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acid rain, which was a real struggle, as Senator Grassley knows, back in the early 1990's in the reauthorization of the Clean Air Act. The statute contemplated a per ton cost of cleanup at about $1,500 a ton. Because of the allowance trading system, the performance standard, the, in effect, privatization of enforcement, the cost per ton of the acid rain cleanup has fallen to below $150 a ton, and the cleanup is 40 percent ahead of schedule.

I would submit that any time you can get 140 percent of your statutory goal at one-tenth the cost, you have a winner, and that technique, that approach, that innovation, ought to be duplicated. It isn't now being so duplicated. This legislation would put it much more front and center.

A couple of more points in response to things that were said this morning. The provision for reviewing these rules I don't think overrides the Americans With Disabilities Act, for example, or other statutes that have their own standards. The ADA is based, is premised, on a concept of reasonable accommodation. I believe, Šenator Grassley, you were involved yourself in much of this work. Reasonable accommodation does connote a balancing, which is precisely what this legislation would seek. Take the Toxic Substances Control Act. It talks about unreasonable risk. That is the standard. Again, that is a reasonable standard which connotes a balancing of costs and benefits.

On the question of judicial review, I do think that as this bill gets marked up, one must be very careful not to open up too much, but to have no judicial review would lead to a situation that we have with the Reg Flex Act which is totally unenforceable from the outset. So I do think some judicial review is entirely appropriate. During the Reagan-Bush years, at least, cost-benefit analyses and regulatory impact analyses were put in as part of the record and were available on judicial review, and it is regrettable, but it is also a fact that virtually every major rule is already challenged, and so I am not sure that having carefully crafted judicial review provisions will materially add to the court burden.

Thank you very much. I would be happy to answer questions, of

course.

[The prepared statement of Mr. Gray follows:]

PREPARED STATEMENT OF C. BOYDEN GRAY

SUMMARY

The "Comprehensive Regulatory Reform Act of 1995" (S. 343) provides much-needed reforms for the regulatory review process that will ensure that the benefits of federal regulations are commensurate with their costs. The legislation codifies the guidelines for effective regulatory review that were developed during the Bush and Reagan Administrations. In addition, the regulatory review process is expanded to include risk assessments and the use of market-based incentives. These changes will go far towards rationalizing the $500 billion per year federal regulatory burden.

Importantly, S. 343 relies on presidential oversight and centralized regulatory review to address regulatory reform. Centralized review has existed as an informal process throughout the Nixon, Ford, and Carter Administrations. When President Reagan came into office, the centralized regulatory review was formalized through Executive Order 12291, which authorized the Office of Information and Regulatory Affairs within the Office of Management and Budget to review federal regulations. Centralized regulatory review, supervised by the Presidential Task Force for Regulatory Relief under Reagan and the Council for Competitiveness under Bush, provided billions of dollars in savings for the American public.

When addressing health, safety, and environmental regulations, risk assessment is an important component of cost-benefit analysis. By identifying particular hazards and the threats they pose to the public, agencies can more effectively allocate their resources to target those risks that are most dangerous. S. 343 provides for a transparent, open risk assessment process that is premised on sound science. Assumptions and value judgments are to be clearly stated, and risks must be compared to other risks more familiar to the public. Coupled with opportunities for public comment, the risk assessments in S. 343 will provide valuable information to federal regulators and the public. Moreover, the bill would require agencies to use the fundings of risk assessments to develop their regulatory program.

In addition, S. 343 requires the use of market-based incentives in those instances where regulations are warranted. This provides regulated entities the flexibility necessary to achieve regulatory objectives in the most cost-effective manner. Marketbased incentives reward innovations that reduce the cost of regulatory compliance. In the past, regulations using market-based incentives have generated substantial savings for the public.

The Clinton executive order on regulatory review, while acknowledging the importance of benefit-cost analysis and centralized review, introduced changes to the process that weaken regulatory review while granting more discretion to the agencies. In addition, the executive order included requirements for agencies to use risk assessment and market-based incentives, but there appears to be reluctance on the part of agencies to use these regulatory tools, as is evidenced by EPA's refusal to use an emissions trading program to address ozone issues in the Northeast. S. 343 would provide the regulatory tools necessary to ensure the regulatory burden is costeffective and that the least-cost alternative is chosen when regulations are adopted.

Good morning. Mr. Chairman and members of the Subcommittee. My name is C. Boyden Gray. I am a partner at Wilmer, Cutler, and Pickering and I am Chairman of Citizens for a Sound Economy, a 250,000 member grassroots research and education organization that advocates market-based solutions to public policy problems. I appreciate the opportunity to comment on S. 343, "Comprehensive Regulatory Reform Act of 1995." The regulatory reforms contained in S. 343 provide the necessary tools for easing the regulatory burden on American consumers.

In recent years there has been a growing sense that the regulations have become cumbersome and arcane. Oftentimes, federal regulators pursue increasingly trivial risks with costly new rulemakings that provide few, if any, benefits to consumers. As a consequence, the American public shoulders an annual federal regulatory burden of over $500 billion and spends over six billion hours complying with federal paperwork requests. S. 343 is an important step towards rationalizing the regulatory process and ensuring that federal regulations target real threats to public safety in a manner that provides benefits in excess of the costs of federal regulation.

FUNDAMENTAL COMPONENTS OF REGULATORY REFORM

Regulatory reform has provided billions of dollars in benefits to consumers. Economic deregulation, which began under the Carter Administration, increased consumer welfare by $30 billion in the transportation sector alone. These gains continued in the Reagan and Bush administrations with the introduction of Executive Order 12291, which standardized the use of benefit-cost analysis across federal agencies. The executive order implemented a set of simple guidelines for federal regulators: Regulators should have sufficient information prior to writing and promulgating regulations; regulators should choose the least-costly method of achieving a regulatory objective when alternative solutions are available; and regulations should not be implemented if the benefits do not exceed costs.

To ensure consistency and coordination of the regulatory program across federal agencies, the Office of Information and Regulatory Affairs (OIRA) within the Office of Management and Budget was given the task of reviewing proposed and final regulations, subject to the supervision of the Presidential Task Force on Regulatory Relief under Reagan and the Competitiveness Council under Bush. The simple guidelines of Executive Order 12291 framed regulatory policy throughout the 1980s and early 1990s. Requiring agencies to identify a clear need for regulatory action, to demonstrate that the benefits exceed the costs, and to select the most cost effective method for achieving regulatory objectives were important tools for avoiding excessive or unnecessary regulations.

PRESIDENTIAL OVERSIGHT AND CENTRALIZED REVIEW

Presidential oversight was a key component of the successful regulatory review program during the Reagan-Bush years. White House review provided a perspective that is much broader than the viewpoints of a particular agency and the interests that it regulates. Moreover, presidential oversight allowed more effective coordination between and among agencies, which helped the president fulfill his constitutional obligation to manage the executive branch.

Centralized regulatory review under the auspices of OMB has become an integral part of the regulatory process, at least until the current administration. Presidents Richard Nixon, Gerald Ford and Jimmy Carter all had informal mechanisms for White House regulatory review, but it was President Reagan who formalized the review process through Executive Order 12291, "Federal Regulation." Under the executive order, OIRA was given the authority to conduct reviews of agency regulations. The review process generated billions of dollars in savings by identifying and eliminating inherited rules that were excessive as well as ensuring that currently issued rules were as cost-effective as possible.

President Clinton, noting that excessive and burdensome regulations can harm the economy, continued the tradition of centralized regulatory review with Executive Order 12866, "Regulatory Planning and Review," which replaced the regulatory review requirements introduced by President Reagan. The Clinton executive order reaffirms the principles of benefit-cost analysis and encourages the use of performance standards and market-based incentives in the regulatory process.

However, Executive Order 12866 also includes important differences that weaken benefit-cost analysis. While agencies must maximize the net benefits of any given regulation, the definition of benefits has been expanded to include "distributional impacts" and "equity" in addition to economic considerations. Introducing nonquantitative factors into the calculus provides a greater degree of discretion on the part of agencies that may, over time, increase the burden of regulation. Issues such as equity cannot be effectively addressed in economic analysis and should properly be viewed as a political issue that is separate from the economic issue.

The Clinton Executive Order also includes procedural differences that limit the effectiveness of OIRA's regulatory review. Fewer rules are being sent to OIRA and when an agency submits its regulatory plan, OIRA only has ten days to evaluate and challenge the agencies' list of significant regulations. Ultimately, the new executive order transfers a certain degree of responsibility from OIRA to the agencies. With fewer rules being reviewed by OIRA, centralized review has been weakened.

REVISING THE CURRENT REGULATORY REVIEW PROCESS

S. 343 restores a straightforward centralized regulatory review process that avoids the pitfalls of the recent executive order. The legislation codifies the benefitcost requirements that guided the federal regulatory program throughout the 1980s and early 1990s. The requirements would only apply to major rules, defined as rules that will have an impact on the economy greater than $50 million, or will have a significant impact on a particular sector of the economy. Under these guidelines, agencies will more carefully assess the impact of regulations, particularly with respect to competition, employment, and investment.

The problem of identifying existing rules that are excessive or have become outdated due to technological changes is also addressed by S. 343. Specifically, the legislation includes a petition process by which the public could help agencies identify obsolete regulations. As noted above, Presidents Reagan and Bush conducted a review of existing regulations, with savings of billions of dollars. No such review has been conducted by the current administration, despite a requirement in the executive order to do so.

In addition, the S. 343 would expand the regulatory review process to include both risk assessment and the use of market-based incentives in federal regulation. Risk assessments are crucial to conducting a proper benefit-cost analysis of most health, safety, and environmental regulations. In those cases where regulations are warranted, market-based incentives ensure that regulated entities have the flexibility to meet regulatory objectives in the least-cost manner. Despite the Clinton executive order's requirements to use these tools, it is not clear that agencies are identifying opportunities to use market-based incentives or risk assessment (as is made clear by the recent EPA regulation on California cars in the Northeast). As is discussed more fully below, both risk assessment and the use of market-based incentives are fundamental to a cost effective regulatory program.

risk assessment

Health, safety, and environmental regulations have become the major component of the regulatory program in recent years. Americans are paying more than $100

billion a year just to comply with the Environmental Protection Agency's (EPA's) regulations and the costs may rise to $185 billion by the turn of the century. While the costs of such regulations has risen substantially over the last 20 years, many have questioned whether there have been commensurate increases in benefits. In some instances, agencies may be pursuing trivial risks through more and more costly regulations.

Evaluating such regulations requires more than benefit-cost analysis alone. Perceptions of risk oftentimes differ from the true hazards of a given activity and it is often difficult to define the optimal level of safety. Risk assessment provides an important complement to benefit-cost analysis for identifying hazards and the threats they pose to individuals. Using risk analysis, regulators can determine where to allocate scarce resources in order to provide the greatest protections for the public. Risk assessment provides greater insights into the benefits of any given rule and should be used as an integral part of benefit-cost analysis.

Risk assessment must be based on sound, scientific principles that provide regulators and the public useful information about the risks posed by particular hazards. To this end, the risk assessment process should be open and transparent, allowing opportunities for public comment and peer review of risk assessments. Discussions of risk should be open and provide comparisons to risks that are familiar to the public; this allows a fuller understanding of the potential benefits and need for regulation.

A risk assessment process that utilizes the best available scientific knowledge while clearly explaining the underlying assumptions is an important addition to benefit-cost analysis that can be used to reduce the burden of excessive regulations that provide marginal reductions in negligible risks at very high prices. S. 343 effectively incorporates these principles into the regulatory review framework. In addition, the bill also introduces the concept of risk management, which ensures that the results of agency risk assessments will be used to more effectively allocate scarce resources. Having conducted the requisite risk assessments, agencies would then be required to identify the most serious risks to health and safety and choose their regulatory priorities accordingly.

In short, risk assessment provides additional information for shaping the federal regulatory program in a manner that avoids unnecessary regulations. Section 638 best summarizes the requirements of the act: "* * * the risk assessment under section 634 is based on scientific and unbiased evaluation, reflecting realistic exposure scenarios, of the risk addressed by a major rule and is supported by the best available scientific data, as determined by a peer review panel ***" In turn agencies would determine that, “*** there is no alternative that is allowed by statute under which the major rule is promulgated that would provide greater net benefits or that would achieve an equivalent reduction in risk in a more cost-effective manner." These straightforward guidelines would go far in easing the regulatory burden.

USING MARKET-BASED INCENTIVES IN REGULATIONS

The regulatory experiences of the 1980s identified additional methods of easing the regulatory burden. In particular, it was found that providing regulated entities the greatest flexibility in fulfilling regulatory obligations offers substantial reductions in the cost of compliance. The need for flexibility was incorporated into the regulatory policy guidelines of the Reagan and Bush Administrations through the use performance standards rather than design standards. In other, words, agencies defined the regulatory ends, not the means to achieve them. The flexibility allowed regulatory objectives to be achieved in the most cost-effective manner.

Market-based incentives provide even greater savings for achieving regulatory objectives. By allowing individuals and businesses to develop responses to regulatory requirements by using market-based mechanisms such as tradable permits, it is possible to satisfy regulatory obligations much more cheaply that traditional command-and-control regulations. Market exchanges and entrepreneurial innovations allow regulated entities to develop the best response to a regulatory requirement. For example, in the early 1980s, the EPA implemented a market-based approach to reduce the amount of lead in gasoline. Allowing refiners and importers to trade lead credits cut compliance costs with a uniform lead-content standard by more than $250 million.

The acid rain trading program in the early 1990s is another example of the potential of market-incentives. An allowance market with tradeable permits greatly reduced the cost and hastened the reduction of SO2 emissions. Briefly, the acid rain program set a cap on emissions and created a marketplace to trade emission permits. The cost per unit of emissions was initially predicted in the statute to be $1500 per ton. However, through market trades, significant innovations have

emerged and the cost has fallen to $150 per ton, saving consumers billions of dollars. In addition, the clean up is 40 percent ahead of the statutory schedule.

The EPA has long been aware of the importance of market incentives in the regulatory process; however, the agency has been reluctant in some instances to pursue market-based regulation. In 1992, for example, the EPA stated it was "committed to using market-based principles to achieve the greatest level of environmental protection at the least cost.” The agency also stated that it was “very supportive of efforts to trade emission reductions among mobile and stationary sources (Emphasis added.) More recently, however, the EPA has been reluctant to develop market-based regulations.

For example, the recent California car regulation for the Northeast ignores the possibilities of a trading program, resulting in a costly rulemaking that does not promote innovation. The rulemaking violates the spirit of the 1990 Amendments to the Clean Air Act, which relied on market-based mechanisms to keep regulatory compliance costs to a minimum. Instead, the agency recently stated that the "EPA believes that information is not yet sufficient to support an intersector trading approach." Without intersector trading, the rule encourages the car companies to trade any emission reductions among themselves, but prohibits them from trading with utilities, who are elsewhere encouraged also to trade among themselves, but not with the car companies. By artificially fragmenting these emissions markets, the resulting regulation limits market activities and creates a rule that is far costlier than necessary. The requirements in S. 343 would help avoid similar situations.

Market-based approaches to regulation, when properly structured, create incentives that reward those who can satisfy the regulatory objective most effectively through innovation and technological change. Command-and-control regulations are too inflexible to effectively adapt to every firm and activity and the only incentive they provide is to satisfy the existing standard. S. 343 recognizes the importance of market incentives and requires federal regulators to consider alternatives that, "employ performance or other market-based standards that permit the greatest flexibility in achieving the identified benefits of the proposed rule." Agencies must also prepare an "assessment of the feasibility of establishing a regulatory program that operates through the application of market-based mechanisms." Health, safety, and environmental regulations are not cheap; requiring regulators to consider market incentives helps ensure that important regulatory objectives are met in the most cost-effective manner. S. 343 moves the agencies in the right direction.

CONCLUSION

The fact that agencies have more discretion and fewer rules are being reviewed by OIRA tends to weaken the role of centralized review, and leads to unnecessarily costly rules. Consequently, I think it is important to modify the regulatory review process in the manner adopted by S. 343 to avoid unwarranted increases in the regulatory burden. The changes included in S. 343 would go far towards eliminating unnecessary regulatory burdens and ensuring that federal regulations target real risks in a cost-effective manner. Ultimately, the regulatory review must be judged not on process, but on whether the regulatory burden on consumers and businesses has become excessive and too costly. In this sense, S. 343 is an important step forward. Thank you, Mr. Chairman. I would be happy to answer any questions at this time.

Senator GRASSLEY. I would like to take Mr. Smith first.
Go ahead.

STATEMENT OF TURNER T. SMITH, JR.

Mr. SMITH. Thank you, Senator Grassley. I appreciate the opportunity to address you and discuss S. 343.

I think one of the important points I tried to make in my testimony is that the central elements of S. 343 spring directly from the S. 1080 legislation that was passed by the Senate, came out of the Judiciary Committee and passed by the Senate in 1982 unanimously. Those two central provisions are cost-benefit as decisional criteria, not just procedural requirements, and normal provisions for judicial review.

Regulatory reform legislation should, in my judgment, aim at establishing a flexible and rational decisionmaking framework for

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