oversight

Regulatory Reform: Comments on S. 746--The Regulatory Improvement Act of 1999

Published by the Government Accountability Office on 1999-04-21.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                        United States General Accounting Office

GAO                     Testimony
                        Before the Committee on Governmental Affairs
                        U.S. Senate



Not to be Released
Before 10:00 a.m. EDT
Wednesday
                        REGULATORY REFORM
April 21, 1999


                        Comments on S. 746--
                        The Regulatory
                        Improvement Act of 1999
                        Statement for the Record of L. Nye Stevens
                        Director, Federal Management and Workforce Issues
                        General Government Division




GAO/T-GGD/RCED-99-163
Statement

Regulatory Reform: Comments on S. 746—
The Regulatory Improvement Act of 1999

                        Mr. Chairman and Members of the Committee:

                        I am pleased to assist in your consideration of S. 746, the “Regulatory
                        Improvement Act of 1999.” As I said in my testimony on its predecessor, S.
                        981, we believe that the bill thoughtfully addresses many issues in
                                                                                                1
                        regulatory management that have long been the subject of controversy.
                        We have issued reports on a number of those issues.

                        My statement today focuses on our past work in four areas of relevance to
                        the bill: (1) the effectiveness of previous regulatory reform initiatives, (2)
                        agencies’ cost-benefit analysis practices and the trigger for the analytical
                        requirements, (3) peer review of agencies’ regulatory analyses, and (4) the
                        transparency of the regulatory development and review process.

                        During this Committee’s hearings on S. 981, one of the witnesses indicated
Unfunded Mandates       that Congress should determine the effectiveness of previously enacted
Reform Act Had Little   regulatory reforms before enacting additional reforms. Perhaps the most
Effect on Agencies’     directly relevant of those reforms to S. 746 is title II of the Unfunded
                        Mandates Reform Act of 1995 (UMRA), which requires that agencies take a
Rulemaking Actions      number of analytical and procedural steps during the rulemaking process.

                        We examined the implementation of UMRA during its first 2 years of
                        operation and, for several reasons, concluded that it had little effect on
                                                        2
                        agencies’ rulemaking actions. First, the act’s cost-benefit requirement did
                        not apply to many of the rulemaking actions that were considered
                        “economically significant”actions under Executive Order 12866 (78 out of
                        110 issued in the 2-year period). Second, UMRA gave agencies discretion
                        not to take certain actions if they determined that those actions were
                        duplicative or unfeasible. For example, subsection 202(a)(3) of the act
                        requires agencies to estimate future compliance costs and any
                        disproportionate budgetary effects of the actions “if and to the extent that
                        the agency determines that accurate estimates are reasonably feasible.”
                        Third, UMRA requires agencies to take actions that they were already
                        required to take. For example, the act required agencies to conduct cost-
                        benefit analyses for all covered rules, but Executive Order 12866 required
                        such analyses for more than a year before UMRA was enacted and for a
                        broader set of rules than UMRA covered.

                        1
                         Regulatory Reform: Comments on S. 981—The Regulatory Improvement Act of 1997 (GAO/T-
                        GGD/RCED-97-250, Sept. 12, 1997); and Regulatory Reform: Comments on S. 981—The Regulatory
                        Improvement Act of 1998 (GAO/T-GGD/RCED-98-95, Feb. 24, 1998).
                        2
                         Unfunded Mandates: Reform Act Has Had Little Effect on Agencies’ Rulemaking Actions (GAO/GGD-
                        98-30, Feb. 4, 1998).




                        Page 1                                                              GAO/T-GGD/RCED-99-163
Statement
Regulatory Reform: Comments on S. 746--The Regulatory Improvement Act of 1999




Like UMRA, S. 746 contains some of the same requirements contained in
Executive Order 12866 and in previous legislation. However, the
requirements in the bill are also different from existing requirements in
many respects. For example, S. 746 would address a number of topics that
are not addressed by either UMRA or the executive order, including risk
assessments and peer review. These requirements could have the effect of
improving the quality of the cost-benefit analyses that agencies are
currently required to perform. Also, S. 746 applies to rules issued by
independent regulatory agencies that are not covered by Executive Order
12866.

However, as currently written, S. 746’s analytical requirements do not
appear to apply to some rules that are covered by Executive Order 12866.
The executive order’s cost-benefit analysis requirements apply to
“economically significant” rules issued by the covered agencies, and the
order defines economically significant rules as ones that are likely to have

“an annual effect on the economy of $100 million or more or adversely affect in a material
way the economy, a sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or State, local, or tribal governments or communities.”

Under the executive order, a rule can have a $100 million effect on the
economy by imposing $100 million in costs or by providing $100 million in
benefits. S. 746’s cost-benefit analysis requirements apply to “major” rules,
and the bill defines a major rule in subsection 621(7)as one that

“(A) the agency proposing the rule or the Director (of the Office of Management and
Budget) reasonably determines is likely to have an annual effect on the economy of
$100,000,000 or more in reasonably quantifiable costs; or (B) is otherwise designated a
major rule by the Director on the ground that the rule is likely to adversely affect, in a
material way, the economy, a sector of the economy, including small business, productivity,
competition, jobs, the environment, public health or safety, or State, local or tribal
governments, or communities.”

Therefore, a rule that is economically significant under Executive Order
12866 because it is likely to have more than $100 million in benefits (but
perhaps only $90 million in costs) would not be covered by the analytical
requirements in S. 746 (unless designated by the Director). Also, the bill
does not cover a rule if the agency determines that it imposes $90 million
in costs plus other costs that are not “reasonably quantifiable.” If the intent
of the bill is not to exclude these kinds of rules covered by the executive
order, the definition of a major rule in subsection 621(7)(A) could be
amended to eliminate the words “in reasonably quantifiable costs.”




Page 2                                                            GAO/T-GGD/RCED-99-163
                       Statement
                       Regulatory Reform: Comments on S. 746--The Regulatory Improvement Act of 1999




                       The centerpiece of S. 746 is its emphasis on cost-benefit analysis for major
Agencies Could         rules. The bill establishes detailed procedures for preparing those analyses
Improve Cost-Benefit   and using them in the rulemaking process. Therefore, it is important to
Analyses               understand how agencies are currently preparing cost-benefit analyses.

                       Mr. Chairman, in a 1998 report prepared at your and Senator Glenn’s
                       request, we examined 20 cost-benefit analyses at 5 agencies to determine
                       the extent to which those analyses contain the “best practices” elements
                       recommended in the Office of Management and Budget’s (OMB) January
                                                                           3
                       1996 guidance for conducting cost-benefit analyses. We concluded that
                       some of these 20 analyses did not incorporate OMB’s best practices. For
                       example, the guidance states that the cost-benefit analysis should show
                       that the agency has considered the most important alternative approaches
                       to the problem addressed by the proposed regulatory action. However, 5 of
                       the 20 analyses that we examined did not discuss any alternatives to the
                       proposed action, and some of the studies that discussed alternatives did so
                       in a limited fashion. For example, the Food and Drug Administration’s
                       (FDA) regulation on adolescents’ use of tobacco examined six regulatory
                       alternatives but contained only a few paragraphs on the five that were
                       ultimately rejected. A more thorough discussion of the alternatives that
                       FDA considered would have better enabled the public to understand why
                       the agency chose the proposed action.

                       Six of the cost-benefit studies did not assign dollar values to benefits, and
                       only six analyses specifically identified net benefits (benefits remaining
                       after costs have been accounted for)—a key element in OMB’s guidance.
                       Executive Order 12866, on which OMB’s guidance is based, emphasizes
                       that agencies should select approaches that maximize net benefits unless a
                       statute requires another regulatory approach.

                       The OMB guidance stresses the importance of explicitly presenting the
                       assumptions, limitations, and uncertainties in cost-benefit analyses.
                       However, the analyses that we examined often were not explicit or
                       “transparent” on these matters. For example, five of the analyses did not
                       explain why the agencies did not use a discount rate to determine the
                       present value of future benefits and costs. Also, five of the analyses did not
                       explain why they did not discuss the uncertainty associated with the
                       estimated benefits and costs. Similarly, in a 1997 report examining 23 cost-
                       benefit analyses supporting the Environmental Protection Agency’s (EPA)
                       air quality regulations, we concluded that certain key economic

                       3
                       Regulatory Reform: Agencies Could Improve Development, Documentation, and Clarity of Regulatory
                       Economic Analyses (GAO/RCED-98-142, May 26, 1998).




                       Page 3                                                              GAO/T-GGD/RCED-99-163
Statement
Regulatory Reform: Comments on S. 746--The Regulatory Improvement Act of 1999




assumptions were not identified or were not explained in 8 of the
          4
analyses. For example, one analysis assumed a value of life that ranged
from $1.6 million to $8.5 million while another analysis that was prepared
in the same year assumed a value of life that ranged from $3 million to $12
million. In neither case did the analysis clearly explain why the values
were chosen.

Eight of the 20 cost-benefit analyses that we examined in our 1998 report
did not include an executive summary that could help Congress,
decisionmakers, the public, and other users quickly identify key
information addressed in the analyses. In our 1997 report, 10 of the 23
analyses supporting air quality regulations did not have executive
summaries. We have previously recommended that agencies’ cost-benefit
analyses contain such summaries whenever possible, identifying (1) all
benefits and costs, (2) the range of uncertainties associated with the
                                                                      5
benefits and costs, and (3) a comparison of all feasible alternatives.

S. 746 addresses many of these areas of concern. For example, when an
agency publishes a notice of proposed rulemaking (NPRM) for a major
rule, section 623 of the bill would require agencies to prepare and place in
the rulemaking file an initial regulatory analysis containing an analysis of
the benefits and costs of the proposed rule and an evaluation of the
benefits and costs of a reasonable number of alternatives. Section 623 also
requires an evaluation of the relationship of the benefits of the proposed
rule to its costs, including whether the rule is likely to substantially
achieve the rulemaking objective in a more cost-effective manner or with
greater net benefits than other reasonable alternatives. Finally, it requires
agencies to include an executive summary in the regulatory analysis that
describes, among other things, the key assumptions and scientific or
economic information upon which the agency relied.

Enactment of the analytical, transparency, and executive summary
requirements in S. 746 would extend and underscore Congress’ previous
statutory requirements that agencies identify how regulatory decisions are
made. We believe that Congress and the public have a right to know what
alternatives the agencies considered and what assumptions they made in
deciding how to regulate. Although those assumptions may legitimately


4
 Air Pollution: Information Contained in EPA’s Regulatory Impact Analyses Can Be Made Clearer
(GAO/RCED-97-38, Apr. 14, 1997).
5
 Cost-Benefit Analysis Can Be Useful in Assessing Environmental Regulations, Despite Limitations
(GAO/RCED-84-62, Apr. 6, 1984).




Page 4                                                                  GAO/T-GGD/RCED-99-163
                         Statement
                         Regulatory Reform: Comments on S. 746--The Regulatory Improvement Act of 1999




                         vary from one analysis to another, the agencies should explain those
                         variations.

All Major Rules Do Not   If enacted, Congress may want to review the implementation of this part of
                         S. 746 to ensure that the initial regulatory analysis requirements apply to
Have NPRMs               all of the rules that it anticipated. As I previously noted, the bill’s analytical
                         requirements apply to all major rules at the time they are published as an
                         NPRM. The Administrative Procedure Act of 1946 (APA) permits agencies
                         to issue final rules without NPRMs when they find, for “good cause,” that
                         the procedures are impracticable, unnecessary, or contrary to the public
                                  6
                         interest. When agencies use this exception, the APA requires the agencies
                         to explicitly say so and provide an explanation for the exception’s use
                         when the rule is published in the Federal Register.

                         In a report we issued last April, we pointed out that 23 of the 122 final rules
                         that were considered “major” under the Small Business Regulatory
                         Enforcement Fairness Act and published between March 29, 1996, and
                                                                                  7
                         March 29, 1998, were issued without a previous NPRM. If the same
                         proportion holds true for the major rules covered by S. 746, the initial
                         analytical requirements in the bill would not apply to nearly one-fifth of all
                         final major rules.

                         We also examined the issuance of final rules without NPRMs in another
                                                         8
                         report that we issued last year. In some of the actions that we reviewed,
                         agencies’ stated rationales for using the good cause exception were not
                         clear or understandable. For example, in one such action, the agencies
                         said in the preamble to the final rule that a 1993 executive order that
                         imposed a 1994 deadline for implementation and incorporation of its
                         policies into regulations prevented the agencies from obtaining public
                         comments before issuing a final rule in 1995. In other actions, the agencies
                         made only broad assertions in the preambles to the rules that an NPRM
                         would delay the issuance of rules that were, in some general sense, in the
                         public interest.

                         We believe that agencies need the flexibility to publish final rules without
                         NPRMs in order to respond quickly to emergencies and in other

                         6
                         An NPRM is also not required for interpretative rules; general statements of policy; or rules of agency
                         organization, procedures, or practice.
                         7
                          Regulatory Reform: Major Rules Submitted for Congressional Review During the First 2 Years
                         (GAO/GGD-98-102R, Apr. 24, 1998).
                         8
                          Federal Rulemaking: Agencies Often Published Final Actions Without Proposed Rules (GAO/GGD-98-
                         126, Aug. 31, 1998).




                         Page 5                                                                     GAO/T-GGD/RCED-99-163
                     Statement
                     Regulatory Reform: Comments on S. 746--The Regulatory Improvement Act of 1999




                     appropriate situations. Similarly, we believe that using the issuance of
                     NPRMs as the trigger for analytical requirements may be entirely
                     appropriate. However, as a result, some major rules will probably not be
                     subject to these requirements.

                     S. 746 also requires agencies to provide for an independent peer review of
Peer Review Can      any required risk assessments and cost-benefit analyses of major rules that
Improve Regulatory   the agencies or the OMB Director reasonably anticipate are likely to have a
Decisionmaking       $500 million effect on the economy. Peer review is the critical evaluation
                     of scientific and technical work products by independent experts. The bill
                     states that the peer reviews should be conducted through panels that are
                     “broadly representative” and involve participants with relevant expertise
                     who are “independent of the agency.”

                     We believe that important economic analyses should be peer reviewed.
                     Given the uncertainties associated with predicting the future economic
                     impacts of various regulatory alternatives, the rigorous, independent
                     review of economic analyses should help enhance the quality, credibility,
                     and acceptability of agencies’ decisionmaking.

                     In our 1998 study of agencies’ cost-benefit analysis methods that I
                     mentioned previously, only 1 of the 20 analyses that we examined received
                                                  9
                     an independent peer review. Of the five agencies whose analyses we
                     examined, only EPA had a formal peer review policy in place. Although
                     OMB does not require peer reviews, the Administrator of OMB’s Office of
                     Information and Regulatory Affairs (OIRA) testified in September 1997 that
                     the administration supports peer review. However, she also said that the
                     administration realizes that peer review is not cost-free in terms of
                     agencies’ resources or time.

                     The peer review requirements in S. 746 provide agencies with substantial
                     flexibility. If an agency head certifies that adequate peer review has
                     already been conducted, and the OMB Director concurs, the bill requires
                     no further peer review. However, agencies will need to carefully plan for
                     such reviews given the bill’s requirement that they be done for all risk
                     assessments and each cost-benefit analysis for which the associated rule is
                     expected to have a $500 million effect on the economy. Agencies will also
                     need to ensure that a broad range of affected parties are represented on
                     the panels and (as S. 746 requires) that panel reports reflect the diversity
                     of opinions that exist.


                     9
                         GAO/RCED-98-142.




                     Page 6                                                       GAO/T-GGD/RCED-99-163
                     Statement
                     Regulatory Reform: Comments on S. 746--The Regulatory Improvement Act of 1999




                     Mr. Chairman, last year we issued a report which you and Senator Glenn
Transparency of      requested, assessing the implementation of the regulatory review
Regulatory Actions                                                          10
                     transparency requirements in Executive Order 12866. Those requirements
Can Be Improved      are similar to the public disclosure requirements in S. 746 in that they
                     require agencies to identify for the public the substantive changes made
                     during the period that the rules are being reviewed by OIRA, as well as
                     changes made at the suggestion or recommendation of OIRA. We reviewed
                     four major rulemaking agencies’ public dockets and concluded that it was
                     usually very difficult to locate the documentation that the executive order
                     required. In many cases, the dockets contained some evidence of changes
                     made during or because of OIRA’s review, but we could not be sure that all
                     such changes had been documented. In other cases, the files contained no
                     evidence of OIRA changes, and we could not tell if that meant that there
                     had been no such changes to the rules or whether the changes were just
                     not documented. Also, the information in the dockets for some of the rules
                     was quite voluminous, and many did not have indexes to help the public
                     find the required documents. Therefore, we recommended that the OIRA
                     Administrator issue guidance on how to implement the executive order’s
                     transparency requirements.

                     The OIRA Administrator’s comments in reaction to our recommendation
                     appeared at odds with the requirements and intent of the executive order.
                     Her comments may also signal a need for ongoing congressional oversight
                     and, in some cases, greater specificity as Congress codifies agencies’
                     public disclosure responsibilities and OIRA’s role in the regulatory review
                     process. For example, in response to our recommendation that OIRA issue
                     guidance to agencies on how to improve the accessibility of rulemaking
                     dockets, the Administrator said “it is not the role of OMB to advise other
                     agencies on general matters of administrative practice.” The OIRA
                     Administrator also indicated that she believed the executive order did not
                     require agencies to document changes made at OIRA’s suggestion before a
                     rule is formally submitted to OIRA for formal review. However, the
                     Administrator also said that OIRA can become deeply involved in
                     important agency rules well before they are submitted to OIRA. Therefore,
                     adherence to her interpretation of the order would result in agencies’
                     failing to document OIRA’s early role in the rulemaking process. Those
                     transparency requirements were put in place because of earlier
                     congressional concerns regarding how rules were changed during the
                     regulatory review process.


                     10
                      Regulatory Reform: Changes Made to Agencies’ Rules Are Not Always Clearly Documented
                     (GAO/GGD-98-31, Jan. 8, 1998).




                     Page 7                                                             GAO/T-GGD/RCED-99-163
              Statement
              Regulatory Reform: Comments on S. 746--The Regulatory Improvement Act of 1999




              Finally, the OIRA Administrator said that an “interested individual” could
              identify changes made to a draft rule by comparing drafts of the rule. This
              position seems to change the focus of responsibility in Executive Order
              12866. The order requires agencies to identify for the public changes made
              to draft rules. It does not place the responsibility on the public to identify
              changes made to agency rules. Also, comparison of a draft rule submitted
              for review with the draft on which OIRA concluded review would not
              indicate which of the changes were made at OIRA’s suggestion—a specific
              requirement of the order.

              We believe that enactment of the public disclosure requirements in S. 746
              would provide a statutory foundation to help ensure the public’s access to
              regulatory review information. In particular, the bill’s requirement that
              these rule changes be described in a single document would make it easier
              for the public to understand how rules change during the review process.
              We are also pleased to see that S. 746 requires agencies to document when
              no changes were made to the rules.

              Additional refinements to the bill may help clarify agencies’
              responsibilities in light of the OIRA Administrator’s comments responding
              to our report. For example, S. 746 could state more specifically that
              agencies must document the changes made to rules at the suggestion or
              recommendation of OIRA whenever they occur, not just the changes made
              during the period of OIRA’s formal review. Similarly, if Congress wants
              OIRA to issue guidance on how agencies can structure rulemaking dockets
              to facilitate public access, S. 746 may need to specifically instruct the
              agencies to do so.

              S. 746 contains a number of provisions designed to improve regulatory
Conclusions   management. These provisions strive to make the regulatory process more
              intelligible and accessible to the public, more effective, and better
              managed. Passage of S. 746 would provide a statutory foundation for such
              principles as openness, accountability, and sound science in rulemaking.

              This Committee has been diligent in its oversight of the federal regulatory
              process. However, our reviews of current regulatory requirements suggest
              that, even if S. 746 is enacted into law, congressional oversight will
              continue to be important to ensure that the principles embodied in the bill
              are faithfully implemented.




              Page 8                                                       GAO/T-GGD/RCED-99-163
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