whol esale on behalf of a farmer’s collective; and

• Agricultural end users – farmers, both i ndividual farm operators and agribusiness companies that may occupy several spots in the supply chain (including packager, distributor, and end user) that use AN as a fertilizer.

AN reaches the agricultural end user through one of several paths. In some cases, farmers receive AN directly from the manufacturer. Other farmers may purchase AN from a retail supply store that purchased its AN from a broker, the terminal, or (le ss frequently) via an aftermarket repackager. Hence, while all of the above-cited el ements may exist in the supply chain, there is no predominant model. The route from manufacturer to s upplier can vary widely.

In terms of manufacturing facili ties, the Department estimates that there are 26 facilities that produce AN in the United States and an additional eight faciliti es that produce a compound of which AN is a primary ingredient. AN is al so repackaged – although many manufacturers discourage this practice – in sma ller quantities for sale in retail outlets. Fifty-pound bags of AN, however, are not sold at Home Depot, Lowes or other similar home improvement and hardware stores. These stores typically sell fertilizers fo r lawn and garden use and frequently use AN in a mix with phosphates and potash as the primary nitrog en source. Such bags of fertilizer typically contain approximately 40 pounds of so il with a handful of AN “prills” 11 evenly mixed throughout the bag.

Some cooperatives, or “co-ops ,” and farm supply centers do sell pure fertilizer form AN in as little as 50-pound bags. More commonly, AN is so ld as a “service” by entities that apply AN

and other fertilizers to a farmer’s fields. Based on information from the National Council of Farmer Cooperatives, the Department believes that there are approximately 3,000 farmer-owned cooperatives in the United States. There is no data available which break s down what percentage of fertilizer sold is AN or was appl ied directly to farmland by the co-op.

Most co-op and agricultural supp ly stores that sell AN in bul k have regular customers, know those customers, and are aware of customers’ legitimate needs for AN. Some large farm co-ops and agricultural supply stores have proact ively and voluntarily be gun recording a buyer’s information, similar to some of the informati on required by Section 563. This information is kept along with a copy of the buyer’s government id entification, usually a dr iver’s license. This practice is consistent with i ndustry-sponsored security program s and, again, generally mirrors some of the requirements within Section 563.

Scientific and laboratory supply stores sell highly concentrated AN to their customers; these laboratory supply stores typically sell AN in small base units in the range of 500 grams to 2.5

11 Prills are small white balls of AN less than a centimeter in diameter.

6kilograms. Several laboratory chemical supply companies will sell AN in 100-pound units. These sales typically occur through a distributor. To register, the buyer generally must provide his or her name, company, or school represente d; a physical address; and a phone number. Purchasers are typically engaged in research of some sort and ar e often colleges a nd universities.

Farmers typically purchase AN but rarely sell it. Consistent w ith industry-sponsored security approaches, farmers are often required to show valid identification to purchase AN. Farmers may store AN on-site, but it is ofte n delivered and applied by the re tailer or co-op at the time the farmer is ready to use it, ra ther than stored on the farm.

7

### The Chemical Facility Anti-Terrorism Standards

Section 550 of the Fiscal Year 2007 DHS Appropr iations Act (P.L. 109-2 95) authorized the Department to require high-risk chemical f acilities to complete security vulnerability assessments, develop site security plans, and im plement measures designed to satisfy risk-based performance standards, as defined by the Departme nt. To achieve the objectives set forth in Section 550, on April 7, 2007, the Department promul gated security regulations, better known as CFATS, which can be found at 6 CFR Part 27. CF ATS, and the vulnerability assessment tools deployed therein, provide the Department w ith a mechanism by which to place high-risk chemical facilities into tiers, based on their s ecurity risk, and establis h risk-based performance

standards tailored to each risk tier.

In a subsequent rulemaking published on November 20, 2007, the Department released the final Appendix A to the CFATS rule, a list of COIs and corresponding screening threshold quantities (STQs). This list identifies 322 COIs, including common industrial chemicals such as chlorine, propane, anhydrous ammonia and AN. A chemical is designated a COI if the Department determines that the chemical has the potential to create significan t human life or health consequences if released, stolen, diverted or contaminated. Under the CFATS regulation, a facility that possesses one or more COIs that meet or exceed th e applicable STQ must submit an online assessment questionnaire called a Top-Screen. The Top-Screen, a consequence-based assessment tool, is the Department’s preliminary means of evaluating whether a facility is highrisk and thus subject to the ru le, and was designed to facilitate the receipt and analysis of information about facilities. That facility-speci fic information serves to inform the preliminary high-risk determination process. The CFATS rule became effective with the release of Appendix A on November 20, 2007, requiring facilities that po ssessed any COI at or above the applicable STQ on that date to submit their Top-Screens to the Department on or before January 22, 2008. Facilities that come into posse ssion of any COI at or above the applicable STQ after November 20, 2007, must complete and submit a Top-Screen within 60 calendar days of coming into possession of a COI that meets or exceeds the corresponding STQ.

As discussed above, implementation and execu tion of the CFATS regulation requires the Department to identify which chemical facilities it considers high-risk. To facilitate this, the Department developed the Chemical Securi ty Assessment Tool (CSAT) Top-Screen questionnaire. The Top-Screen builds on the asse ssment tool referred to as the Risk Analysis and Management for Critical Asset Protecti on (RAMCAP), which the Department developed with industry input.

If a facility is not screened out during the Top-Screen process, the Department will make a preliminary determination that the facility is hi gh-risk and assign the facility to a preliminary risk-based tier. All high-risk facilities must then complete the CSAT Security Vulnerability Assessment (SVA). In some cases, an Alternativ e Security Program (ASP) may be submitted in

lieu of an SVA. Results from this online tool in form the Department’s final tier determination of a facility’s risk level.

All high-risk chemical facilities fall into one of four risk-based tiers. Following review of the SVAs and ASPs, high-risk chemical facilities , including those AN facilities determined to be

8high-risk, will be required to develop Site Secu rity Plans (SSP), or ASPs in lieu of SSPs, addressing the CFATS Risk-based Performance Standards and the facilities’ identified vulnerabilities. A high-risk facil ity’s security measures must meet the performance standards for its respective tier. The higher a facility’s risk tier, the stricter the measures it will need to incorporate and the more frequent and rigorous its inspections will be. Inspections will both validate the adequacy of a facility’s SSP and ve rify the implementation of the plan’s measures.

In developing the list of COIs and STQs iden tified in Appendix A, the Department examined chemicals categorized by the following three secu rity issues, in addition to the common business and operational practices associated with the identified chemicals:

• Release Chemicals –Toxic, flammable, or expl osive chemicals that have the potential to

create significant adverse consequences fo r human life or health if intentionally released or detonated;

• Theft and Diversion Chemicals – Chemicals th at have the potential, if stolen or

diverted, to be used or converted into weapons; and

• Sabotage and Contamination Chemicals – Chem icals that, if mixed with other readily

available materials, have the potential to create significant adverse consequences for

human life or health.



### I. Ammonium Nitrate Under CFATS

Corresponding to the previously discussed histor ical exploitation of AN, the CFATS program

differentiates between two forms of AN to address the various applications and security issues associated with it: (1) the e xplosive, as defined by refere nce to DOT Hazardous Materials Regulations at 49 CFR § 172.101 (with more than 0.2 percent combustible substances, including any organic substance calculated as carbon, to the exclusion of any other added substance); and (2) the more common form frequently used as a fe rtilizer. In addition to STQs, Appendix A also identifies the specific security issue or issues asso ciated with each COI. In some cases, different STQs are provided for a single COI based upon th e different security issues presented. Appendix A identifies two security issues associ ated with both forms of AN: Release-Explosive and Theft/Diversion – Explosive/ IED Precursor (EXP/IEDP).

Along with chlorine and propane, AN is one of th ree chemicals for which a specialized approach has been developed under CFATS. This speciali zed approach for AN was developed in light of the circumstances surrounding its use (e.g., extensiv e use in the agricultural industry). Under the specialized approach to AN, AN as an explos ive is treated the same as all DOT Division 1.1 explosives subject to the CFATS regulation. Accordingly, the STQ for AN as a commercial grade explosive is 400 pounds if it presents a th eft/diversion-EXP/IEDP s ecurity threat and 5,000 pounds as a commercial grade explos ive if it poses a release-explos ive threat. However, AN in its more common, solid form (with a nitrogen concen tration of 23 percent or greater) is treated differently, as AN in that form is largely used in the agricultural community as a fertilizer in amounts that typically exceed 400 pounds. Acco rdingly, in order to avoid unnecessarily

9capturing small-scale agricultural operations in the regulatory regime, the Department established a 2,000-pound STQ for the fertilizer form of AN (rather than the 400 pound STQ

used for all other theft/d iversion-EXP/IEDP COI).



### II. Review of Treatment of Ammoni um Nitrate End-Users Under CFATS

CFATS, together with other s ecurity programs identified above (e.g., those managed by TSA and USCG), already have regulatory implications across a significant porti on of the AN supply/value chain. With respect to CFATS, the initial consequence screening activities of the CFATS regulation may capture, essentially, most elem ents of the value chain, from the largest manufacturers and importers, potentially down to individual large-scale agricultural users.

More specifically, at th e fertilizer theft/diversion STQ of 2,000 pounds, nearly all facilities that manufacture, distribute, or sell AN fertilizer would be required to complete the Top-Screen. The Department understands that even local retail ers that sell AN in 50-pound bags and fertilizer application services (including farm co-ops ) typically possess an excess of 2,000 pounds of AN onsite. It is important to not e that although these facilities ma y be required to complete and submit Top-Screens, they may not necessarily be included in any subs equent CFATS regulatory activities. In fact, the Department believes th at, based on review of their Top-Screens, the overwhelming majority of facilities closer to the end-user side of the AN value chain will either fall at the lower end of tiering determinations or, more likely, fall out of the regulatory program entirely. By falling outside of the regulatory program, the facility will no longer be subject to CFATS regulatory requirements, provided there are no material changes in the operations (e.g., in the COI holdings) of the facili ty that require a new Top-Screen.

Although the intent of the CFATS program generally is not to include sm all-scale agricultural operations, some end users, give n their operations, may be large enough to represent a high level of risk, which would be of interest to the Department within the CFATS regime.

In part to better unders tand the AN distributor and end user landscape within the food and agricultural sectors, the Depart ment has granted an extension for the Top-Screen submission deadline to agricultural end users under certain conditions. That extension, issued December 21, 2007, and published in the Federal Register on Ja nuary 9, 2008, has allowed the Department time to engage agri-business distribut ors and end users in dialogue rega rding ways to refine CFATS to focus on the truly high-risk agricultural operations. The Department currently is gathering more

information about these issues to determine whether any modification of the Top-Screen requirements might be warranted. As a result of this research and dialogue DHS may revise its approach toward COIs used in agricultural operations.

If the Department determines that either the current approach is valid or selects a revised approach for agricultural end us ers under CFATS, DHS expects to give potentially covered agricultural end users 60 days to complete and submit a Top- Screen to the Department. Based on that information, DHS will make preliminary tie ring determinations (including whether or not a given facility is considered high-risk) and notify e nd users of any applicable determinations, and covered facilities will then begin to impl ement any follow-on regulatory requirements. DHS

10currently intends to make the ag ricultural end-user tiering determinations and to utilize the information gained during this process to bett er inform the developm ent of the Section 563 regulatory program.



### III. Risk-Based Performance Standards

CFATS requires high-risk facilities to comply wi th 18 risk-based performance standards. The standards themselves are broad and designed to promote a great deal of flexibility in how a facility meets standards applicable to it. For example, a regulated facility possessing AN as a theft/diversion-EXP/IEDP security issue would be required to meet the applicable performance standards for monitoring, shippi ng, theft or diversion, sabotage, personnel surety and all other standards applicable to that security issue.

How the facility chooses to meet the required perfo rmance standard in its SSP is at the facility’s discretion, subject to final depa rtmental approval. For exampl e, a facility with a releaseexplosive hazard security issue may be able to satisfy the “shipping, receipt, and storage” performance standard by establis hing clearly defined procedures for cataloging AN brought in or sent out of a facility and ensuring that the AN is properly secured while onsite. To meet the performance standard, the facility can consider a vast numbe r of security measures, and might ultimately choose to institute a product stewardship program, develop a “know your customer” program, implement strict inventory control meas ures, and secure all tr ansportation containers not actively in transit. As long as the specific measures are sufficient to meet the performance standard, DHS would approve the plan.

11

### SECTION 563: SECURE HANDLING OF AMMONIUM NITRATE ACT

Currently, the Department’s chemical secur ity mission is predominantly focused on the implementation and execution of the CFATS regula tory program. DHS has recently completed one of the most critical phases of this re gulatory period. After analyzing each of the approximately 32,000 Top-Screens received from pot entially high-risk chem ical facilities, the Department has identified over 7,000 of them as preliminaril y high-risk based on the data submitted. On June 23, 2008, DHS began sending lett ers to all of the fa cilities from which it received a Top-Screen submission (excluding th ose facilities who were determined to be statutorily exempt from CFATS), informing each one whether or not it is a preliminarily highrisk facility and, if so, what ri sk-based tier it has prel iminarily been placed in. Those facilities that were determined to be preliminarily high-ri sk have between 90 and 180 days (based on their risk tier) to complete and submit to DHS a Secur ity Vulnerability Assessment or, in some cases,

an ASP.

As explained in detail above, upon receipt of the SVAs (or ASPs) from the preliminarily highrisk facilities, the Department will make final determinations re garding the risk level of each facility, and those facilities that are deemed hi gh-risk after review of the SVA data will be required to develop and implement an SSP or an ASP in lieu of an SSP commensurate with their

risk level. Each SSP or ASP has to be review ed and approved by the Department, and must be implemented by the facility upon receipt of DHS approval. Ultimately, DHS will inspect each facility for compliance with its approved SSP or ASP. DHS is putting significant resources towards implementing this comprehensive, risk-b ased chemical security program, of which AN is already a part. At the same time, pursuant to Section 563, DHS is analyzing how best to draft regulations that would harmonize with existing regulatory programs that cover aspects of the AN supply chain.

The Department has expeditiously conceptualized and continues to evaluate some potential approaches that may satisfy the requirements of Section 563, and has conducted a preliminary analysis of the resources that may be required to implement a regulatory program. The following

information is the result of such efforts and reflec ts an initial projection of the tasks required, as well as the estimated resources necessary to suppor t the execution of those tasks. Pursuant to Section 563 of the Act, DHS is to develop and implement a regulatory pr ogram covering the sale and transfer of AN for the purpose of preventing the misappropriation or use of AN in an act of terrorism. The following categories of activities a nd sub-activities are expected to be included in that program:

Category 1: Registration Activities

A. Registration Applications: AN Facilities and prospective AN Purchasers must apply for registration numbers from DHS in order to sell, transfer and/or purchase AN. This activity requires prospective registrants to provide specific identifying information to the Department.

B. Terrorist Screening Database (TSDB) Checks: The Department must conduct a check of identifying information of all prospective regi strants against identifying information that appears on the terrorist watch list, or the TSDB.

12C. Registration Numbers: The Department generally must issue or deny registration numbers within 72 hours of receipt of an AN Facility or AN Purchaser’s complete registration application.

Category 2: Point-of-Sale (POS) Activities

A. Seller Verification of Purchase r’s Registration and Identity: At the point-of-sale, AN Facilities must verify that a potential AN Pu rchaser is registered with DHS (including verifying the AN Purchaser’s iden tity and registration number).

B. Recordkeeping: All AN Facilities must keep records of sales or transfers of AN for at least two years after each tran saction, with penalties for failing to maintain records appropriately.

Category 3: Additional Regula tory Activities/Requirements

A. Reporting Theft or Loss of AN: AN facilities and AN purchasers must report the theft or loss of AN to federal law enforcement authorities within one calendar day of discovery of

the theft or loss.

B. Inspections and audits: The Department must conduct or oversee regulatory compliance inspections and audits of AN F acilities’ records to ensure th at regulated facilities are properly maintaining records, to monitor compliance with the requirements of the Act, and to deter or prevent misapprop riation of AN for terrorist acts.

C. Guidance Materials and Posters: The Department must devel op guidance materials that 1) set forth procedures for appealing a denial of an application for a registration number, and 2) help facilities iden tify suspicious AN purchases or attempted purchases or

transfers and determine the a ppropriate course of action. The Department also must develop posters providing information on a seller’s record-keeping requirements and penalties for violating those requirements.

Category 4: Administrative Activities

A. Establishing Threshold Leve l of AN in a Substance: The Department must establish a threshold percentage of AN in a substance fo r it to be considered AN. As extensive consultation with federal agencies supported the Department’s establishment of an AN threshold percentage in Appendix A to CFAT S, DHS expects to propose maintaining the same threshold percentage(s) in the new re gulations under this Act. However, this threshold will likely be included in an ANPRM for public comment.

B. Appeals and Penalties: The Department must establish an expedited appe als process for applicants denied a registration number. Speci fically, DHS is required to resolve such an appeal within 72 hours of receiving a denied individual’s request for appeal. DHS also has the authority to assess ci vil penalties of up to $50,000 per violation of the regulations and thus must establish a process for managi ng both the assessment and potential appeal of those penalties.

The remainder of this report contains an expl anation of potential regu latory approaches for implementing Section 563 and a high-level evalua tion of the costs that may be incurred by AN

13Facility owners and operators, AN Purchasers, a nd the Department in the implementation of and compliance with these approaches. This evalua tion begins with a statement of the estimated population of the regulated community, along with the assumptions used to develop that estimate. The evaluation then continues by pr oviding estimates of the cost to both the Department and the regulated community of each of the regulatory activ ities required under the legislation. For certain activities where DHS is considering various approaches to implementation, the estimated costs associated with each of the different approaches under

consideration ar e provided.

I. POPULATION OF REGULATED COMMUNITY

For purposes of this analysis, the population of the regulated community used is based on broad

estimates of the number of faciliti es that sell, transfer or purchase AN, as DHS does not know at this time the precise number of facilities that will incur costs from co mplying with Section 563 and the related rules to be promulgated. 12 As previously mentioned, the Department is currently gathering more information about the AN distributor and end user landscape in the agricultural sector to determine whether any modification of the CFATS Top-Screen requirements might be warranted, which may also inform a more refi ned estimate of the population that may fall under an AN regulation.

Under the new statute, the regulated population is divided into two main groups: AN Facilities and AN Purchasers. As defined in Section 563, an “AN Facility” is “ any entity that produces, sells, or otherwise transfers ownership of, or provides application services for” AN. Further, an

“AN Purchaser” is defined as “any person who purchases [AN] from an [AN] facility. Notably, these population groups are not mutu ally exclusive, as the Depart ment’s research has indicated that a vast majority of AN Facilities actually purchase AN from other AN Facilities, thereby rendering such facilities both AN Facilities and AN Purchasers. Accordingly, for purposes of estimating the cost that a potential regulator y program may incur to both the regulated community and the Department, DHS has divided the regulated population into three predominant groups: (1) entities that are AN Fac ilities, but not AN Purcha sers; (2) entities that are both AN Facilities and AN Purchasers, and (3 ) entities that are AN Purchasers, but not AN

Facilities.

Group 1 – Entities that are AN Facilities, but not AN Purchasers

This first group of AN Faciliti es is intended to capture th e facilities that produce and manufacture AN. Unless subjec t to a statutory exemption, a ll AN manufacturers will possess sufficient quantities of AN to require them to complete a CSAT Top-Screen, and may well be captured under the existing CFATS regulatory regime as high-risk chemical facilities. The AN manufacturers are also anticip ated to fall under the AN regula tions developed pursuant to

Section 563.

12 Please note that this required report necessarily makes assumptions about details of a future rulemaking to implement Section 563. Those assumptions do not imply that DHS has made any decisions on any specific provisions of proposed or final rulemaking required by Section 563.

14Group 2 – Entities that are both AN Facilities and AN Purchasers

The second group of AN Faciliti es consists primarily of the merchants of AN, including businesses along the supply chain that sell AN, but also purchase AN fr om an AN manufacturer, as described above. Entities found in this gr oup include fertilizer mixers, farmer-owned cooperatives, wholesalers and retailers. The U.S. Census Bureau reports that approximately 534 entities are engaged in the mixi ng of fertilizers, including AN. According to the National Council of Farmer Cooperatives, there are about 3,000 farmer-owned cooperatives. In addition, using Census data, the Department identified 7,600 wholesalers of fe rtilizer materials and approximately 11,300 nursery, garden center and farm s upply stores that sell fe rtilizer materials. Thus, an estimated 22,460 entities ar e engaged in selling fertilizer materials, of which AN could account for a significant portion. It is important to note that thes e estimates likely overstate the

number of entities that would be subject to the forthcoming rules under Section 563, as the Department has not yet determined the universe of entities that sell AN from those entities selling fertilizer materi als other than AN.

While fertilizer applicators sell the service of applying AN rather than selling AN directly to a third party (or otherwise additional entity), they nevertheless are included in this group, as Section 563 specifically includes app lication service providers in th e definition of AN Facilities.

Based on data from the 2006 Bureau of Labor Statis tics, the Department estimates that there are 3,300 fertilizer application services, although no t all of those would necessarily apply AN

fertilizer.

Many of the entities encompassed by Group 2 are e xpected to possess sufficient quantities of AN to require them to complete a CSAT Top-Screen, and a significant portion of those are likely to be determined to be high-risk chemical faci lities and thus captured by the CFATS regulatory regime, in addition to the fo rthcoming AN regulatory program.

Group 3 – Entities that are AN Purchasers, but not AN Facilities

The third and final population gr oup of the regulated community, AN Purchasers, consists of those entities who purchase AN fr om an AN merchant facility, but are not AN Facilities. Specifically, this population group captures the en d-use consumers of AN – those entities that do not sell AN to an additional entity. This group includes farms, construction businesses and mining facilities. According to the Census of Agriculture, approximately 1.08 million farms use commercial fertilizer, lime or soil conditioners. For the purposes of this analysis and based on industry consultations, DHS assumes that approxima tely half of these farms use AN. Of those farms assumed to incorporate AN into their opera tions, the Department estimates that only 20 percent purchase AN directly from the AN Facility, store the AN on their premises, and apply the chemical to their land (thereby in possession of AN). Research has indicated the remaining 80 percent of farms utilize fertilizer-application se rvices and thus do not purchase, and are never actually in possession of AN, directly. A nother 27,000 construction businesses and mining facilities purchase AN (to produce ANFO explosive mixtures). Many of the entities captured under Group 3 are either unlikely to possess suffi cient quantities of AN to be required to do a Top-Screen or are unlikely to be determined to be high-risk after completing a Top-Screen and

15SVA, and thus are unlikely to be captured unde r the CFATS regulatory program. However, most of them will be subject to the AN regulatory program.

Table 1 provides an illustration of the regulated community population estimates assumed in this analysis.

Table 1. Estimated Regulated Community Population

# of Facilities

Group 1 - Entities that are AN Facilities, but not AN Purchasers

AN Manufacturers 26

Total 26

Group 2 - Entities that are both AN Facilities and AN Purchasers

Manufacturers/Fertilizer Mixers 534

Wholesalers 7,600

Co-ops 3,000

Retailers 11,300

Fertilizer applicators 3,300

Total 25,734

Group 3 - Entities that are AN Purchasers, but no t AN Facilities

Farms 110,000

Mining 7,000

Construction sites 20,000

Total 137,000

Total Estimated Regulated Community Population 162,760

Pursuant to Section 563, the forthcoming AN regulatory program will ultimately impose disparate compliance requirements for AN Facilitie s and AN Purchasers, as previously noted. For the purposes of preparing a relevant and s ubstantive cost estimate, it is important to recognize the estimated population factions within the overarching regulated community.

As defined by Section 563, the estimated num ber of AN Facilities and AN Purchasers is provided in Table 2 on the following page. Note that the sum of these two categories is larger

than the total estimated re gulated community, as over 25,000 members of the regulated community are expected to be both AN Facilities and AN Purchasers.

16Table 2. Estimated Number of AN Facilities and AN Purchasers

# of Facilities

AN Facilities

Entities that are AN Facilities, but not AN Purchasers 26

Entities that are both AN Facilities and AN Purchasers 25,734

Total AN Facilities 25,760

AN Purchasers

Entities that are AN Purchasers, but not AN Facilities 137,000

Entities that are both AN Facilities and AN Purchasers 25,734

Total AN Purchasers 162,734

Additionally, these estimates likely overstate the size of the regulated community for the following reasons: the time constraints for th is report rendered the Department unable to segregate those entities selling AN from those ent ities selling other fertiliz er materials, excluding AN. Consequently, the Department assumes that a certain number of entities that sell fertilizers

that do not contain AN and othe rwise do not acquire/purchase AN have been captured in the population estimate described in this report.

In addition, pursuant to Section 563, the Department may exempt persons who produce, sell or purchase AN exclusively to produce explosives unde r a license or permit issued under 18 U.S.C. Chapter 40. The Department may choose to exem pt many, if not all, of the 27,000 construction sites and mines included in the estimated regul ated community. For purposes of the following cost estimates, however, DHS has assumed that thes e entities will not be exempted and thus are captured under Group 3 – Entit ies that are AN Purchasers but not AN Facilities.

II. ANALYSIS OF COST OF REGULATORY ACTIVITIES

This section of the document an alyzes the potential cost to both the Department and the regulated community of the ten primary activities explicitly or implicitly required by Section 563. For each activity, the document provides the likely approach to implementation, the assumptions used when performing the cost anal yses, and the estimated costs to both DHS and the regulated community.

For many of the activities required by Section 563, there are a variety of approaches available to DHS. The Department is proposing an approach th at satisfies the statutory requirements, while incurring a minimal cost to the Federal Government. For certain activities, such as registration applications, where the Department is actively c onsidering more than one approach, this report presents the estimated costs for the a pproaches currently under review.

On the next page, Table 3 provi des a breakdown of the estimated annual and five-year costs to both the Department and industry/the regulated co mmunity on an activity-by- activity basis. The

cost estimates in Table 3 and th e remainder of this analysis ar e intended to serve as high-level estimates, based on multiple assumptions and have been developed simply to inform the early analysis of various pote ntial approaches warranting further cons ideration. A much more detailed

17evaluation of the estimated costs to both DHS and industry will be prepared to support budget development and the regulatory evaluation required as part of the rulemaking process, pursuant

to Executive Order 12866.

Table 3. Activity-by-Activity Breakdo wn of Annual and Five-year Costs to DHS and Industry (in $ Millions)

DHS

Year 1 DHS

Years 2- 5 (per year) DHS

Years 1- 5 (total) Industry

Year 1 Industry

Years 2-5 (per year) Industry

Years 1- 5 (total)

Activity 1A: Registration Applications 3.3 .25 4.3 9.1 .45 10.9

Activity 1B: TSDB Checks 5.7 1.4 11.3 0 0 0

Activity 1C: Registration Numbers .25 .01 .3 0 0 0 Activity 2A: Seller Verification of Purchaser’s Registration and Identity 0 0 0 4.8 4.8 24.2

Activity 2B: Recordkeeping 0 0 0 64.3 57.0 292.3

Activity 3A: Reporting of Theft or Loss of AN 0 0 0 .9 .9 4.6

Activity 3B: Inspections and Audits 5.8 3.8 21.0 6.3 6.3 31.5

Activity 3C: Guidance Materials and Posters .2 .01 .2 0 0 0 Activity 4A: Establishing Threshold Level for AN in a

Substance 0 0 0 0 0 0

Activity 4B: Appeals and Penalties 1.1 .4 2.7 .8 .7 3.4

Total Costs (without staffing costs) 16.35 5.87 39.83 86.2 70.15 366.8

Staffing Costs (for 45 Federal Positions) 4.64 7.11 3 3.08

-- -- --

Total Costs (incl uding staffing costs) 20.99 12.98 72.91 86.2 70.15 366.8

ANALYTICAL ASSUMPTIONS

In the interest of good business practice or to comply with re gulations promulgated by other federal and state agencies, many companies have previously dedicated su bstantial financial and human capital in order to enhance the security of their facility. The costs provided in this analysis do not capture those pr e-existing resources, as many business have previously purchased point-of-sale equipment, as well as track and ma intain records of AN tr ansactions, and manage security and inventory of the AN at their facili ties. Rather, this analysis summarizes best estimates of any incremental costs related to co mpliance with the new regulatory requirements applicable to the sale and transfer of AN.

The regulatory program may produce certain benef its to the AN facility owners and operators, including improved security and monitoring of AN transactions, which will, in turn, improve inventory control, alert owners to loss and th eft, and generally enhan ce product stewardship. There remains the question of the consistency in a pproach to verification related to transactions, as this activity is not cont rolled by DHS per Section 563.

Cost of Industry Time

Throughout this analysis, cost es timates have been developed based on the estimated amount of time assumed necessary to complete a particul ar activity and then multiplied by an average loaded hourly wage for a particular class of wo rkers. The average hourly wages described below are from the Bureau of Labor Statistics, O ccupational and Employment Survey, May 2006. The

18hourly wages represent the wages at the 90 th percentile except for t hose of the General and Operations Manager, which represent the 75 th percentile (the 90 th percentile was not reported). Each hourly wage is adjusted by 40 percent to acc ount for the cost of bene fits and other overhead charges. Table 4 presents the averag e hourly wages used in this report.

Table 4. Hourly Wages (in $ Dollars)

90th percentile hourly wage 40% benefits Total loaded hourly Wage

General & Operations Manager* 61.82 24.73 86.55

Purchasing Manager 38.85 15.54 54.39

File Clerk 15.15 6.06 21.21

Sales Staff 21.53 8.61 30.14

Auditor/Accountant 44.70 17.88 62.57

Inventory Manager 54.45 21.78 76.23

* General & Operations Manager at 75th percentile

Cost to DHS of Developing the Regulations

In addition to implementation costs, the Depart ment will incur some costs to develop the regulations. Developing the regula tions requires the following generic activities: 1) development of proposed and final regulations (including th e development and release of an ANPR), 2) gathering and reviewing public comments on the proposed regulation, and 3) development of a regulatory evaluation (including a small business analysis). The cost of these activities is primarily the cost of the federal and/or contractor personnel necessary to perform these activities. Based on the performance of sim ilar activities during the development of CFATS, it is estimated that approximately nine individuals, at a tota l two year cost of $2,320,545 will be necessary to develop the AN regulations. This is estimated to include two attorney s, four individuals dedicated to program management and polic y analysis, two econo mists to support the development of a regulatory evaluation and associ ated small business analysis, and contractor support for the comment collection and review pr ocesses and related activ ities. A breakdown of the personnel needed to develop the AN regulat ions and the approximate cost for each is

contained in Table 5.

Table 5. Costs to DHS of De veloping the AN Regulations

Number of

Personnel 2009 Costs 2010 Costs Total Cost

Legal Support for Development of Regulations and Regulatory Evaluation, and Review of Comments (i.e., Attorneys) 2 $244,405 $398,003 $642,408

Programmatic & Policy Support for Development of Regulations and Regulatory Evaluation, and Review of Comments 4 $371,027 $547,731 $918,758

Economist Support for Development of Regulatory Evaluation (including Small Business Analysis) 2 $185,513 $273,866 $459,379

Contractor Support for Comment Collection and Review 1 $150,000 $150,000 $300,000

Total 9 $950,945 $1,369,600 $2,320,545

19CATEGORY 1 – REGISTRATION ACTIVITIES

Activity 1A – Registration Applications

The first regulatory activity to occur will be the submission of applications for registration numbers. The Department expects to require that an owner of one or more AN Facilities provides the name, address, telephone number, designated point of contact and any other requested information for each AN Facility he or she owns. The Department also expects to require that each AN purchasing applicant provi de DHS with his or her name, address and telephone number, as well as the intended use of the AN to be purchased. DHS is considering two primary methods in which this information can be collected: 1) electronically via a secure Web portal, and 2) via paper forms either faxed or mailed to the Department. If DHS elects to

include face-to-face identif ication verification of the applicant, it may require that the application (whether electronic or paper) be completed a nd submitted at a local USDA Extension Service office (provided that DHS and USDA reach a coope rative agreement as authorized by Section 563).

For the purpose of this analysis, the Department assumes that each entity that is solely an AN Facility (Group 1) or that is both an AN Fac ility and an AN Purchaser (Group 2) will register two people (a primary and a backup) and an en tity that is an AN Pu rchaser but not an AN Facility (Group 3) will register one person. Thus, a total of 188,520 registration applications are expected in the first year of the program. The Department estimates that there will be annual turnover of approximately five percent of the population, meaning there will be an additional 9,426 applications submitted to the Department each year.

DHS Costs

Option 1 - Electronic submission

To support electronic submission, the Department would need to develop a secure Web portal that is accessible by AN Facilities and prospective AN Purchasers via the Internet. The initial development cost of such a system on its own is estimated at $3.3 millio n, with annual operating and maintenance costs estimated at $250,000. 13 If the Department is ab le to leverage CSAT or another existing secure Web portal, both the in itial development costs and the annual operating and maintenance costs may be significantly lowered.

Option 2 - Paper submission

To support paper submission of application materials, the Department would need to hire staff to extract information manually from the submitted application form for performance of the TSDB check and submission into a registered user da tabase maintained by the Department. It is estimated that the Department would incur a transaction cost of approximately $25 per registration application. With 188,520 applicants expected in the fi rst year, the cost of handling

13 These estimates were informed by the cost to DHS to develop, operate, and maintain the CSAT IT system as part

of the CFATS effort.

20the associated paper submissions is estimat ed at $4,713,000. Assuming a five percent annual turnover rate, approximately 9,426 new applications would be received each year, which would cost DHS approximately $235,650 annually.

Requiring Submission at USDA Extension Service Office

While the USDA will incur some costs if this option is selected, DHS will bear no additional costs above those associated with Options 1 or 2 unless the Department funds USDA’s operations in this activity. In order to devel op a comprehensive coordinated effort with the USDA, DHS must conduct extensive research a nd establish a candid and substantive dialogue with the regulated community and the USDA. Such an undertaking is necessary for the Department to determine the specific regulator y approach for this au thority, as Section 563 requirements and security implications may be more appropriately addressed by the USDA. DHS may consider relinquishing registration activities to the US DA in order to support an enhanced identity verification process.

For the purposes of this activ ity, the USDA extension offices dispersed throughout the United States or sites operated by other federal entities such as a United States Post Office, Federal Courthouse, and so forth, may provide non-agricultural users of AN a logistically feasible registration location, and may serve as the best possible approach to appropriately verifying an applicant’s identity and submitting completed registration applications, assuming DHS reaches appropriate agreements with such entities. Additional incrementa l costs to the agencies or the Department for this approach have not been estimated.

Industry Costs

Option 1 - Electronic submission

Each prospective AN Facility or AN Purchase r applying for an AN re gistration number will spend approximately 45 minutes reading about the rule and procedures for registration before completing the registration application. If the ap plication is online, the Department assumes it will take the applicant approximately 15 minutes to find the Website, enter information, submit it to the Department, and print and file a copy fo r his or her records. Assuming 188,520 applicants with an average per-applicant fully loaded hourly rate of $48, the initial ye ar costs to industry/the regulated community of th is option would be $9,048,960, with annual recurring costs of $452,448.

Option 2 - Paper submission

Each prospective AN Facility or AN Purchase r applying for an AN re gistration number will spend approximately 45 minutes reading about the rule and procedures for registration before completing the registration application. If the application is paper-bas ed, DHS assumes it will take each applicant about 15 mi nutes to complete a paper app lication, fax or mail it to the Department, and file it for his or her records. Assuming 188,520 applicants with an average perapplicant fully loaded hourly rate of $48, the initial year co sts to industry/the regulated community of this option would be $9,048,960, with annual recurring costs of $452,448.

21Requiring Submission at USDA Extension Service office

If the applicant is required to submit the form in person at a USDA Extension Service office, the Department assumes that in addition to th e hour spent reading about the regulation and completing the application, it will take an averag e applicant one hour in tr ansit to and from the USDA facility, thus doubling the cost to industry/the regulated co mmunity of either the direct submission of a paper or electronic form.

Activity 1B – TSDB Check

Section 563 requires that all AN re gistration applicants submit identifying information to be checked against the consolidated TSDB.

DHS Costs

As applicants cannot directly access the TSDB, th e Department will bear the direct costs of the

TSDB check. Based on discussion with the DHS Screening Coordination Office (SCO) and the TSA, ISCD estimates the total costs associated with processing an initia l check of the TSDB will amount to approximately $30 per applicant, w ith process costs for annual re-verification amounting to an estimated annual cost of six dollars per applicant. This is the only check that will be conducted, as the statute only requires ch ecks against the TSDB. Therefore, a more thorough commercial background inves tigation that includes criminal history and credit, which would cost an additional $250 or more per chec k, is not included in this analysis.

To perform the TSDB check, the Department coul d leverage the TSDB portal being developed as part of the CFATS regulatory program, or coul d simply provide SCO with a list of applicants to screen. DHS has assumed a five percent tu rnover rate; thus, the annual cost for background checks on new applicants will be based on five percent of the base population. The estimated costs for this activity ar e contained in Table 6.

Table 6. TSDB Costs

Initial Year Year 2 Year 3 Year 4 Year 5 Total Years 1-

5

Number of Facilities &

Purchasers Checked in TSDB for

First Time 188,520 9,426 9,426 9,426 9,426 226,224 Process Costs per Initial TSDB

check $30 $30 $30 $30 $30 $30

Cost of First Time TSDB Checks $5,655,600 $282,780 $282,780 $282,780 $282,780 $6,786,720

Number of Facilities &

Purchasers Re-Verified 0 188,520 188,520 188,520 188,520 754,080

Process Costs per Re-Verification $6 $6 $6 $6 $6 $6

Cost of Re-Verifications $0 $1,131,120 $1,131,120 $1,131,120 $1,131,120 $4,524,480

Total $5,655,600 $1,413,900 $1,413,900 $1,413,900 $1,413,900 $11,311,120

22Industry Costs

As fee authority is not in th e legislation, unless DHS charge s prospective registrants an application fee for this service, all the costs wi ll be borne by the Department, and there will be no cost to industry/the regulated community for this activity.

Activity 1C – Registration Numbers

Pursuant to Section 563, DHS is required to pr ovide each approved AN Facility or AN Purchaser with a registration number. Currently, the Departme nt intends to either e-mail or mail a letter or certificate with a registration number to each approved applicant.

DHS Costs

Regardless of whether e-mail or regular mail is used to distribute the letters/certificates, to help manage the registration number process, the De partment would develop a basic AN registered

user database. DHS estimates that a basic da tabase meeting baseline security requirements would cost approximately $250,000 to develop and ope rate in the first year , with five percent annual maintenance costs in years two through five. If DHS e-mails the le tters or certificates,

than the cost of the database (and the salary of any personnel w ho manage it) are the only costs of this activity to the Department.

If the letters or certificates are mailed, the Depa rtment will incur additional costs associated with the production and distribution of the letters. Th ese additional costs are estimated to be $.80 per letter or certificate. Additionally, DHS assumes th at 10 percent of registered entities will need a replacement letter or certificate ea ch year due to loss of the origin al, and that there will be five percent turnover among the registered entity pop ulation each year. Based on these assumptions, the Department would bear first year letter /certificate production and distribution costs of $165,898 and annual production and distribution co sts of $15,080 each year thereafter. The annual costs to DHS for this approach, incl uding the costs for re placement letters and certificates, are summarized in Table 7.

Table 7. Costs of Provision of Registration Numbers via Mail

Initial Year Year 2 Year 3 Year 4 Year 5 Total Years

1-5 Number of Registered Facilities & Purchasers Requiring Notification 188,520 9,426 9,426 9,426 9,426 226,224 Annual Letter/Certificate Manufacturing Cost ($0.30 per item) $56,556 $2,828 $2,828 $2,828 $2,828 $67,867

Annual Letter/Certificate Distribution Costs ($0.50 per item) $94,260 $4,713 $4,713 $4,713 $4,713 $113,112 Number of Replacement

Letters/Certificates 18,850 18,850 18,850 18,850 18,850 94,250 Annual Replacement Letter/Certificate Costs ($0.80 per card) $15,080 $15,080 $15,080 $15,080 $15,080 $75,400

Total $165,896 $22,621 $22,621 $22,621 $22,621 $256,380

23Industry Costs

There is no cost to industr y related to registration numbers if the letters or certificates are mailed to them. If the letters or certificates are provi ded via e-mail, there may be some cost to the regulated community based on the need for so me registrants who ma y not currently possess Internet access or an e-mail account to acquire su ch access or accounts. However, this cost is expected to be minimal.

CATEGORY 2 – POINT-OF-SALE ACTIVITIES

Activity 2A – AN Facility Verification of Registration and Identity of AN Purchasers

Pursuant to Section 563B(e)(2)(D), the owner of an AN Facility must verify the registration including the identity of any AN Purchaser, as well as the identity of designated agents purchasing AN from the Facility. The Department is currently evaluating several approaches to support compliance with this requi rement. For example, the regul atory program may require the AN Facility to perform a simple check of a prospective purchaser’s (1) state- or federal-issued identification (e.g., driver’s license, passport) and (2) AN registration number le tter or certificate.

DHS Costs

Because the verification is performed solely by the AN Facility, the Department will bear no cost for this activity other than some relatively sma ll initial costs to develop and distribute guidance on proper verification processes.

Industry Costs

The cost to industry/the regulated community of this activity is the increm ental time spent during an AN transaction to verify the identity a nd AN registration number of the prospective purchaser. Accordingly, the overall cost would depend on the number of AN transactions that occur and the time it takes to perform a simple driver’s license or similar identity check, assuming that is all the regulations require.

There is currently not enough info rmation to estimate the number of AN transactions that occur each year. Some large AN Facilities will have many more transactions than others. For the purpose of this analysis, it is assumed that larger AN Facilities with existing equipment, software, and services to enable electronic transactions will r ecord on average 500 transactions per year. Smaller, paper-based AN Facilities are assumed to pro cess 250 transactio ns per year. This amounts to 9,660,000 transactions per year or just over one tran saction per week per purchaser. Assuming that an identity check ta kes approximately 30 seconds per transaction and that both the average AN Facility sales cl erk performing the check and the average AN Purchaser being checked make $30 an hour fully lo aded, this activity cost s industry/the regulated community $.50 per transaction, or $4,830,000.

24Under Section 563, AN Facilities are not required to underg o training on how to properly perform an identity check. However, for impl ementation of meaningful purchaser verification, the Department may wish to require that e ach employee with authority to sell AN undergo training to:

• Recognize a valid AN registration letter/cer tificate and appropriate identification,

• Spot suspicious behavior,

• Identify conditions to deny a transaction,

• Record a transaction appropriately, and

• Notify the appropriate federal en tity and/or state or local la w enforcement of suspicious purchases or transfers of AN and the theft or loss of AN.

If the regulations either require such training or industry decide s unilaterally to require training, assuming training takes one hour and the average f acility trains eight sales clerks per year, industry will incur an additional $6,182,400 in training related costs.

Activity 2B - Recordkeeping

The second POS activity required un der the legislation is recordk eeping. Pursuant to Section 563B(e)(1)(A) of the Homeland Security Act, as amended by P.L. 110-161, an AN Facility must

maintain a record of each sale or transfer of AN for at least two years from the date of sale or

transfer.

DHS Costs

The costs for this activity reside solely with the AN Facilities. The Department may incur some costs related to inspecting or auditing a facility ’s records, but those costs are covered under Activity 3B – Inspections and Audits.

Industry Costs

The costs to industry/regulated community associat ed with this activity ar e the costs of the time spent during each transaction collecting and recording the information required under the regulations, the costs of the time spent on ongoing recordkeeping activit ies throughout the year, and any capital investment costs a facility incurs in acquiring equipment to facilitate the safe storage of the AN transaction records.

Transactional Recordkeeping Costs. The first costs are those a ssociated with the time spent during each transaction co llecting and recording the following information:

• Name of purchaser,

• Registration number,

• Amount purchased (including units),

• Date of transaction, and

• Any additional information that DHS may reas onably require a facility to maintain to demonstrate compliance with the statute and the regulations.

25For purposes of this analysis, the Department estimates that collecting and recording this information will take on average 2.5 minutes per transaction. Assuming ag ain that an average AN Facility sales clerk and an average AN Purchase r each cost $30 per hour fully loaded, than the total annual cost to the regulated community of this sub-activity is $2.50 per transaction, or $24,150,000.

Ongoing Recordkeeping Costs . DHS assumes that each AN Facility will spend 60 hours per year (an average of five hours per month) engaged in recordkeeping activities such as organizing, filing, photocopying, and reconciling AN transaction records, including possibly entering the data into an internal spreadsheet application. The Department a ssumes that a file clerk will be responsible for these activities, a nd that a file clerk costs approxi mately $21 an hour fully loaded. Based on these assumptions, DHS estimates the regulated community will incur annual ongoing recordkeeping costs of $32,457,600.

Storage of Records. The Department assumes that each AN Facility will purchase an additional filing cabinet with lock s to store AN transactions records. The estimated cost is $300 per facility, or $7,728,000. This would be a one-time cost for each f acility incurred in year one; however, assuming a five percent annual turnover rate, new regulated facilities are expected to spend an estimated $386,400 annually on storage equipment.

CATEGORY 3 – ADDITIONAL REGULA TORY ACTIVITIES/REQUIREMENTS

Activity 3A – Reporting Theft of Loss of AN

Pursuant to Section 563 requirements, AN Facilitie s and AN Purchasers are required to report to

federal law enforcement authorities the theft or loss of AN within one calendar day of becoming

aware of the theft or loss.

DHS Costs

For the purposes of this preliminary estimate, DHS currently assumes that such reports will be made to existing federal law enforcement author ities (e.g., the FBI), and that whichever entity receives the report will initiate the appropria te investigatory actions. Accordingly, the Department envisions incurring no additional costs related to this activity.

Industry Costs

The cost to industry of this activit y will be the time to gather detail s and report the theft or loss of

AN. Because of the seriousness of theft or loss of AN, the total time to report a theft or loss is assumed to include two hours each for an inventory manager and sales person, plus one hour for the general manager. This includes the time for the reporter to organize useful details for law enforcement and conduct a brief investigation. There will likely be additional time for a necessary follow-up investigation. Strictly for pur poses of this analysis, the Department assumes that two percent of AN Faciliti es and AN Purchasers will report loss or theft once per year.

26Based on these assumptions, there will be 3,255 reports of theft or loss annually, at a total annual cost to industry of $918,188.

Activity 3B – Inspections and Audits

Pursuant to Section 563, the Department must either directly perform or oversee facility compliance inspections and/or audits. For purposes of this analysis, it is assumed that 25 percent of AN Facilities, or 6,440 facilitie s, will be inspected or audited annually. A typical inspection will include an examination of both the facility ’s registration documents and its recordkeeping process, as well as an audit of some of th e records of transactions involving AN.

DHS Costs

It is estimated that a typical inspection of one AN Facility – including preparation time, travel, on-site time, and report writing – will take a single inspector two days. DHS is considering the following three entities to perform such inspec tions: (1) the Department, (2) USDA (provided a cooperative agreement is reached), or (3) state agencies receivi ng delegations of authority in accordance with Section 563. Assuming an average inspection takes a single inspector two days, approximately 35 inspectors/auditors would be required to inspect or audit 6,440 facilities annually.

Using the costs of the CFATS Inspector Cadre as a guide, it is estimated that $5,790,000 will be needed to hire, train, equip, provide office space to, and deploy 35 inspectors in year one of the AN program. In years 2-5, these activities are estimated to cost $3,805,000 annually. Note that

this does not include the costs of salary and benefits for the in spectors or their support staff (those costs are addressed below under “Staffing Costs to DHS”). A breakdown of potential inspection and audit-related costs (excluding inspector salary and be nefits) is contained in Table 8 below. The specific inspection approach that the Department will employ warrants further

consideration and extensive c oordination with the USDA and individual state governors and relevant agencies.

Table 8. Inspection and Audit Costs (excl uding inspector salary and benefits) 14

Initial Year Year 2 Year 3 Year 4 Year 5 Total Years 1-

5 Training (Year 1 - $30K per inspector; Years 2-5 - $12K annually per inspector) $1,050,000 $420,000 $420,000 $420,000 $420,000 $2,730,000

Equipment & Vehicles (Year 1 - $18K per inspector; Years 2-5 - $9K per inspector annually) $630,000 $315,000 $315,000 $315,000 $315,000 $1,890,000

Travel (Year 1 - $26K per inspector; Years 2-5 - $43K per inspector annually) $910,000 $1,470,000 $1,470,000 $1,470,000 $1,470,000 $6,790,000

Office Space (Year 1 - $800K per office ; Years 2-5 - $400K per office annually) $3,200,000 $1,600,000 $1,600,000 $1,600,000 $1,600,000 $9,600,000

Total $5,790,000 $3,805,000 $3,805,000 $3,805,000 $3,805,000 $21,010,000

14 Estimated costs per inspector and costs per office (with the exception of the initial year’s travel costs) were based on costs incurred or anticipated by the CFAT S inspector cadre. As less travel is expected to occur in the first year of implementation of the AN regulations, the initial year’s travel costs were estimated to be approximately 60% of the costs incurred in the out years.

27Please note that it can be assumed that a CFATS inspection will be significantly more comprehensive and technically challenging than an AN Facility inspection/audit may be, certain costs (e.g., training, salary) for the AN inspection program might turn out to be less than the costs incurred to perform thos e activities under CFATS. The Department has chosen to use CFATS costs as the basis for estimating the cost s for these activities for AN inspectors for the following reasons: (1) it is possible that the same inspectors will be used to perform inspections under both CFATS and the AN regulat ions, and thus all inspectors will have to be trained and equipped to perform the more complex CFATS inspections; and (2) the Department does not know precisely what an inspection under the AN re gulatory regime will enta il at this time and thus cannot accurately estimate the related traini ng costs. Similarly, the estimated office space

costs are based on the CFATS cost estimates fo r establishing new regional offices for CFATS inspectors. If the AN inspectors can share sp ace in facilities alre ady established by the Department to house CFATS inspectors, actual office space costs are likely to be lower.

Industry Costs

The primary cost of this activity to industry is the cost of preparing fo r and hosting an inspection or audit. If an audit is conducted off-site, th e audited AN Facility woul d have to prepare and transmit a report of its recordkeeping that would li kely include some sort of reconciliation of its AN sales and copies of its verifi cation/transaction logs. The time required for an AN Facility to prepare and transmit the required information coul d range from as little as an hour for a small business to several days for a la rger-volume business. For the purpose of this analysis, it is assumed that each audit will take eight hours of clerical time ($21.21 an hour) and two hours each for an inventory manager ($76.23 an hour) and general manager ($86.55 an hour) or equivalent to review. Based on these assumpti ons, each off-site audit would cost a facility $495.24.

If an inspection or audit occurs on-site, it is assumed that they will be unannounced, and the cost to the AN Facility would be the cost of the tim e during which the inspect ion/audit takes place, not any preparation time. During the audit, the De partment assumes that the facility manager (or equivalent position) and a clerical person will be on hand to retrieve the records and answer questions from the auditor. The time to complete the inspection/audit could range from as little as an hour for a small business to several days for a larger-volume busine ss. For the purpose of this analysis, it is assumed that each audit will take eight hours each for clerical support ($21.21 an hour), inventory manager ($76.23 an hour), and general manager ( $86.55 an hour). Based on these assumptions, each on-site a udit would cost a facility $1,471.90.

Assuming 50 percent of inspecti ons/audits are done off-site and the other 50 percent of inspections/audits are done on-si te, the total annual cost to industry of this activity is $6,334,191.

Activity 3C – Guidance Materials and Posters

Pursuant to Section 563, the Department is re quired to develop and provide to the regulated community primarily two types of guidance documents:

28• Guidance on the procedures for appealing a deni al of a registration application to the .2% (approximately 377) of applicants estimated to be denied a registration number and

• Guidance (to the approximately 25,760 AN Faciliti es) on the identification of suspicious AN purchases and appropriate actions to be taken.

Additionally, DHS is required to develop and prov ide to AN Facilities materials suitable for posting that provide notificati on of the recordkeeping requir ements and the penalties for violating such requirements.

DHS Costs

The costs associated with developing the guida nce documents and posters are expected to be relatively small. The bulk of the costs related to these efforts will be in the reproduction and dissemination of the final guidance materials and posters. It is estimated that these guidance materials will cost $0.85 each per recipient to re produce and distribute, while the posters will cost approximately $6.50 each per recipient to re produce and distribute. With an estimated 377 applicants receiving the first guidance doc ument and an additional 25,760 AN Facilities receiving the second guidance document, the total cost for developing, reproducing, and distributing the guidance material s is estimated at $22,217. Assuming an annual turnover rate of five percent, an additional 1,307 guidance documents will be produced annua lly thereafter, at a cost of $1,111 per year. An estimated 25,760 posters will need to be produced in the first year, which will cost the Department approximate ly $167,440. Assuming a turnover rate of five percent, the Department will spend approxima tely $8,372 per year on posters after year one.

Industry Costs

It is assumed that DHS will bear the cost of producing and distributing the guidance materials and posters to the regulated community. Thus, th e cost to industry for this activity will be

minimal.

CATEGORY 4 – ADMINISTRATIVE ACTIVITIES

Category 4A - Threshold Percentage of AN in a Substance

Under Section 563, the Department must establish a threshold percentage of AN in a substance

for it to be considered AN. Because DHS ha s already made similar determinations in promulgating Appendix A to CFATS, the additional cost related to this activity for either DHS or industry should be relatively minimal.

Category 4B – Penalties and Appeals

Pursuant to Section 563, the Department has th e authority to assess ci vil penalties of up to $50,000 per violation of the regulations. How DH S will enforce violations and collect fines likely will depend on the inspection approach taken. If the Department performs the inspections, it can identify and report violations internally and collect fines direc tly. If DHS outsources

29inspection authority, it likely will have to be notified by the states or USDA inspectors of

violations then initiate enforcement actions and collect fines.

It is not possible to accurately predict the number of AN Facilities that will be assessed penalties for noncompliance. It is also not possible to es timate the number of fac ilities assessed penalties that will appeal that penalty assessment. Stri ctly for purposes of this cost analysis, the Department has assumed that one percent of all AN Facilities (258 facil ities) will be assessed penalties annually and that ha lf of those (129 facilities ) will appeal their penalty.

In addition to appeals of a penalt y, applicants denied registration numbers also have the right to appeal, and DHS must, to the exte nt practicable, resolve appeals w ithin 72 hours. Historically, approximately 0.2 percent of all individuals sc reened through the TS DB are found to be a potential security risk base d on the TSDB search results. 15 Based on this historical average, the Department estimates that appr oximately 377 app licants will be denied registration numbers in the first year of the AN regulations, and approximately 19 will be deni ed registration numbers each year thereafter. It is difficult to estimate the percent of these denied applicants who will appeal the ruling, so for the purposes of this an alysis, DHS has assumed all individuals found to be a security risk based on the TS DB screening will appeal the finding.

DHS Costs

Penalties and Appeals of Penalties: The primary cost of assessing a penalty will be associated with the decision-making process leading up to the assessment of a penalty and the follow-up tracking to ensure payment. It is estimated th at these activities will cost approximately $500 per facility, meaning that penalty assessment s are estimated to cost approximately $129,000 annually.

The cost of an appeal likely will vary great ly depending on the specific factual circumstances surrounding the penalty, and the arguments raised in challenging the penalty. This makes it extremely difficult to estimate the average cost of an appeal to DHS. For purposes of this cost analysis, the Department has assumed that a typical appeal of a penalty will cost DHS approximately $2,500, for an estimated annual cost of $322,500.

Appeals of Denials of Applicati ons for Registration Numbers Similarly, the cost of an appeal of a denial of an application for a registration numbe r likely is case-specific and very difficult to estimate. However, for purposes of this analysis, the Department estimates that the average cost to DHS of such an appeal will be $2,000. Base d on these assumptions, the total expected annual cost for appeals of denials of registrati on numbers during the fi rst year is $754,000, and $38,000 for each year thereafter.

15 Because the legislation specifically re quires a search of the TSDB only, the estimated hit rate of provided (0.2 percent) is for a search of the TSDB only. If additional da tabases are searched for potential threat indicators, the hit rate is estimated to be closer to 2 percent, which woul d increase the costs for this activity by a factor of ten.

30Table 9. Appeals of Denials of App lication for Registration Numbers

Initial Year Year 2 Year 3 Year 4 Year 5 Total Years 1-

5

Number of Facilities & Purchasers Applying for Registration 188,520 9,426 9,426 9,426 9,426 226,224 Estimated Percentage of Applicants who are Denied and

who Appeal 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% Estimated Number of Applicants who are Denied and who Appeal 377 19 19 19 19 453

Cost to DHS per Appeal $2,000 $2,000 $2,000 $2,000 $2,000 $2,000

Total $754,000 $38,000 $38,000 $38,000 $38,000 $906,000

Industry Costs

Penalties and Appeals of Penalties The cost of an appeal may vary greatly depending on the specific factual circumstances surrounding the pena lty, but in all cases wo uld likely involve the time of the general manager, inventory manager, a ttorneys, corporate manage rs and clerical time. For purposes of this cost analysis, the Department has assumed that a typi cal appeal would cost a facility approximately $5,000 in legal fees a nd time spent working on the appeal. Thus, assuming 129 facilities a year appe al penalties, the cost to indu stry of this activity is $645,000.

This cost estimate does not include the actual amo unt of any penalties paid by a facility found to be in noncompliance either before or after an appeal.

Appeals of Denials of Applica tions for Registration Numbers: It is assumed that individuals requesting an appeal will be required to file and serve a Notice of Appeal, Brief, and any other necessary filings. The Department assumes it woul d take an applicant a total of six hours to prepare the needed paperwork to appeal. Using an average lo aded hourly rate of $54.39 for a denied applicant, the estimated cost per appeal is $326, for a total first year cost to industry of $123,043, and $6,152 every year thereafter.

STAFFING COSTS TO DHS

Implementation of the new AN-rela ted responsibilities wi ll require the Department to expand its existing Infrastructure Security Compliance Division organization. This includes costs associated with the performance of mana gement, oversight, tracking, reporting, and administration activities in support of the Division ’s AN-security related ac tivities, as well as the actual issuance of registration numbers, performance of TSDB checks, performance of inspections and audits, and implementation of other regulatory re quired activities. DHS estimates that 45 individuals, at a first year cost of approximately $4,640,298 and a second year cost of $7,112,873, will be required to carry out th is new regulatory responsibility. The

breakdown of the roles of the i ndividuals and the estimated cost per individual can be found in Table 10 on the following page.

31Table 10. DHS Staffing Costs for Im plementation of AN Regulations

Number of

Personnel 2009 Costs 2010 Costs

Programmatic and Policy Support 7 $649,296 $958,529

Legal Support 1 $122,202 $199,002

Administrative Support 2 $152,312 $205,495

Inspectors/Auditors 16 35 $3,716,488 $5,749,847

Total 45 $4,640,298 $7,112,873

ADDITIONAL POTENTIAL INDUSTRY COST S NOT INCLUDED IN THIS ANALYSIS

Industry Costs

Additional legal liability If an upstream AN Facility is responsible for its customers’ compliance with the AN rules, an additional liability may be created. It is possible that umbrella liability insurance premiums c ould increase as a result; however , there is not enough information at this point to determine the cost asso ciated with this additional liability.

Industry guidance: In addition to the Department gui dance, AN Facilities will likely develop and distribute their own guidance materials (such as current “Be Secure for America” efforts). Industry will incur the cost of printi ng and distributing th e industry guidance.

Capital Investments: This analysis assumes that AN Fac ilities will use existing technologies to comply with the AN rule. In reality, due to th e inefficiencies of pa per-based recordkeeping, some AN Facilities may make capital investments in hardware and software to allow faster electronic verification and recordkeeping.

Increased wait times: All customers at a facility that sells AN, to include those customers not necessarily attempting to purch ase AN, will incur longer wait times as AN registrations are

verified and transactions are recorded through the methodology em ployed by the facility. These costs could be mitigated through the hiring of ad ditional workers or through the acquisition of technology to support expedited recording of AN transacti ons, at a cost to industry.

16 Estimated staffing cost of inspectors/auditors depends primarily on the Federal General Schedule (GS) pay grade

at which the individuals are hired. Becau se it is unclear at this time (a) what precisely an AN in spection will entail, and (b) whether or not AN inspectors also will be asked to perform CFATS inspections, it is unclear at what pay grade the AN inspectors will be hired. Accordingly, th e actual inspector/auditor salary costs may be noticeably higher or lower depending on the grade at which staff eventually are hired.

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### CONCLUSION

Over the past few months, the De partment has made significant progress not only in establishing some basic parameters for developing regulations focused specifically on securing AN under Section 563, but also in implementing regulatio ns (e.g., CFATS) that are helping to secure portions of the AN supply chain immediately. Go ing forward, DHS will continue its effort to define an appropriate regulatory structure for secu ring the sale and transfer of AN, in accordance with Section 563, as well as identifying and s ecuring high-risk facilities that manufacture, distribute, sell, store, or use AN. Immedi ate next steps related to securing AN include:

• Issuance of an Advanced Notice of Public Rulemaking describing po tential regulations for implementing Section 563 and asking for public comment on certain aspects of the potential regulatory approach.

• Continued outreach and partne rship with the agricultural co mmunity to identify how to best accomplish the mission of Section 563 a nd the Department’s se curity goals while minimizing the impact on the agricultural community.

• Further analysis of the potential ap proaches to implementing Section 563.

• Continued coordination with ot her federal security partners to ensure harmonization of any Section 563 efforts with related efforts.

• Development and issuance of proposed regul ations under Section 563 for public review

and comment.

• Development of a regulatory evaluation/detaile d industry cost assessm ent for regulations implementing Section 563, as well as a deta iled assessment of costs to the Federal Government of implementing Section 563.

33