Regulatory Reform: Comments on S. 746--The Regulatory Improvement Act of
1999 (Statement/Record, 04/21/99, GAO/T-GGD/RCED-99-163).

The Regulatory Improvement Act of 1999 addresses many issues in
regulatory management that have long been controversial. This statement
focuses on GAO's past work in the following four areas: (1) the
effectiveness of previous regulatory reform initiatives, (2) agencies'
cost-benefit analysis practices and the trigger for the analytical
requirements, (3) the peer review of agencies' regulatory analyses, and
(4) the transparency of the regulatory development and review process.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-GGD/RCED-99-163
     TITLE:  Regulatory Reform: Comments on S. 746--The Regulatory
	     Improvement Act of 1999
      DATE:  04/21/99
   SUBJECT:  Cost effectiveness analysis
	     Proposed legislation
	     Executive orders
	     Agency proceedings
	     Policy evaluation
	     Public relations
	     Government information dissemination
	     Regulatory agencies
	     Economic analysis
	     Reporting requirements

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

United States General Accounting OfficeGAO Testimony Before the
Committee on Governmental AffairsU.S. Senate

Not to be ReleasedBefore 10:00 a.m. EDT WednesdayApril 21, 1999

GAO/T-GGD/RCED-99-163

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

Page 1 GAO/T-GGD/RCED-99-163 Mr. Chairman and Members of the
Committee: I am pleased to assist in your consideration of S. 746,
the "RegulatoryImprovement Act of 1999." As I said in my testimony
on its predecessor, S. 981, we believe that the bill thoughtfully
addresses many issues inregulatory management that have long been
the subject of controversy.

1

We have issued reports on a number of those issues.

My statement today focuses on our past work in four areas of
relevance tothe bill: (1) the effectiveness of previous regulatory
reform initiatives, (2) agencies' cost-benefit analysis practices
and the trigger for the analyticalrequirements, (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 indicatedthat Congress
should determine the effectiveness of previously enacted
regulatory reforms before enacting additional reforms. Perhaps the
mostdirectly relevant of those reforms to S. 746 is title II of
the Unfunded Mandates Reform Act of 1995 (UMRA), which requires
that agencies take anumber of analytical and procedural steps
during the rulemaking process.

We examined the implementation of UMRA during its first 2 years
ofoperation and, for several reasons, concluded that it had little
effect on agencies' rulemaking actions.2 First, the act's cost-
benefit requirement didnot apply to many of the rulemaking actions
that were considered "economically significant"actions under
Executive Order 12866 (78 out of110 issued in the 2-year period).
Second, UMRA gave agencies discretion not to take certain actions
if they determined that those actions wereduplicative or
unfeasible. For example, subsection 202(a)(3) of the act requires
agencies to estimate future compliance costs and
anydisproportionate 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 abroader set of rules
than UMRA covered.

1Regulatory 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 RegulatoryImprovement Act of 1998 (GAO/T-GGD/RCED-
98-95, Feb. 24, 1998).

2Unfunded Mandates:  Reform Act Has Had Little Effect on Agencies'
Rulemaking Actions (GAO/GGD98-30, Feb. 4, 1998).

Unfunded MandatesReform Act Had Little Effect on
Agencies'Rulemaking Actions

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

Page 2 GAO/T-GGD/RCED-99-163 Like UMRA, S. 746 contains some of
the same requirements contained inExecutive Order 12866 and in
previous legislation. However, the requirements in the bill are
also different from existing requirements inmany respects. For
example, S. 746 would address a number of topics that are not
addressed by either UMRA or the executive order, including
riskassessments and peer review. These requirements could have the
effect of improving the quality of the cost-benefit analyses that
agencies arecurrently required to perform. Also, S. 746 applies to
rules issued by independent regulatory agencies that are not
covered by Executive Order12866.

However, as currently written, S. 746's analytical requirements do
notappear 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 theeconomy 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
Order12866 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 analyticalrequirements in S. 746 (unless designated
by the Director). Also, the bill does not cover a rule if the
agency determines that it imposes $90 millionin 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
executiveorder, the definition of a major rule in subsection
621(7)(A) could be amended to eliminate the words "in reasonably
quantifiable costs."

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

Page 3 GAO/T-GGD/RCED-99-163 The centerpiece of S. 746 is its
emphasis on cost-benefit analysis for majorrules. The bill
establishes detailed procedures for preparing those analyses and
using them in the rulemaking process. Therefore, it is important
tounderstand how agencies are currently preparing cost-benefit
analyses.

Mr. Chairman, in a 1998 report prepared at your and Senator
Glenn'srequest, we examined 20 cost-benefit analyses at 5 agencies
to determine the extent to which those analyses contain the "best
practices" elementsrecommended in the Office of Management and
Budget's (OMB) January 1996 guidance for conducting cost-benefit
analyses.3 We concluded thatsome of these 20 analyses did not
incorporate OMB's best practices. For example, the guidance states
that the cost-benefit analysis should showthat the agency has
considered the most important alternative approaches to the
problem addressed by the proposed regulatory action. However, 5
ofthe 20 analyses that we examined did not discuss any
alternatives to the proposed action, and some of the studies that
discussed alternatives did soin a limited fashion. For example,
the Food and Drug Administration's (FDA) regulation on
adolescents' use of tobacco examined six regulatoryalternatives
but contained only a few paragraphs on the five that were
ultimately rejected. A more thorough discussion of the
alternatives thatFDA 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, andonly 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 astatute requires
another regulatory approach.

The OMB guidance stresses the importance of explicitly presenting
theassumptions, 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 thepresent value of future benefits and
costs. Also, five of the analyses did not explain why they did not
discuss the uncertainty associated with theestimated benefits and
costs. Similarly, in a 1997 report examining 23 costbenefit
analyses supporting the Environmental Protection Agency's (EPA)air
quality regulations, we concluded that certain key economic

3Regulatory Reform:  Agencies Could Improve Development,
Documentation, and Clarity of Regulatory

Economic Analyses (GAO/RCED-98-142, May 26, 1998).

Agencies CouldImprove Cost-Benefit Analyses

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

Page 4 GAO/T-GGD/RCED-99-163 assumptions were not identified or
were not explained in 8 of theanalyses.

4 For example, one analysis assumed a value of life that ranged

from $1.6 million to $8.5 million while another analysis that was
preparedin 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
valueswere chosen.

Eight of the 20 cost-benefit analyses that we examined in our 1998
reportdid not include an executive summary that could help
Congress, decisionmakers, the public, and other users quickly
identify keyinformation addressed in the analyses. In our 1997
report, 10 of the 23 analyses supporting air quality regulations
did not have executivesummaries. We have previously recommended
that agencies' cost-benefit analyses contain such summaries
whenever possible, identifying (1) allbenefits and costs, (2) the
range of uncertainties associated with the benefits and costs, and
(3) a comparison of all feasible alternatives.5 S. 746 addresses
many of these areas of concern. For example, when anagency
publishes a notice of proposed rulemaking (NPRM) for a major rule,
section 623 of the bill would require agencies to prepare and
place inthe rulemaking file an initial regulatory analysis
containing an analysis of the benefits and costs of the proposed
rule and an evaluation of thebenefits and costs of a reasonable
number of alternatives. Section 623 also requires an evaluation of
the relationship of the benefits of the proposedrule to its costs,
including whether the rule is likely to substantially achieve the
rulemaking objective in a more cost-effective manner or
withgreater net benefits than other reasonable alternatives.
Finally, it requires agencies to include an executive summary in
the regulatory analysis thatdescribes, among other things, the key
assumptions and scientific or economic information upon which the
agency relied. Enactment of the analytical, transparency, and
executive summaryrequirements in S. 746 would extend and
underscore Congress' previous statutory requirements that agencies
identify how regulatory decisions aremade. We believe that
Congress and the public have a right to know what alternatives the
agencies considered and what assumptions they made indeciding how
to regulate. Although those assumptions may legitimately

4Air Pollution:  Information Contained in EPA's Regulatory Impact
Analyses Can Be Made Clearer

(GAO/RCED-97-38, Apr. 14, 1997). 5Cost-Benefit Analysis Can Be
Useful in Assessing Environmental Regulations, Despite Limitations
(GAO/RCED-84-62, Apr. 6, 1984).

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

Page 5 GAO/T-GGD/RCED-99-163 vary from one analysis to another,
the agencies should explain thosevariations. If enacted, Congress
may want to review the implementation of this part ofS. 746 to
ensure that the initial regulatory analysis requirements apply to
all of the rules that it anticipated. As I previously noted, the
bill's analyticalrequirements apply to all major rules at the time
they are published as an NPRM. The Administrative Procedure Act of
1946 (APA) permits agenciesto issue final rules without NPRMs when
they find, for "good cause," that the procedures are
impracticable, unnecessary, or contrary to the publicinterest.

6 When agencies use this exception, the APA requires the agencies

to explicitly say so and provide an explanation for the
exception's usewhen the rule is published in the Federal Register.

In a report we issued last April, we pointed out that 23 of the
122 final rulesthat were considered "major" under the Small
Business Regulatory Enforcement Fairness Act and published between
March 29, 1996, andMarch 29, 1998, were issued without a previous
NPRM.

7 If the same

proportion holds true for the major rules covered by S. 746, the
initialanalytical 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 anotherreport that we issued last year.

8 In some of the actions that we reviewed,

agencies' stated rationales for using the good cause exception
were notclear or understandable. For example, in one such action,
the agencies

said in the preamble to the final rule that a 1993 executive order
thatimposed a 1994 deadline for implementation and incorporation
of its policies into regulations prevented the agencies from
obtaining publiccomments before issuing a final rule in 1995. In
other actions, the agencies made only broad assertions in the
preambles to the rules that an NPRMwould 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
withoutNPRMs in order to respond quickly to emergencies and in
other
6An NPRM is also not required for interpretative rules; general
statements of policy; or rules of agency

organization, procedures, or practice. 7Regulatory Reform:  Major
Rules Submitted for Congressional Review During the First 2 Years
(GAO/GGD-98-102R, Apr. 24, 1998). 8Federal Rulemaking:  Agencies
Often Published Final Actions Without Proposed Rules (GAO/GGD-98-
126, Aug. 31, 1998).

All Major Rules Do NotHave NPRMs

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

Page 6 GAO/T-GGD/RCED-99-163 appropriate situations. Similarly, we
believe that using the issuance ofNPRMs as the trigger for
analytical requirements may be entirely appropriate. However, as a
result, some major rules will probably not besubject to these
requirements.

S. 746 also requires agencies to provide for an independent peer
review ofany required risk assessments and cost-benefit analyses
of major rules that the agencies or the OMB Director reasonably
anticipate are likely to have a$500 million effect on the economy.
Peer review is the critical evaluation of scientific and technical
work products by independent experts. The billstates that the peer
reviews should be conducted through panels that are "broadly
representative" and involve participants with relevant
expertisewho 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, independentreview 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 Imentioned previously, only 1 of the 20
analyses that we examined received an independent peer review.9 Of
the five agencies whose analyses weexamined, only EPA had a formal
peer review policy in place. Although OMB does not require peer
reviews, the Administrator of OMB's Office ofInformation and
Regulatory Affairs (OIRA) testified in September 1997 that the
administration supports peer review. However, she also said that
theadministration 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 substantialflexibility. If an
agency head certifies that adequate peer review has already been
conducted, and the OMB Director concurs, the bill requiresno
further peer review. However, agencies will need to carefully plan
for such reviews given the bill's requirement that they be done
for all riskassessments and each cost-benefit analysis for which
the associated rule is expected to have a $500 million effect on
the economy. Agencies will alsoneed to ensure that a broad range
of affected parties are represented on the panels and (as S. 746
requires) that panel reports reflect the diversityof opinions that
exist.

9 GAO/RCED-98-142.

Peer Review CanImprove Regulatory Decisionmaking

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

Page 7 GAO/T-GGD/RCED-99-163 Mr. Chairman, last year we issued a
report which you and Senator Glennrequested, assessing the
implementation of the regulatory review transparency requirements
in Executive Order 12866.10 Those requirementsare similar to the
public disclosure requirements in S. 746 in that they require
agencies to identify for the public the substantive changes
madeduring the period that the rules are being reviewed by OIRA,
as well as changes made at the suggestion or recommendation of
OIRA. We reviewedfour major rulemaking agencies' public dockets
and concluded that it was usually very difficult to locate the
documentation that the executive orderrequired. 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 allsuch changes
had been documented. In other cases, the files contained no
evidence of OIRA changes, and we could not tell if that meant that
therehad 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 ruleswas quite voluminous, and many did not have
indexes to help the public find the required documents. Therefore,
we recommended that the OIRAAdministrator issue guidance on how to
implement the executive order's transparency requirements. The
OIRA Administrator's comments in reaction to our
recommendationappeared at odds with the requirements and intent of
the executive order. Her comments may also signal a need for
ongoing congressional oversightand, in some cases, greater
specificity as Congress codifies agencies' public disclosure
responsibilities and OIRA's role in the regulatory reviewprocess.
For example, in response to our recommendation that OIRA issue
guidance to agencies on how to improve the accessibility of
rulemakingdockets, the Administrator said "it is not the role of
OMB to advise other agencies on general matters of administrative
practice." The OIRAAdministrator also indicated that she believed
the executive order did not require agencies to document changes
made at OIRA's suggestion before arule is formally submitted to
OIRA for formal review. However, the Administrator also said that
OIRA can become deeply involved inimportant 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
earliercongressional concerns regarding how rules were changed
during the regulatory review process.

10Regulatory Reform:  Changes Made to Agencies' Rules Are Not
Always Clearly Documented

(GAO/GGD-98-31, Jan. 8, 1998).

Transparency ofRegulatory Actions Can Be Improved

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

Page 8 GAO/T-GGD/RCED-99-163 Finally, the OIRA Administrator said
that an "interested individual" couldidentify changes made to a
draft rule by comparing drafts of the rule. This position seems to
change the focus of responsibility in Executive Order12866. The
order requires agencies to identify for the public changes made to
draft rules. It does not place the responsibility on the public to
identifychanges made to agency rules. Also, comparison of a draft
rule submitted for review with the draft on which OIRA concluded
review would notindicate 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. 746would
provide a statutory foundation to help ensure the public's access
to regulatory review information. In particular, the bill's
requirement thatthese 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 thatagencies must document the
changes made to rules at the suggestion or recommendation of OIRA
whenever they occur, not just the changes madeduring the period of
OIRA's formal review. Similarly, if Congress wants OIRA to issue
guidance on how agencies can structure rulemaking docketsto
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 regulatorymanagement. These provisions strive
to make the regulatory process more intelligible and accessible to
the public, more effective, and bettermanaged. 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
regulatoryprocess. However, our reviews of current regulatory
requirements suggest that, even if S. 746 is enacted into law,
congressional oversight willcontinue to be important to ensure
that the principles embodied in the bill are faithfully
implemented.

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