Federal agencies that reflects the straightforward and common sense way real people make real decisions. It should require politically and judicially accountable agency answers to two simple questions before a major rule is promulgated. Is this worth it, and is this the best way of doing it?

Now, let me turn first to the question of cost-benefit as a decisional criteria. To be effective, cost-benefit analysis must be more than just a procedural hoop through which the agency has to go. It must be used in the decisionmaking process. To do this, it must constitute decision criteria that govern agency decisions, and it must, at a minimum, in my judgment, supplement existing statutory criteria, and that is apply as an additional criteria to the existing criteria.

Now, note that I didn't say that it should supersede. I agree with Boyden. I believe that, as drafted, S. 343 does not supersede the existing statutory criteria and other statutes that Congress has enacted. If you will look at the language on the House side, you will see that the words "and supersede" have been inserted. That, it seems to me, does override; this does not.

Note, also, that by cost-benefit analysis I do not mean a rigid or complex analysis. As is indicated in the Judiciary Committee report on S. 1080, quantification and cost-benefit analysis and risk assessment should only be required where practicable. The methodology and the level of detail for each type of analysis, cost-benefit or risk assessment, should be appropriate to the significance and complexity of reasoned decisionmaking on the matter at issue, considering any need for expedition. In short, you ought to cut the cloth to fit the decisionmaking process.

Let me turn now to judicial review and why I think judicial review is critical. There has been a good deal of rhetoric over on the House side about judicial review simply being a question of lawyers stirring up yet more litigation. I suggest to you that judicial review is much more fundamental than that, and it is really about agency accountability to the rule of law, and that if you are going to get effective agency compliance with what Congress has required in the statute, the courts are where ultimately you can assure that that happens.

Executive office review is important, and executive branch review and Congressional oversight is important. Congress can't be every place all the time. Allowing private litigants to act as surrogates for Congress, ensuring in front of the courts that the agencies are following the law and, once the sort of cost-benefit analysis requirements are in place, are applying the rigor and the logic required by this decisional framework in their discretionary decisions-that sort of review needs to take place in the courts.

In short, judicial review is a neutral mechanism, one available both to public interest groups and to industry groups, and it is the method by which, in the end, both Congress and the public are able to ensure that the bureaucrats do what Congress has told them to do.

S. 343 seems to me to incorporate all the necessary elements of effective regulatory reform legislation. There may be further tinkering needed with the language as experience in the review proc

ess here develops, but in my view it is an excellent bill and it ought to be pushed forward and adopted.

Thank you.

[The prepared statement of Mr. Smith follows:]

PREPARED STATEMENT OF TURNER T. SMITH, JR.

SUMMARY

Turner T. Smith, Jr. is a partner at Hunton & Williams, where he practice environmental law.

The regulatory reform legislation before Congress springs directly from S. 1080, the Regulatory Reform Act that was passed by the Senate 940 in 1982. S. 1080 had two central elements that are the keystones to regulatory reform today:

• Cost/Benefit Decisional Criteria

• Normal Judicial Review

Regulatory reform legislation should aim at establishing a flexible, rational decisionmaking framework for federal agencies that reflects the straightforward, common sense way in which real people make real decisions. It should require politically and judicially accountable agency answers to two simple questions before a major rule is promulgated.

• Is this action "worth it"?

• Does this way of doing it maximize society's net benefits?

Regulatory reform should also require that agencies use good science and all reasonably available relevant information, and that the factual bases for their actions be objective and not deliberately biased. Finally, it should require the federal government to consider and prioritize all the various risks on which it spends the public's money or forces the spending of consumer's money by regulating private business, it should require each agency to track the cumulative regulatory burden being imposed, and it should require each agency to prioritize those risks that it is individually charged with addressing.

Regulatory reform does not undermine the values that stand behind the environmental legislation developed to date. Its aim is not economic efficiency per se, but a more rational decisional system that lets us vindicate the values and policy choices that we arrive at through the political process.

S. 343 contains all of the essential elements for effective regulatory reform. It applies its cost/benefit and alternative analysis criteria as a supplement (that is, addition) to existing agency decisional criteria, except to the extent that the statute "containing such criteria has explicit textual language prohibiting the consideration" of the new criteria. It also contains a normal judicial review requirement, a petition process for applying its provisions to existing major rules, deadline extensions as necessary, and provisions to prevent undue court deference to agencies and agency evasion of rulemaking requirements.

S. 291 is weaker in key aspects. S. 343 should be adopted.

Good morning. Mr. Chairman and Members of the Subcommittee. My name is Turner T. Smith, Jr. I am a partner at Hunton & Williams, where I have been practicing environmental law for over twenty-five years.

I have had an interest in regulatory reform issues and the application of cost/benefit analysis to agency decisionmaking for many years. I participated in the briefing of the Calvert Cliffs case that introduced the use of cost/benefit analysis under the National Environmental Policy Act (NEPA), Calvert Cliffs' Coordinating Committee v. Atomic Energy Com., 449 F.2d 1109 (D.C. Cir. 1971), and in the subsequent development of cost/benefit principles in Nuclear Regulatory Commission regulations as a result of that case. I also participated in the briefing of the Appalachian Power case in the United States Court of Appeals for the Fourth Circuit, which established in 1973 the need for cost/benefit analysis of effluent guidelines under the Clean Water Act. Appalachian Power v. Envtl. Protection Agency, 477 F.2d 495 (4th Cir. 1973). Finally, many of our current clients, members of the regulated community, would be directly affected by and are interested in the regulatory reform legislation now in Congress, and I am advising a number of them with respect to it.

I appreciate the opportunity to comment on S. 343, the Comprehensive Regulatory Reform Act of 1995, and on S. 291, the Regulatory Reform Act of 1995.

The current regulatory reform effort embodied in these bills builds on thirty years of work in the United States Senate on regulatory reform matters. It is by no means a hasty or ill-conceived effort. Its essential elements spring directly from the important work done by you, Mr. Chairman, and your colleagues when you adopted S. 1080, the Regulatory Reform Act, by a vote of 94-0 in 1982.

That legislation, which died in the House, had two central elements that are the keystones to regulatory reform today in S. 343:

• Cost/Benefit Decisional Criteria: A requirement that agency decisions that require the exercise of discretion be made according to cost/benefit principles, after considering reasonable alternatives.

• Judicial Review: A strong provision that provides the normal judicial review that Congress has provided for decades through the Administrative Procedure Act to ensure agency accountability in doing this.

These two principles are the heart of effective regulatory reform. You and the thirty-seven other Senators who sponsored S. 1080 and who are Members of the 104th Congress (see Attachment A to this testimony for this list) are to be congratulated for your foresight in seeing, as early as 1982, the problems created by the modern regulatory state, and in seeing, back then, the need to structure and guide the exercise of agency discretion in a way that will produce the greatest benefits for society.

Your hard work in 1982 went hand-in-hand with President Reagan's earlier Executive Order that accustomed agencies to using cost/benefit analysis. President Bush retained that Executive Order, and President Clinton replaced it with a Similar, but less effective, one. What died with S. 1080 in the House, however, was the effective judicial review of the cost/benefit requirements that is necessary to ensure that agencies do what they are told. Your watchword now should therefore be to enact legislation that, like S. 1080 in 1982, incorporates both cost/benefit decisionmaking and judicial review. S. 343 does this, and adds some crucial new provisions that highlight below. S. 291, I am afraid, does not.

As an aside, I should note that S. 1080 also contained general revisions to the Administrative Procedure Act that were unrelated to the essential regulatory reform points I have just outlined. Such revisions were well considered. Fortunately, evolution of our court-made law has since incorporated many of them into the corpus of modern federal administrative law. The need today for comprehensive, general reform of the Administrative Procedure Act is less pressing than it was in 1982. Such reforms, to the extent they may still be necessary, should await another time and another bill.

Time has marched on since 1982, and your colleagues on the House side are now ready to respond to your call for regulatory reform. Acting together, you have a historic opportunity to enact reforms that will enshrine in our law neutral decisional principles embodying good government and common sense. Likewise, you can ensure, through effective judicial review, that those principles prevail when administrative agencies regulate, as they must, in a modern industrial society.

THE NEED FOR REGULATION

It is important at the outset to understand why government must regulate. The 1981 Report of the Judiciary Committee on S. 1080 (perhaps the best-written Committee Report I have seen in twenty-five years of practicing law) contains an excellent discussion of the reasons why regulation is needed in a free-market economic system. See S.Rep. No. 284, 97th Cong., 1st Sess. 7-8 (1981) (hereafter "S.Rep.") (the Report's important passages dealing with regulatory reform issues are Attachment B to my testimony). I will not pause to deal with the reasons for traditional economic regulation, which are well stated there. Rather, I will turn immediately to the essential rationale for much of environmental regulation (although what I say here also echoes your 1981 Report). The remainder of my testimony will deal with environmental regulation, because that is what I know best and because, as your own 1981 Report documents, that is where much of the reform is most needed.

Environmental degradation is, at base, caused by "externalities"-costs that one economic unit imposes on others and need not reckon with itself. Here, the language of your 1981 Report is instructive:

"Externalities" of the free market are the most common justifications for health, safety, and environmental regulation, often called “social” regulation.

An externality is a cost that is not borne directly by the producer of a good or service (e.g., pollution) or a benefit that is enjoyed by someone other than the direct consumer of the good or service (e.g., education-society as

a whole benefits from an educated populace). COWPS Report, supra at 10– 11.

Where the production of a good involves external cost-a "negative" externality-the price of that good will not reflect those costs since the producer did not have to bear them. Consequently, those in the marketplace do not take account of such costs and tend to demand more for the product than they would if the price of the product reflected its external costs. If producers had to bear such costs, that is, the full cost of production, less of the product would be produced, due to either higher costs of operation, or, if those costs are passed on in higher prices, to less demand for the product. Id. at 11; L. White supra at 28. Exactly what the ramifications of externalities are for public policy is open to debate. "The problem is not that side effects exist, but that the benefits they confer or the costs they impose are often not reflected in the prices and costs which guide private decisions." Schultze, supra at 49. In the area of environmental protection, for example, "the externality problem means that the marketplace is not charging a proper price for the pollution and the resulting costs; it is not providing the right incentives for pollution reduction." L. White, supra at 41. How to provide those incentives is the central question of any policy of government intervention. To intelligently address that question, and to understand the rationale behind many of the provisions of S. 1080, two basic principles must be recognized.

First, "regulation is justified only if it achieves without too great a correspondent cost policy objectives that a consensus of reasonable observers would consider to be in the public interest." Breyer, supra at 553 (emphasis in original). The second principle is really more of a caution, aptly put by the report of the Council on Wage and Price Stability:

Very few, if any, markets achieve ideal competitive perfor-mance. But very few, if any, regulations achieve an ideal outcome, either. Since even imperfect markets often produce satisfactory economic results, and since their deficiencies are more likely to be self-correcting than those of government regulation, the burden of proof should be on the regulator to show that there is sufficient market failure to necessitate regulation and that the chosen regulatory action can be expected to yield a better outcome than the improperly functioning market. COWPS Report, supra at 10 n.1.

Or in the words of Charles Schultze, "[I]n all cases we should compare an imperfect market with an imperfect regulatory scheme, not with some ideal and omniscient abstraction." Schultze, supra at 50.

Senate Judiciary Committee Report No. 97-284, S.Rep. No. 284, 97th Cong., 1st Sess. 16-17 (1981). [Footnote omitted.]

The result is that much of what we want to achieve can be had simply by understanding how and where external costs exist, what their extent is, and how they can be re-imposed on the relevant economic actors. Thus, the essential goals of environmental policy are to restructure the legal framework applicable to a free market through the re-imposition of external costs.

THE NATURE OF ENVIRONMENTAL RELATION

Law is inextricably intertwined with environmental policy, because it is the legal structure that gives rise to the externalities just noted. Tort, property, contract, and procedural laws traditionally define the basic rights and responsibilities of economic actors, thus providing the frame-work within which a free-market economy operates and defining which costs each economic unit must bear. The contours set by legal systems worldwide typically tend to re-impose only those costs that are most easily identified and measured. The developments in environmental law of the last twentyfive years represent an effort to move beyond these traditional limits, using both new administrative law tools and new versions of old liability rules.

Thus, environmental law can, in a sense, be defined as the complete legal framework governing our interaction with the natural environment. Viewed in this way, we have always had an environmental law, and not simply because there were smoke control ordinances in old London.

As a result, environmental law, properly considered, is less a matter of inventing new legal tools to force compliance with new moral values, than of understanding how the old ones have failed us in achieving goals and values we have held all along. It is also a matter of deciding how we can restructure the legal framework we already have so as to achieve the ends it has heretofore failed to serve, but to do so in the most efficient and least disruptive manner. In short, the aim of regulatory reform in environmental law is not economic efficiency per se, but a more ra

tional decisional system that lets us vindicate the values and policy choices that we arrive at through the political process.

In a free-market economy, identifying the existence and determining explicitly the extent of "external" costs has the benefit of pointing us to the basic causes of the problems and to the factor most directly relevant to the extent and type of change needed. This approach also forces us to consider automatically the powerful market incentives to which all economic actors-big corporations, governments (particularly when acting in their proprietary capacity), and individuals alike are constantly subject. These market incentives operate inexorably to undermine any form of regulation that fails to consider them. This approach, in turn, helps to avoid unintended consequences by enabling us to foresee how the various actors in a dynamic market system will react to new requirements, and thus how such requirements will actually work when implemented. Finally, this approach makes us alert to opportunities to design new requirements that use the existing incentives of the marketplace for reinforcement, or even, where possible, for implementation.

All of this may seem oversimple, but it is a matter of the spirit with which one approaches the subject. I submit that for purposes of developing regulatory reform policy, one must realize that with environmental regulation, it is as important to understand why the desired results are not already being achieved as it is to understand what those results should be. It may in fact be more important, since the latter may be fairly obvious, at least in principle, and the former much more complex. Further, to understand how to achieve the results and the specifics of how far to pursue a policy in the face of competing objectives, an understanding of the former may be crucial. In short, in devising effective environmental laws, it is useful always to visualize environmental law as a form of economic regulation-that is, the regulation of actors within an economic system. Thus, regulatory reform should promote flexible performance-based standards and market-based solutions, as S. 343 does.

ENVIRONMENTAL VALUES SEIZING THE INITIATIVE

The core of the traditional conservation movement has been a doctrine of wise use and stewardship of land and natural resources, championed originally, beginning in the 19th Century, by the Republican Party. See Celia Campbell-Mohn, Barry Breen, J. William Futrell, Sustainable Environmental Law 15-28 (1993). That doctrine is now captured in the phrase "sustainable development" (properly understood as a necessary balancing of economic growth and environmental protection, neither being able to survive in the long run without the other).

In addition to this tradition of stewardship, there is now need for a more reasonable approach to regulation-one in which the social utility and economic efficiency of regulation must be demonstrated. The principles of "pollution prevention" and of re-imposition of external costs (the latter, in effect, being the "polluter pays" principle, which as noted above corrects market failure by getting pricing right and by letting decentralized market forces govern out-comes) are the keys here.

The two polestars of sustainable development and reasoned decisionmaking offer an ideological basis for a new approach to environmental regulation. Properly employed, they provide the framework for reshaping constructively the conservation and environmental protection movements in this country.

THE NEED FOR REFORM OF ENVIRONMENTAL REGULATION

Environmental regulation now cuts deeply enough that the average person is impacted by it and, while continuing to support reasonable environmental protection, is finally saying what business has said from the outset. Given limited resources and limited patience with government control, what is done through government regulation needs to be justified, prioritized, explicable, and fair. That is, it must be simple (or at least simpler) and workable (normally at the expense of perfection), rational, focused, based on good science and affordable given other needs.

THE ESSENCE OF REGULATORY REFORM

It is important to be clear about what regulatory reform should accomplish. Regulatory reform legislation should aim at establishing a flexible, rational decisionmaking framework for federal agencies that reflects the straightforward, common sense way in which real people make real decisions. It should require politically and judicially accountable agency answers to two simple questions before a major rule is promulgated.

• Is this action "worth it"?

• Does this way of doing it maximize society's net benefits?