WSR 21-01-205

PROPOSED RULES

DEPARTMENT OF AGRICULTURE

[Filed December 23, 2020, 7:48 a.m.]

Original Notice.

Preproposal statement of inquiry was filed as WSR 20-14-112.

Title of Rule and Other Identifying Information: Chapter 16-218 WAC, Hops—Certification analysis—Fees, as a result of a petition from the Washington hop commission, the department is proposing increasing all fees related to the certification of hops under WAC 16-218-015, 16-218-025, and 16-218-035 by approximately forty-five percent. In addition, the department is proposing updating section titles to move away from a question and answer format and modifying the language to improve readability.

Hearing Location(s): On February 9, 2021, at 10:00 a.m., Skype conference line. Join by link https://lync.wa.gov/agr.wa.gov/meet/grobinson/77GFSGDC?sl=1.

Join by phone: 1-360-407-3816, Conference ID: 86838. Due to the mandated social distancing requirements in place during the current COVID-19 pandemic, the public hearing will be held solely over video and teleconference.

Date of Intended Adoption: February 16, 2021.

Submit Written Comments to: Gloriann Robinson, Agency Rules Coordinator, P.O. Box 42560, Olympia, WA 98504-2560, email wsdarulescomments@agr.wa.gov, fax 360-902-2092, by 5:00 p.m., February 9, 2021.

Assistance for Persons with Disabilities: Contact Deanna Painter, phone 360-902-2061, TTY 800-833-6388 or 711, email dpainter@agr.wa.gov, by February 2, 2021.

Purpose of the Proposal and Its Anticipated Effects, Including Any Changes in Existing Rules: WAC 16-532-035 requires that all varieties of hops produced in the state be inspected and certified by the federal/state hop inspection service prior to marketing or processing. The Washington state department of agriculture's (WSDA) hop inspection program provides this service to the hop industry by carrying out site inspections for phytosanitary certificates, chemical analysis, and certification of the state's hop crop. The program takes a representative sample of all hop lots during harvest, as well as accepting a number of samples submitted by hop producers directly. WSDA last increased hop inspection fees in 2005. The Washington hop commission determined that a fee increase is necessary to stabilize and maintain the financial health of the hop inspection program and petitioned the department to conduct rule making to do so. The Washington hop commission also determined the amount of the increase that should be implemented.

The proposed amendment would increase fees for the certification of hops by approximately forty-five percent. This includes all fees listed under WAC 16-218-015, 16-218-025, and 16-218-035. The anticipated effects from this would be increased costs to businesses in Washington that pay to certify their hops.

Reasons Supporting Proposal: RCW 22.09.790 requires the department maintain fees at a level necessary to cover the cost of providing service. Eight years ago, the hop inspection program went through a streamlining process in order to reduce costs and improve operational efficiency. Everyday operations were analyzed to see how they could be improved to speed up processing and reduce time and labor. Some systems were made electronic or automated in order to reduce the number of staff needed for processing. These changes greatly reduced the program's operational costs. However, due to external factors, a fee increase has become necessary. The amount of hops produced annually in the state has increased, creating a greater workload for staff. Additionally, the program has experienced a significant rise in operational costs, due to a mandated wage increase. During peak harvest season from late August to mid-October, inspections are performed seven days a week. Additional temporary staff are hired during this time to meet demand and staff typically work long hours, often outside of their normal schedules. This is done in order to provide the quick turn-around time that growers both request and depend on for test results and the certification of their hops. These factors have led to a dramatic increase in operational costs, which the current fees are not able to cover.

A fee increase is necessary to stabilize and maintain the financial health of the hop inspection program. Current projections indicate the program is running below a six month operating budget and will have difficulty performing necessary functions after the 2021 hop season. The program is projected to reach a zero balance within the next three years. Without a fee increase the hop inspection program would no longer be able to test hops or perform inspections in a timely manner and therefore, could not provide needed services to the hop industry. This would result in negative impacts to Washington hop producers and increased costs, as they would need to ship their samples to Oregon or Idaho for inspection. Not only could this result in a loss of sales for growers, as the turn-around time for test results would be much slower, but Oregon and Idaho likely would not have the capacity to test all of Washington's hops. Since testing is required under WAC 16-532-035, this would leave growers with the legal requirement to have their hops tested, but no place to have that testing performed.

Statutory Authority for Adoption: RCW 22.09.020 and 22.09.790.

Statute Being Implemented: Chapter 22.09 RCW.

Rule is not necessitated by federal law, federal or state court decision.

Name of Proponent: Washington hop commission, governmental.

Name of Agency Personnel Responsible for Drafting, Implementation, and Enforcement: Mike Firman, 21 North 1st Avenue, Suite 106, Yakima, WA 98902, 509-249-6933.

A school district fiscal impact statement is not required under RCW 28A.305.135.

A cost-benefit analysis is not required under RCW 34.05.328. WSDA is not a listed agency under RCW 34.05.328 (5)(a)(i).

The proposed rule does impose more-than-minor costs on businesses.

Small Business Economic Impact Statement

Chapter 16-218 WAC

Hops—Certification Analyses—Fees

December 23, 2020

History and Overview: Washington state is the top producing region for hops in the United States. With an estimated 41,263 acres of commercial hop production in 2019, Washington hops account for nearly seventy percent of the total hop production in the United States1. A majority of the state's hops are grown in the Yakima Valley where the climate, soil, and available water make it an ideal growing area.

WAC 16-532-035 requires that all varieties of hops produced in the state be inspected and certified by the federal/state hop inspection service prior to marketing or processing. WSDA's hop inspection program provides this service to the hop industry by carrying out site inspections for phytosanitary certificates, chemical analysis, and certification of the state's hop crop. The program takes a representative sample of all hop lots during harvest, as well as accepting a number of samples submitted by hop producers directly. The hop industry also has the option of utilizing the services of the Oregon or Idaho departments of agriculture for inspection and certification services.

Each sample is analyzed for the presence of seeds, leaves, and stems, in accordance with United States Department of Agriculture (USDA) procedures. Samples are given a grade that can be used to determine the commercial value of each lot. Hops containing a high amount of leaves and stems are considered less valuable. The hop industry requests sample testing results be provided within twenty-four hours so they can fix any problems with processing if a high amount of leaves and stems are found in their crop.

Seeds are another concern for the hop industry, as they can form an oil when brewed which results in a lower value beer and makes the brewing process harder to control. This can lead to increased brewing costs. Some brewers will even request seedless (contains less than two percent seed) hops. As a result, low seed crops are more attractive to sellers and can fetch a higher market price. Washington traditionally uses low seed farming practices which has given it a reputation for growing hops containing low amounts of seed. The testing conducted by the hop inspection program helps demonstrate the high quality of hops produced in the state. After a hop sample is analyzed, the hop inspection program issues an inspection certificate, which is used for buying and selling the hops.

The program also tests for brewing values of hops, hop pellets, and hop extract; and moisture and hop storage index. Growers and dealers may also submit unofficial samples to the department for these specific tests. By performing these functions and issuing the associated documents necessary for trade, the hop inspection program ensures continued access to international and interstate markets for Washington's hop producers.

RCW 22.09.790 requires the department maintain fees at a level necessary to cover the cost of providing service. As a result of a petition from the Washington hop commission, the department is proposing amendments to WAC 16-218-015, 16-218-025, and 16-218-035 by increasing all fees related to the certification of hops by approximately forty-five percent. Additionally, the department is updating section titles to move away from a question and answer format and modifying the language to improve readability.

Why the Rule Change is Needed: The department last increased hop inspection fees in 2005. Eight years ago, the hop inspection program began going through a LEAN process in order to streamline operations and reduce costs. Everyday operations were analyzed to see how they could be improved to speed up processing and reduce time and labor. Some systems were made electronic or automated in order to reduce the number of staff needed for processing. These changes greatly reduced the program's operational costs. However, even after all the increased efficiencies that were implemented, a fee increase has become necessary after fifteen years.

The amount of hops produced annually in the state has increased, creating a greater workload for staff. Additionally, the program has experienced a significant rise in operational costs, due to a mandated wage increase. During peak harvest season from late August to mid-October, inspections are performed seven days a week. Additional temporary staff are hired during this time to meet demand and staff typically work long hours. This is done in order to provide the quick turn-around time that growers both request and depend on for test results and the certification of their hops. These factors have led to a dramatic increase in operational costs, which the current fees are not able to cover.

A fee increase is necessary to stabilize and maintain the financial health of the hop inspection program. Current projections indicate the program is running below a six month operating budget and will have difficulty performing necessary functions after the 2021 hop season. The program is projected to reach a zero balance within the next three years. Without a fee increase the hop inspection program would no longer be able to test hops or perform inspections in a timely manner and therefore, could not provide needed services to the hop industry. This would result in negative impacts to Washington hop producers and increased costs, as they would need to ship their samples to Oregon or Idaho for inspection. Not only could this result in a loss of sales for growers, as the turn-around time for test results would be much slower, but Oregon and Idaho likely would not have the capacity to test all of Washington's hops. Since testing is required under WAC 16-532-035, this would leave growers with the legal requirement to have their hops tested, but no place to have that testing performed.

Probable Compliance Requirements: The only probable compliance requirement is businesses utilizing the services provided by the hop inspection program will pay higher fees for those services.

Professional Services Needed to Comply with Proposed Amendment: No professional services will be required for businesses to comply with the proposed rule amendment.

Proposed amendments to WAC 16-218-015, 16-218-025, and 16-218-035 increase all fees related to the certification of hops by approximately forty-five percent. Under the proposed amendments, fees would be assessed as follows:

WAC 16-218-015 Fees for the certification of hops:

WAC 16-218-025 Charges for chemical analysis regarding brewing values and additional constituents in raw hops, hop extract, hop pellets, and hop powder. Fees for the chemical analyses of officially sampled raw hops:

Fees for chemical analyses of submitted raw hops, hop extract, hop pellets or hop powders:

WAC 16-218-035 Fees for issuing export certification for hops and hop products:

WAC 16-532-035 requires that all varieties of hops produced in the state be inspected and certified. Under the proposed amendments, the only required fee is under WAC 16-218-015 and is for official lot inspections and the certification of baled hops. This fee is currently $1.25 per bale with a minimum charge of $30 per lot and would increase to $1.81 per bale with a minimum charge of $44 per lot under the proposed changes. The average value for one bale of hops is estimated around $1,000 or more. When comparing this amount to the fee, the cost is relatively minimal. For example, a sample submitted to the hop inspection program may cost the business $217.50 for analysis, but the value of the lot submitted may be around $200,000. In fact, in 2019 the USDA hop report stated that the total value of Washington hops was $475 million. The fees collected that year by the hop inspection program were a total of $630,000.

All fees listed under ASBC and moisture testing are optional fees for service.

Increased fees under the proposed amendment will not cause businesses to lose sales or decrease their revenue, however it will likely increase overall expenses for each business. Additionally, there will be no increased cost for businesses to comply with the proposed rule in terms of extra costs for equipment, supplies, labor, professional services, or administrative costs. In contrast, if the program was not able to continue providing the current level of service or had to shut down completely due to lack of funds, the businesses it serves would likely lose sales due to the inability to have their crops tested and certified as required.

In 2019, an estimated thirty-six small businesses and nine large businesses paid fees for the certification of hops. Table 3.1 shows the total fees paid by each business, as well as the estimated cost under the proposed fee increase.

Costs will vary greatly between businesses, with one small business seeing an increase of $48 and another seeing an increase of $28,364. This is also the case when analyzing the cost difference for large businesses, with one seeing an increase of $163 and another seeing an increase of $35,990. These varying costs are a result of the number of samples taken and tests requested by each business. This is not necessarily related to the size of the business.

Total fees paid by each Washington business in 2019 were compared with estimated costs under the approximate forty-five percent increase. The resulting difference is shown in Table 4.1 and 4.2 under the "Estimated cost increase" column. Totals in this column were compared to the minor cost thresholds identified in Section 2. Under the proposed amendment, some businesses are expected to experience cost increases exceeding the minor cost threshold. This is shown in Table 4.1.

Table 4.1 indicates that of the forty-five businesses which paid fees in 2019, thirteen are expected to have costs exceeding the minor cost threshold. Eight of these businesses are considered to be small and five large.

However, not all businesses that paid fees in 2019 are expected to have costs exceeding the minor cost threshold. Table 4.2 shows that thirty-two businesses are expected to have cost increases less than the minor cost threshold. Twenty-eight of these businesses are considered small and four large.

RCW 19.85.040(1) requires the department compare the cost of compliance for small businesses with the cost of compliance for the largest ten percent of businesses required to comply with the proposed rule amendment. One or more of the following methods can be used as a basis for comparing costs: (a) Cost per employee; (b) cost per hour of labor; or (c) cost per one hundred dollars of sales.

Costs per employee were analyzed for the top ten percent of large businesses impacted by the proposed changes. This was compared with the cost per employee for all impacted small businesses. Table 5.1 shows the results of the analysis, which indicates that small businesses will be disproportionately impacted by the proposed rule amendments.

The average cost per employee for the top ten percent of large businesses impacted by the proposed amendments is $74.56. In comparison, the average cost per employee for all small businesses impacted by the proposed amendments is $604.90. Despite costs per employee varying widely for both large and small businesses, it is evident that small businesses will be disproportionately impacted by the proposed amendment.

Table 5.2 shows a comparison by NAICS code of the average estimated cost per employee for all large and small businesses impacted by the proposed amendment. Under this table, cells with "None" listed indicate that no businesses of that size and NAICS code were found to be impacted. NAICS codes with only one size of business impacted by the proposed amendment are considered to be disproportionately impacted.

It was found that small businesses in the following NAICS categories will be disproportionately impacted by the proposed amendments: 111140 - Wheat Farming, 111191 - Oilseed and Grain Combination Farming, 111320 - Citrus (except Orange) Groves, 111331 - Apple Orchards, 111334 - Berry (except Strawberry) Farming, 111336 - Fruit and Tree Nut Combination Farming, 111998 - All Other Miscellaneous Crop Farming, 112111 - Beef Cattle Ranching and Farming, 112990 - All Other Animal Production, 424480 - Fresh Fruit and Vegetable Merchant Wholesalers, and 424590 - Other Farm Product Raw Material Merchant Wholesalers.

RCW 19.85.030(2) requires consideration of the following methods of reducing the impact of the proposed amendment on small businesses:

(a) Reducing, modifying, or eliminating substantive regulatory requirements: RCW 22.09.790 requires the department maintain fees at a level necessary to cover the cost of providing service. Due to the mandated wage increase, the fees currently set in rule are no longer able to cover the costs of providing these services. The Washington hop commission requested the fee increase, including the recommended approximate forty-five percent increase amount. They determined the increase is necessary in order to maintain the current level of service provided by the program. Modifying the amount in which the fee is increased would lower the level of service the program is currently providing, potentially to a point that the program would not be operational at all and would be in conflict with the statutory mandate.

(b) Simplifying, reducing, or eliminating recordkeeping and reporting requirements: There are no recordkeeping or reporting requirements associated with the proposed rule amendment.

(c) Reducing the frequency of inspections: Inspections are a fundamental part of the hop inspection program and are required in order to complete the necessary services offered by the program. Therefore, any reduction in the number of inspections would have a negative impact on stakeholders and the industry as a whole.

(d) Delaying compliance timetables: Delaying compliance timetables is not a viable mitigation measure. The proposed rule amendment is necessary to maintain the financial health of the program and ensure its continued operation. Delaying compliance timetables could result in a financial deficit making the program unable to perform required duties. This could negatively impact businesses in the industry. However, the new fees would not go into effect until August 2021.

(e) Reducing or modifying fine schedules for noncompliance: There are no fines associated with this rule.

(f) Any other mitigation techniques including those suggested by small businesses or small business advocates: In the past, projects have been initiated to cut costs in an attempt to financially streamline the program. WSDA also proposed conducting private sampling and using unofficial certificates to save on costs. However, this was not widely utilized and it was determined that the industry preferred official services. It was eventually determined by the industry that a proposed fee increase was necessary to maintain the financial health of the program. The industry submitted a request to the department which outlined the increase amount for each fee. No other mitigation techniques were suggested by small businesses or small business advocates.

Budgetary concerns related to the hop inspection program were discussed at meetings with the Washington hop commission. The commission is an organization consisting of representatives from both large and small businesses within the hop industry. Commission meetings are open to the public and well attended by stakeholders, including both dealers and growers. During one of these meetings, the board determined a fee increase was necessary to maintain the financial health of the hop inspection program and requested that the department move forward with the proposed rule amendment to increase fees related to the certification of hops. A committee was convened by the commission to discuss the details of the amendment and determine the amount the fees would be increased. The fee changes within the proposed amendment reflect the recommendations of the committee.

No jobs are expected to be created or lost as a result of compliance with the proposed rule amendment.

A copy of the statement may be obtained by contacting Gloriann Robinson, Agency Rules Coordinator, P.O. Box 42560, Olympia, WA 98504-2560, phone 360-902-1802, fax 360-902-2092, TTY 800-833-6388, email wsdarulescomments@agr.wa.gov.

December 23, 2020

Brad White

Assistant Director

OTS-2804.1