GAO Report from B-280055

B-280055 Jun 09, 1998 Jump To VIEW DECISION RELATED PAGES GAO CONTACTS Highlights DIGEST Title VI of the Department of the Interior and Related Agencies Appropriations Act for Fiscal Year 1998 authorizes activities that would have been prohibited by the 1990 forest Resources Conservation and Shortage Relief Act and its implementing regulations. You asked us whether Title VI of the Department of the Interior and Related Agencies Appropriations Act for Fiscal Year 1998 authorized activities that would have been deemed illegal substitution under the 1990 Forest Resources Conservation and Shortage Relief Act and its implementing regulations. /1/ We found that Title VI of the Appropriations Act contains several changes authorizing activities formerly prohibited. If the private and federal timber originate form the same area this practice is called "substitution. View Decision Subject: Timber Export Law File: B-280055 Date: June 9, 1998 DIGEST The Honorable Peter DeFazio House of Representatives Dear Mr. DeFazio: In your December 1, 1997 letter, you asked us whether Title VI of the Department of the Interior and Related Agencies Appropriations Act for Fiscal Year 1998 authorized activities that would have been deemed illegal substitution under the 1990 Forest Resources Conservation and Shortage Relief Act and its implementing regulations. /1/ We found that Title VI of the Appropriations Act contains several changes authorizing activities formerly prohibited. You also asked us whether these changes apply to states other than Washington. We conclude that they do, and that the new act contains provisions generally applicable throughout the western states, applicable to states other than Washington and Idaho, applicable only to Washington, and applicable only to Idaho. Background The export of federal timber from the western United States has been banned since 1973. Timber harvested from private lands may be exported. As a result of significant demand for raw logs in Japan and high transportation costs, exported private timber generally sells for a significantly higher price than timber harvested from public lands. /2/ A company with large holdings of private land could in theory sell its own timber overseas, while using federal and state timber to supply its domestic mills. If the private and federal timber originate form the same area this practice is called "substitution," on the theory that these companies are substituting public timber for its own timber to supply their mills. /3/ It is called "direct substitution" when the company buys the federal or state timber directly from the government, and "indirect substitution" when the company buys federal timber from a third party. /4/ It has been argued that substitution drives up the price of publicly held timber, and thus places smaller mills (and their employees) at risk, because the large companies are able to use their export profits to subsidize their bids for public timber. /5/ Opponents also contend that substitution drives up timber harvests, particularly of old growth timber on public lands, thus damaging the environment. /6/ Proponents of substitution insist that it is an economically efficient practice that allocates to mills the species and grades of logs they need. /7/ Proponents assert that environmental restrictions on federal timber sales, not substitution, are to blame for timber supply problems in the Pacific Northwest. /8/ The Forest Resources Conservation and Shortage Relief Act of 1990 (the 1990 act) generally prohibits the export of unprocessed timber from federal lands west of the 100th meridian in the 48 contiguous states. /9/ Under the 1990 act, timber purchasers may generally not engage in direct substitution, which occurs when a company uses timber harvested from federal lands in its processing facility while exporting nonfederal timber from the same geographic and economic area that it could have used in the facility. /10/ In addition, the 1990 act generally prohibits indirect substitution, which is similar to direct substitution, except that the exporting company purchases federal timber from a third party, rather than directly from the government. /11/ The prohibitions on substitution do not apply to purchasers who purchase federal timber from within a sourcing area, /12/ and export timber only from areas outside the sourcing area. A sourcing area is an area within which a company obtains federal timber for processing at a particular mill, and which is geographically and economically separate from any area from which the applicant exports private timber. The Forest Service implemented various provisions of the 1990 act in a series of rules, the most comprehensive of which was issued in 1995. /13/ In a rider contained in the act providing appropriations to the Forest Service for fiscal year 1996, Congress effectively suspended implementation of the 1995 rule.