Reagan Orders Cost-Benefit Analysis of Regulations, Confers Broad Powers on OMB and Regulatory Task Force

On February 17 President Reagan took the most significant step yet in his administration's campaign to relieve the private sector of the burden of complying with federal regulations. Executive Order No. 12291,¹ entitled simply "Federal Regulation," is designed to

reduce the burdens of existing and future regulations, increase agency accountability for regulatory actions, provide for presidential oversight of the regulatory process, minimize duplication and conflict of regulations, and insure well-reasoned regulations….²

To this end, the Order subjects past, pending, and future regulations to strict requirements of economic justification as well as factual and legal support. In addition, it vests and unprecedented degree of regulatory oversight authority in the newly-formed Presidential Task Force on Regulatory Relief.³ Not surprisingly, there is some uncertainty as to the extent to which the Order conflicts with existing laws and whether from a policy standpoint it will prove workable.

Background

For the past two decades, publicconcern over environmental and social ills has prompted Congress to enact more and more regulatory legislation. The continuing growth of these laws has led, naturally, to a geometric surge in administrative regulation of the private sector. The costs of administering these programs, as well as the compliance costs borne by industry, have generally been deemed acceptable in light of the gains. More recently, however, these costs have been linked with the poor health of the nation's economy, and industry's complaints of over-regulation have been augmented by those calling for economic recovery. One outgrowth of this philosophical shift is the new attitude that has taken hold of the Congress. New regulatory proposals are now greeted with almost universal skepticism, and there is wide support for retrenchment in traditional areas of regulation.⁴ Similarly, the programs of the regulatory agencies have come under increasing fire. Indeed, President Reagan and his agency appointees have publicly dedicated themselves to reining in a bureaucracy prone to excess, or "reforming the regulators."

The concept of "regulatory reform" attracted significant attention for the first time in 1975, when the Senate ordered a study of the federal regulatory process.⁵ The completion of that massive work⁶ led to the introduction of legislation⁷ in 1979 which incorporated most of its major recommendations. Though they precipitated volumes of hearing reports and months of deliberations, none of the omnibus reform measures considered by the Senate during the last Congress progressed past the committee stage. However, their support has done anything but wane; a number of similar proposals are already under consideration in the 97th Congress.⁸

Meanwhile, the executive branch had recognized the severe economic impact of federal rules and had developed its own responsive measures. In 1974 President Ford ordered that new large regulatory proposals be accompanied by "inflationary impact statements."⁹ This order was expanded somewhat by the Office of Management and Budget (OMB), which interpreted the President's Order to require such statements to address, in addition, the effects of new rules on employment and energy demand.¹⁰

In 1978, President Carter first called for the use of procedures akin to current notions of "regulatory reform." Under Executive Order No. 12044¹¹ regulations causing either a $100 million annual impact on the economy or a major increase in cost or price levels for individual industries were to be discussed in detailed "regulatory analyses." These documents, which bore some structural resemblance to environmental impact statements, contained

(1) a statement of the problem to be addressed by the regulations;

(2) a discussion of the alternative ways of dealing with it;

(3) an analysis of the economic consequences of each alternative; and

(4) a justification for the alternative finally selected.¹²

On the basis of the documents, agency heads were required to adopt the "least burdensome of the acceptable approaches." General responsibility for overseeing agency compliance with the Order was given to OMB.

Executive Order No. 12291

Substantive provisions

Potentially the most important component of Executive [11 ELR 10045] Order No. 12291 is § 2, which is aimed at controlling agency exercise of substantive discretion. It requires agencies to set regulatory priorities

with the aim of maximizing net benefits to society, taking into account the condition of the particular industries affected by regulations, the condition of the national economy, and regulatory actions contemplated for the future.¹³

This seems an eminently sensible approach to organizing agency resources, reminiscent of § 6(g) of the Occupational Safety and Health Act.¹⁴ Curiously, however, this is the only aspect of the Order which explicitly requires agencies to give weight to the health of the economy or particular industries. Subsequent provisions utilize the more general terms of "costs" and "benefits."

Section 2(c) directs that regulatory objectives are to be chosen to maximize "net benefits to society." Further, in considering alternative approaches to any regulatory objective, agencies must select the alternative which results in the "least net cost to society."¹⁵ There appears to be no difference between the concept of "least net social costs" and "maximum net social benefits"; costs are presumably to be netted from benefits in all cases. Consistent with this view is the proscription against taking any regulatory action imposing costs in excess of its benefits.¹⁶

Regulatory Impact Analysis

Like its predecessor, Executive Order No. 12291 designates a category of "major" rules which must be thoroughly scrutinized prior to issuance. The Order's definition of the term "major," however, sweeps more broadly than any before it. It includes rules

(1) having an annual effect on the economy of $100 million or more;

(2) producing "major" increases in costs or prices for consumers, individual industries, federal, state, or local governments, or geographic regions; or

(3) causing "significant adverse effects" on competition, employment, investment, productivity, or innovation.¹⁷

This definition is obviously imprecise and capable of expansive or restrictive interpretations. Guidelines for identifying major rules will be prepared by OMB, under the guidance of the President's Task Force. If, after applying the guidelnes, an agency determines that a proposed rule is not major, it may nevertheless be overruled by OMB.¹⁸

Sixty days before a major rule is proposed, it must be reviewed in a preliminary regulatory impact analysis (RIA) and transmitted to OMB. RIAs will be more ambitious than the regulatory analyses of the last administration in that they will rely heavily on cost-benefit analysis. Each RIA must include

(1) a description of the potential benefits of the rule, including any beneficial effects that cannot be quantified in monetary terms, and the identication of those segments of society likely to receive the benefits;

(2) a description of the potential costs of the rule, including any adverse effects that cannot be quantified in monetary terms, and the identification of those likely to bear the costs;

(3) a determination of the potential net benefits of the rule; and

(4) a description of alternative regulatory approaches that could achieve substantially the same regulatory goal at less cost, and an explanation of why such alternatives were rejected.¹⁹

If OMB does not respond to the transmittal of the proposed rule and preliminary RIA within 60 days, the rule may be proposed on schedule. But if OMB informs the agency that in intends to submit views on the rule or the RIA, proposal of the rule must be delayed until the commenting and consultation process has been completed and all written comments have been responded to and placed in the rulemaking record.²⁰

Once the rule has been proposed, the preliminary RIA is to be made final. Since the substantive requirements for preliminary and final RIAs are the same, finalizing these documents will probably entail little more than last-minute adjustments. Thirty days before the rule is issued in final form, it and the final RIA must be transmitted to OMB for a second and similar review. Again, the rule may be promulgated on schedule unless OMB submits views, in which case promulgation must await the preparation of responses and their insertion in the administrative record.²¹

Pending regulations, i.e., those that were issued in final form prior to issuance of the Order on February 17, 1981 but have yet to go into effect, are generally to be analyzed according to the Order's requirements. An exception is provided for final rules which, in the issuing agency's view, are required by law to become effective before a given date or ought, for "good cause," to become effective without reconsideration.²² In either case OMB is empowered to overrule the agency's legal or policy judgment. Another option mentioned by the Order is to allow such rules to become effective on an interim basis while they are being reevaluated.²³

Role of the President's Task Force

The most significant single respect in which the Order differs from Executive Order No. 12044 is the breadth of the supervisory powers given to OMB and the President's Task Force. The Task Force, which consists of several Cabinet members and presidential advisors,²⁴ is evidently [11 ELR 10046] the real locus of power. Although it is nominally the OMB Director who is authorized to submit comments on regulations and overrule agency determinations, not once does the Order give the Director authority to act except "subject to the direction of the Task Force." Indeed, the Task Force is specifically empowered to "resolve any issues raised under this Order."²⁵

Among the powers of the OMB Director, subject to Task Force direction, are

(1) to issue guidelines for identifying "major" rules;²⁶

(2) to declare, notwithstanding an agency's contrary determination, that any given rule is a major rule;²⁷

(3) to develop "uniform standards" governing the preparation of RIAs;²⁸

(4) to develop procedures for estimating regulatory costs and benefits;²⁹ and

(5) to monitor implementation of the Order.³⁰

However, this list is just the beginning. As mentioned above, the Director, subject to Task Force direction, may bring the development of any regulation to an indefinite halt by notifying the agency that he intends to submit his views. Within this process the Director is authorized to review not only the RIA but also the substance of the proposed or final rule.³¹ The Director may also "[r]equire an agency to obtain and evaluate … any additional relevant data from any appropriate source."³² Moreover, the Director may waive the Order's rulemaking provisions for any regulation.³³ No standards are provided to govern such wiavers.

Finally, the Director may order agencies to review proposed or existing regulations to eliminate conflicts between those rules and (1) "the policies underlying statutes governing agencies other than the issuing agency" or (2) the purposes of the Executive Order.³⁴ Such conflicts are to be resolved through interagency consultation.

Other Requirements

Section 4 of the Order specifies that final major rules must be accompanied by legal memoranda supporting the agency's determination that the rule is within the agency's statutory authority and consistent with congressional intent.³⁵ In addition, the agency must certify that the rule has substantial factual support in the record and that full attention was given to comments on the rule, particularly those of regulatees.

The Order continues in effect President Carter's directive that agencies publish semi-annual agendas of forthcoming regulations. These agendas describe briefly the nature of regulations pending in the proposal and preproposal stages, their purposes, and expected promulgation schedules.

Exemptions

The phrase which appears most frequently in the Order is "to the extent permitted by law." This qualification precedes all of the Order's major directives and acknowledges that the Order applies only to the extent that its requirements do not conflict with the particular statutory mandates under which the agencies operate. Section 7, involving final but not yet effective rules, provides at two points that it is to be implemented consistent with the Administrative Procedure Act (APA).

Explicitly exempted from the reach of the Order are independent regulatory agencies.³⁶ Nor does it apply to adjudicatory proceedings under the APA, military or foreign affairs functions, or regulations applicable to agency organization, management, or personnel.³⁷ Its rulemaking provisions do not apply in the case of emergency regulations or where their application would delay the issuance of a rule past a statutory or court-ordered deadline. In these cases, agencies will be expected to make best efforts at compliance.³⁸

Issues of Law and Implementation

Executive Order No. 12291 raises a welter of questions as to the extent of its consistency with existing law as well as the probable ease and success of its implementation. Since in most respects it applies only "to the extent permitted by law," legal determinations will ultimately define its scope. Conversely, the manner in which OMB and the Task Force exercise their new authority will have a great impact on many of the legal issues.

A number of battles can be expected over the requirement that proposed regulations be subjected to cost-benefit analysis and that agencies select the alternative yielding the "least net cost to society." This mandate, as was surely recognized by the White House, is plainly inconsistent with the requirements of several regulatory statutes³⁹ and to that extent will be void. Some statutes, on the other hand, sanction the use of cost-benefit analysis (or call for the setting of "reasonable" standards) and could presumably be implemented consistently with the Order.⁴⁰ The Occupational Safety and Health Act⁴¹ is an [11 ELR 10047] example ofa statute that seems to fall between these two extremes. OSHA has traditionally denied its authority to balance health and safety against economic considerations, but it has defended this stance with only mixed success.⁴² Laws which are directed at "health" or "safety" without referring to regulatory costs⁴³ will fall somewhere within this continuum and present thorny legal questions. The advent of the Order will certainly complicate this already nettlesome area of the law.

Another interesting question of policy centers on how this cost-benefit review is to be applied. Unlike President Carter's order, which mandated adoption of the least expensive of the minimally acceptable regulatory alternatives, Executive Order No. 12291 favors the alternative yielding the greatest margin of benefits over costs. It therefore could conceivably be relied on to choose an alternative that imposes a heavier regulatory burden than the "cheapest acceptable alternative," provided that the marginal costs of the extra regulatory requirements remain low. All of this, however, credits cost-benefit techniques with more precision than they are due.

The APA may prove a barrier to full implementation of the requirement that agencies reconsider final regulations that have been issued but not yet made effective. Since § 553 requires that notice and comment procedures be followed whenever an agency proposes to formulate, amend, or replace any rule,⁴⁴ the "reconsideration" of a rule would seem to trigger this obligation. Making a final rule effective on an interim basis would appear to fall within the same category. Nonetheless, a simple notice and comment proceeding would probably not substantially burden an already complex process.

Another potential issue under the Order concerns the administrative law prohibition against ex parte contacts. Though the APA expressly prohibits off-the-record contacts with decisionmakers only in adjudicatory proceedings,⁴⁵ the courts have enforced similar standards in informal proceedings.⁴⁶ The potential problem with the Order is that it envisions on-the-record as well as confidential communications between agency and Task Force staff during the rulemaking process.⁴⁷ Particularly where such communications appear to have led to material changes in the form of a final rule, a court might find such communciations to violate the ex parte rule.⁴⁸ On the other hand, this problem may be avoided if, as the Order seems to envision, Task Force input in provided prior to the proposal of rules. In theory, this preserves the public's right of participation in the process.

Over the past few years environmental groups have complained bitterly about what they see as increasing domination of agency rulemaking proceedings by White House officials. In part they are concerned with ex parte contacts. More fundamentally, however, they assert that undermining expert agency deliberations with considerations of political expediency subverts basic principles of administrative law⁴⁹ as well as explicit statutory grants of discretionary agency authority. For example, when environmental standards are required to be set at levels which "in the judgment of the Administrator … are adequate to protect the public health,"⁵⁰ that requirement may be violated if the standards are lowered due to Task Force pressure to achieve the purposes of the Order. Public interest advocates are justifiably concerned both the under the Order more agency decisions may be made in private deliberations of the executive branch as well as the likelihood that those advocates will not be party to such deliberations.

Judicial review of agency regulations promulgated pursuant to the Order will present new and unfamiliar problems. At the threshold, the question is whether a litigant may challenge the validity of an RIA against the Order's requirements. The text of the Order⁵¹ and related case law⁵² indicate strongly that the answer is no. The matter is unfortunately not that simple. The order emphasizes [11 ELR 10048] that for purposes of judicial review, RIAs are to be made a part of the administrative record. If this is done and RIAs are relied upon by agencies in formulating rules, could any court review a rule without at least considering allegations of flaws in the record? If, for example, a litigant claimed that an RIA which was relied upon to justify a decision contained gross arithmetical errors, some judicial review of the RIA would be necessary. However, the complexity of these documents and the difficulty of preparing and reviewing cost-benefit analyses would no doubt lead courts to adopt deferential standards of review.

The question of judicial review highlights what may be one of the most profound, if subtle, effects of the Order: supplementation of the administrative record in support of tempered regulatory action. To begin with, RIAs must be added to the record, and they may well be used simply to justify weaker rather than stronger regulatory alternatives. A similar impact will also result from the addition of the comments of the Director and Task Force and agency responses thereto. Also found in the record will be "any additional relevant data from any relevant source" that the Director may have ordered the agency to "obtain and evaluate." Finally, all major rules must be accompanied by formal determinations that they are based on the entire record,⁵³ and that particular attention has been paid to the comments submitted by persons "directly affected" by the new rule.⁵⁴ The sum of these requirements will be to skew the record to the advantage of those challenging the stringency of a regulation or those defending against charges of lack of stringency. Without implying that courts are not discriminating in reviewing administrative records, it seems fair to predict that augmented record evidence of the adverse effects of regulations will, over the long run, lead courts and agencies alike to favor economically less burdensome alternatives.

Conclusion

Predicting at this point the impact of Executive Order No. 12291 is not unlike predicting in 1970 the impact of the National Environmental Policy Act's environmental impact statement requirement. The implementing agencies, the oversight agencies, and the courts may all come to play key roles in its implementation. It is evident, however, that the Task Force and the Director hold most of the cards and will assume most of the responsibility for defining the new process. They have been delegated extremely broad discretionary powers to give substance to the Order's rather general provisions and could use it in a number of ways. They may, for example, by issuing generic guidelines and orders in specific cases, aggressively expand the scope of the term "major" rule to encompass hundreds of regulations which might otherwise escape cost-benefit review. Or, by demanding extensive revisions to RIAs, "remanding" regulations for further fact-gathering, and demanding substantive alterations in proposed regulations, they could make the regulatory process harrowing and time-consuming. The power to grant waivers for particular rules, moreover, might prove as potent as the power to delay them.

On the other hand, because of limited resources and the advantages of harmonious relations with the agencies, the Task Force might work closely with the implementing agencies during the development of regulations, thus promoting bureaucratic efficiency. After all, President Carter's Executive Order No. 12044 was eventually lauded by EPA for improving without impeding its decisionmaking. Executive Order No. 12291 resembles its predecessor in many superficial respects and thus may be well received and smoothly implemented. On the other hand, it may retard the development of improved health and environmental regulations and subtly work at cross purposes to the mandates of existing regulatory laws.

1. 42 Fed. Reg. 1319 (Feb. 9, 1981), ELR STAT. & REG. 45035 [hereinafter cited as Order].

2. Order at preamble.

3. See note 24, infra.

4. For example, Congress recently launched into a full-fledged reevaluation of the Clean Air Act. See Comment, The Great Clean Air Act Debate of 1981: Environmentalists, Industry, Air Quality Commission Take Positioons, 11 ELR 10027 (Jan. 1981).

5. S. Res. 71, 94th Cong., 1st Sess. (1975).

6. See SENATE COMMITTEE ON GOVERNMENTAL OPERATIONS, STUDY ON FEDERAL REGULATION, 95th Cong., 1st & 2d Sess. (Comm. Print 1977-1978).

7. See generally Comment, Reconditioning the Administrative Process: Congress Weighs "Regulatory Reform" Legislation, 9 ELR 10100 (1979).

8. See, e.g., S. 67, S. 405, and H.R. 746, 97th Cong., 1st Sess. (1981).

9. Exec. Order No. 11821, 3A C.F.R. 203 (1974), extended by Exec. Order No. 11949, 3 C.F.R. 161 (1977).

10. OMB Circular No. A-107.

11. 3 C.F.R. 152 (1979).

12. Exec. Order No. 12044 § 3(b)(1).

13. Order § 2(e).

14. 29 U.S.C. § 655(g).

15. Order § 2(d).

16. Order § 2(b).

17. Order § 1(b).

18. Order § 3(b).

19. Order § 3(d)(4).

20. Order § 3(e)(2)(A). The Order also provides that if a major rule is not to be published in proposed form, a preliminary RIA need not be prepared. Id. § 3(c)(1).

21. Order § 3(e)(2)(A).

22. Order § 7(a)(2).

23. Order § 7(c)(1) & (2).

24. The Task Force is composed of the Secretary of the Treasury, the Attorney General, the Secretary of Commerce, the Secretary of Labor, the President's assistant for policy planning, the chairman of the Council of Economic Advisers, the Director of the Office of Management and Budget, and the Vice President, who serves as the Task Force's chairman.

25. Note also that the OMB Director is a member of, but has no rank within the Task Force. See also Order § 6(b) (giving the Director, "subject to the direction of the Task Force," power to establish regulations governing the performance of all functions by the Director).

26. Order § 3(b).

27. Order § 6(a)(1).

28. Order § 6(a)(2).

29. Order § 6(a)(6).

30. Order § 6(a)(8).

31. Order § 3(e)(1).

32. Order § 6(a)(3).

33. Order § 6(a)(4).

34. Order § 6(a)(5) (emphasis added).

35. Similar questions would be asked by reviewing courts under the terms of the proposed "Bumpers amendment." See S. 67 § 104, 97th Cong., 1st Sess. (1981).

36. Order § 1(d).

37. Order § 1(a)(1), (2) & (3).

38. Order § 8(a)(1) & (2).

39. See, e.g., § 112 of the Clean Air Act, 42 U.S.C. 7412, ELR STAT. & REG. 42219, which on its face appears to prohibit any emissions of hazardous air pollutants from stationary sources. See also the "Delaney Clause" of the Food, Drug, and Cosmetic Act, 21 U.S.C. § 348(c)(3)(A), ELR STAT. & REG. 41325, which bans the introduction of animal carcinogens into human foodstuffs, without regard to cost considerations.

40. See, e.g., Toxic Substances Control Act § 6(a), 15 U.S.C. § 2605(a), ELR STAT. & REG. 41341 (requiring regulation of substances creating an "unreasonable risk"); the Consumer Product Safety Act, 15 U.S.C. § 2056(a) (aimed at "unreasonable risks" to consumers); and the Safe Drinking Water Act, 42 U.S.C. § 300g-1(a)(2), ELR STAT. & REG. 41103 (directing the Environmental Protection Agency to "consider the costs" of implementing regulations).

41. 29 U.S.C. §§ 655 & 656.

42. See Industrial Union Department, AFL-CIO v. American Petroleum Inst., 48 U.S.L.W. 5022, 10 ELR 20489 (1980). See generally Comment, Assessing Regulatory Costs and Benefits: Fifth Circuit Vacates OSHA Benzene Standard, 8 ELR 10250, 10251-53 (1978).

43. See, e.g., Clean Air Act § 109(b)(2), 42 U.S.C. § 7409(b)(2), ELR STAT. & REG. 42212 (calling for the setting of secondary national ambient air quality standards at levels which protect the "public welfare").

44. 5 U.S.C. § 553, ELR STAT. & REG. 41002.

45. 5 U.S.C. § 557(d), ELR STAT. & REG. 41003.

46. see, e.g., United States Lines, Inc. v. Federal Maritime Commission, 584 F.2d 519, 539-41 (D.C. Cir. 1978); Home Box Office, Inc. v. Federal Communications Commission, 567 F.2d 9, 54 (D.C. Cir. 1977).

47. The Order provides not only for the preparation by the OMB Director of written views which are to be included in the rulemaking record, it also requires agencies to "consult" with the Director upon his request. Order § 3(f)(1) & (2).

48. See Action for Children's Television v. Federal Communications Commission, 564 F.2d 458, 476 (D.C. Cir. 1977).

49. A rather extreme picture of these dangers is painted by Professor Davis:

Would invisible White House assistants, using invisible procedures, make mysterious deals, bartering policy positions for political profit, without evidence, without a record, without arguments that are brought out into the open and subjected to counterarguments, and without even the pretense, of reasoned opinions? Might not trial by agency, with all its blemishes, take on a new beauty in the eyes of those who have gazed upon the ugly countenance of trial by lobbyists?

Civilization takes a step forward when it moves from the executive process to the administrative process.

K. DAVIS, ADMINISTRATIVE LAW TREATISE, 1970 Supp. § 1.04-4, at 12-13.

50. Clean Air Act § 109(b)(1), 42 U.S.C. § 7409(b)(1), ELR STAT. & REG. 42212.

51. Order § 9.

52. It appears that Executive Orders lacking explicit foundation in federal statutes are generally not enforceable in private civil suits. Manhattan-Bronx Postal Union v. Gronouski, 350 F.2d 451, 456-57 (D.C. Cir. 1965), cert. denied, 382 U.S. 978 (1966). Thus, President Ford's Order requiring the preparation of inflationary impact statements has been held not to be judicially enforceable. Independent Meat Packers Ass'n v. Butz, 526 F.2d 228, 236 (8th Cir. 1975), cert. denied, 424 U.S. 966 (1976) ("Executive Order No. 11821 was intended primarily as a managerial tool for implementing the President's personal economic policies and not as a legal framework enforceable by private civil action…."). Accord, In re Surface Mining Regulation Litigation, 627 F.2d 1346, 1357, 10 ELR 20465, 20470 (D.C. Cir. 1980).

53. Order § 4(a).

54. Order § 4(b).