The Case for Regulatory Reform
Many agree that there is a place for – and a need for -- effective regulations that help protect the environment, ensure workplace and consumer safety, and enhance our security. But when not crafted carefully, regulations can impose significant burdens, and significant costs, on the regulated community. The cumulative effect of multiple regulations can be to stifle economic growth and kill jobs.
Regulations have an impact on companies of all sizes, but well-established data show that regulation imposes a disproportionate impact on small- and medium-sized businesses. Specifically, according to research unveiled in 2005 by the Small Business Administration:
- small companies face an annual regulatory cost of $7,647 per employee, 45 percent higher than the regulatory cost facing large firms;
- Compliance with environmental regulations, like TSCA, costs 364 percent more for small companies;
- Out of all the categories of regulatory costs studied—economic, workplace, environmental, and tax—compliance with environmental regulations is the main driver of the disproportionate cost impact on small versus large companies.
Furthermore, SBA found that while federal government receipts as a share of the economy declined between 2000 and 2004, the federal regulatory burden grew. In 2004, the annual cost of federal regulation in the U.S. increased to more than $1.1 trillion. According to SBA, “[h]ad every household received a bill for an equal share, each would have owed $10,172, an amount that exceeds what the average American household spent on health care in 2004.” 1
II. Mixed Messages from the Administration
A. Executive Orders
On one hand, The Obama Administration seems to recognize this. A series of executive orders, beginning in January 2011, reflect an awareness of the daunting burdens that regulations can impose:
- Executive Order 13563 (“Improving Regulation and Regulatory Review”),
January 18, 2011
- Executive Order 13610 (“Identifying and Reducing Regulatory Burdens”)
May 10, 2012
- Executive Order (“Promoting International Regulatory Cooperation”),
May 1, 2012
- Executive Order 13563 noted that our regulatory system “must measure, and seek to improve, the actual results of regulatory requirements.” That order required federal agencies to engage in “periodic review of existing significant regulations.” Through the development of retrospective review plans, agencies are required “to determine whether any such regulations should be modified, streamlined, expanded, or repealed.” The purpose of the requirement, the Order concluded, is to “make the agency’s regulatory program more effective or less burdensome in achieving the regulatory objectives.”2 Subsequently, the agencies have developed those plans and submitted them for public comment; the plans identified over 500 initiatives.
- More recently, the President acknowledged the stifling affect of the cumulative impact of regulations. Executive Order 13610, titled “Identifying and Reducing Regulatory Burdens” states that “During challenging economic times, we should be especially careful not to impose unjustified regulatory requirements… it is particularly important for agencies to conduct retrospective analyses of existing rules to examine whether they remain justified and whether they should be modified or streamlined in light of changed circumstances, including the rise of new technologies.” The order adds that “further steps should be taken, consistent with law, agency resources and regulatory priorities, to promote public participation in retrospective review, to modernize our regulatory system, and to institutionalize regular assessment of significant regulations.” Specifically, the Order:
- Requires agencies “to invite, on a regular basis….public suggestions about regulations in need of retrospective review and about appropriate modifications to such regulations;”
- [Regarding the retrospective review plans and suggestions] requires the agencies “to give priority, consistent with law, to those initiatives that will produce significant quantifiable monetary savings or significant quantifiable reductions in paperwork burdens while protecting public health, welfare, safety, and our environment. “
- Require agencies to “give special consideration to initiatives that would reduce unjustified regulatory burdens or simplify or harmonize regulatory requirements imposed on small businesses” [to the extent practicable and permitted by law]
- Requires agencies to “give consideration to the cumulative effects of their own regulations, including cumulative burdens, and shall to the extent practicable and consistent with law give priority to reforms that would make significant progress in reducing those burdens…”
- Requires agencies to regularly report on the status of their review efforts to the Office of Information and Regulatory Affairs (OIRA). Draft reports to OIRA are due on September 10, 2012, and the second Monday of January and July for each year thereafter, unless subsequently directed otherwise. The final reports are to be made available to the public no more than 3 weeks after the draft reports are submitted.3
- A third executive order – issued on May 1, 2012 – seeks to reduce “unnecessary differences” in regulatory requirements in such areas as health, safety, labor, security, and the environment while maintaining current levels of protection. This order – “Promoting International Regulatory Cooperation” – outlines the responsibilities and mission of The Regulatory Working Group, which was first established by Executive Order 12866 in 1993. It will be run by OIRA, and is tasked with, among other things, examining “strategies for engaging in the development of regulatory approaches through international regulatory cooperation, particularly in emerging-technology areas.” For any previously required regulatory plans, Agencies are required to summarize their “international regulatory cooperation activities that are reasonably anticipated to lead to significant regulations,” and “to consider reforms to existing significant regulations that address unnecessary differences in regulatory requirements between the United States and its major trading partners.”4
EPA finalized its Retrospective Review Plan in August 2011. Progress reports on the implementation status of that plan were released in January 2012 and May 2012. The plan and both progress reports can be found at: http://yosemite.epa.gov/opei/RuleGate.nsf/
B. “Major” New Rules
Thus, the Administration has rhetorically recognized the burdens that many regulations can have on the regulated community, particularly small businesses, and has taken useful steps to advance formalize a process for reviewing existing rules and the cumulative effect of rules in general. However, simultaneously, this administration has issued an unusually high amount of “major” new rules, those estimated by the government to cost $100 million or more annually.
III. Case Study – The Chemical Manufacturing Industry
A closer look at one industry sector – the chemical manufacturing industry – demonstrates how the Administration’s actions on regulatory reform don’t necessarily match its rhetoric. The chemical industry is one of the most regulated industries in the United States. Numerous federal and state regulations govern nearly every facet of chemical manufacturing, including voluminous environmental and workplace rules. Furthermore, over the past decade, the industry has witnessed the gradual movement of jobs overseas to regions of the world that offer a significantly less regulated environment and lower paid workers. Consequently, American consumers have paid a price through sub-standard products that are made in these countries, exported to the United States, and placed into US markets due to their competitive price advantage.
This year alone, EPA intends to issue, at a minimum, the following rules which directly impact the chemical manufacturing industry:
- A reconsidered Chemical Manufacturing Area Sources Rule;
- Uniform emissions standards for heat exchange systems, as well as for Storage Vessel and Transfer Operations, Equipment Leaks, and Closed Vent Systems and Control Devices; and Revisions to the National Uniform Emission Standards
- New rules for industrial and commercial boilers.
There are additional pending EPA air proposals which may not directly affect members of our industry directly, which may set unfortunate, burdensome precedents for future rulemakings. Furthermore, there are still other rulemakings from EPA addressing a range of topics, including the Definition of Solid Waste, Confidential Business Information and Disclosure Requirements, and TSCA, which add to the regulatory burden industry members face. These proposals, of course, just derive from EPA; numerous proposals from other agencies including the Occupational Health and Safety Administration and the Department of Homeland Security further add to the regulatory mix. In particular, it is increasingly difficult for EHSS professionals at small businesses, many of whom wear the “environmental, safety, and security “hats” for their respective companies, to comply with this onslaught of regulations and recordkeeping requirements.
Finally, in addition to the difficulty of simple compliance, there is the issue of the regulatory uncertainty that is created by the flood of regulations. In a letter to the Chairman of a Committee in the House of Representatives, SOCMA captured the impact of this uncertainty on its industry, writing that
“…it is worth nothing that when new regulations are proposed or implemented, they create much uncertainty among chemical manufacturers, especially small companies. The more that they spend complying with regulations, the less they have available to spend on conducting critical research and development activities to develop innovative products that help companies expand their businesses.” 5
That uncertainty can be particularly significant for the specialty batch industry. This industry typically produces a diversity of products in batches, using multiple-step processes. These products and processes often change from month to month, or every two to three months. In this manufacturing context, the concepts of regulatory certainty and the cumulative effect of regulations are especially important. For the stability and future growth of this specialized component of the broader manufacturing sector, it is imperative that the regulatory process take the fundamental characteristics and structure of our industry into account. Unfortunately, that does not always occur.
SOCMA concluded that “it is especially crucial that rules be crafted to address recognized problems and do so in the least costly fashion possible. Otherwise, chemical manufacturers could be forced to discontinue supplying a particular market or producing a specific product, either of which could negatively impact jobs in the industry or elsewhere in the value chain.”6
A. Five Examples
Five more detailed examples of pending environmental rules affecting the chemical industry are provided below:
- EPA’s Chemical Manufacturing Area Sources Final Rule. This rule, which was first finalized in response to a court order in October 2009, establishes national emission standards for hazardous air pollutants for chemical manufacturing smaller, “area” sources. It will impact the vast majority of SOCMA members.
In response to SOCMA’s Petition for Reconsideration, the Agency unveiled a reconsidered proposal on January 30, 2012. While this new proposal included some positive changes, it significantly retained a costly Title V requirement for certain area sources. It also did not address SOCMA’s request to consider the establishment of a comprehensive de minimis threshold, which could exempt some of our smaller emitters from the burdens of the rule. Furthermore, even though the industry has been living in a state of uncertainty for much of the last three years and just saw the revised proposal at the end of January, SOCMA members are expected to comply with the vast majority of the rule by the end of October of this year -- a mere month or two after having first seen what’s in the final rule! SOCMA believes that the latest version of the CMAS rule remains more costly and burdensome than it needs to be, and that the Title V requirement in particular could limit some its members’ operational flexibility.
- EPA’s Definition of Solid Waste (DSW) Rule. The DSW rule is actually a successful example of the rulemaking process – in theory. SOCMA worked closely with EPA on this issue for years, and the final rule adopted in the fall of 2008 reflected that collaboration. Specifically, the final rule contained an exemption for materials that were produced and remained “under the control of the generator” and, more specifically, for those produced under certain toll manufacturing relationships. Many SOCMA members are engaged in toll manufacturing, and stood to save tens or hundreds of thousands dollars from the rule because these provisions would have enabled them to recycle materials which they otherwise would not have been able to due to cost considerations. Such savings, of course, would be incredibly important to these members, many of whom are small or medium-sized businesses. The rule was immediately challenged by the Sierra Club, however; EPA launched a reconsideration and new rulemaking process; and, consequently only a handful of states have adopted the final rule because of the regulatory uncertainty surrounding it.
Thus, in practice, even though the rule has been finalized since October 2008, the majority of SOCMA members across the country cannot take advantage of its most favorable provisions. Furthermore, in the new rulemaking on this issue, EPA is considering stripping the exemption for tolling from the final rule in part because no one has taken advantage of it! SOCMA believes that the regulatory uncertainty surrounding the development of revisions to this rule – dating back to the 1990’s – has been detrimental to its members’ economic interests. Simultaneously, this uncertainty has served to block progress on a top environmental goal of the agency – that of increased recycling.
- Chemical Sector Rulemaking (Uniform Standards). This year, EPA has proposed sets of uniform standards for the chemical manufacturing industry and petroleum refiners – including those for heat exchange systems; as well as for Storage Vessel and Transfer Operations, Equipment Leaks, and Closed Vent Systems and Control Devices; and Revisions to the National Uniform Emission Standards. While these standards are “designed to increase the consistency of existing standards at similar emission sources, while streamlining and coordinating recordkeeping and reporting requirements,” SOCMA believes that the standards are essentially a solution in search of a problem, and that they will create more problems that they solve. SOCMA also questions EPA’s legal authority to issue such standards, and believe that the goal of achieving “uniformity” can be reached by altering existing individual regulations or revising the existing “standard standards.” There is a reason why different regulations which were created for different industry sectors – namely, the fact that each industry is inherently different – and consequently, SOCMA thinks that the proposed standards will not be easily applicable – or adaptable – to the chemical sector specifically. While well-intentioned in theory, the goals of “streamlining and simplifying” in this case can actually mean “complicating and increasing regulatory burdens.
- EPA’s Proposed Action to Force Chemical Identity Disclosure under the Toxic Substances Control Act (TSCA). On December 27th, 2011, the White House Office of Management and Budget (OMB) posted a draft proposed rule that would amend EPA’s new chemical and microorganism regulations under the Toxic Substances Control Act (TSCA)1. As we understand it, the proposed rule would limit the ability of submitters to protect their intellectual property in premanufacture notices (PMNs) and microbial commercial activity notices (MCANs) submitted to the EPA. The longstanding option of using generic names for chemicals and microorganisms involved in health and safety studies – prior to commencement of manufacture – would apparently be eliminated. The proposal has been undergoing OMB review since last December.
1 RIN: 2070-AJ87 CBI: PMN Amendments Claiming Chemical and Microorganism Identity as Confidential in Data from Health and Safety Studies.
EPA has taken a number of actions over the past few years to increase the transparency of chemical substances under TSCA. Over-claiming information as Confidential Business Information (CBI) has been a problem and SOCMA has acknowledged this. Unfortunately, this latest EPA proposal goes too far. Protection of chemical identity is particularly important in our sector, the specialty, batch, and custom chemical manufacturing industry. Given the typically narrow applications for which our members’ chemicals are used and the niche markets they serve, disclosure of chemical identity may be all it takes to give away a competitive advantage and result in less innovation in the U.S. It bears repeating that over 70% of SOCMA members 4 are SMEs and thus especially sensitive to proposals that would compromise competitiveness. If the U.S. is to reassert its economic clout, it must not create disincentives to continued innovation. It is not clear what benefits would be derived by challenging the ability of U.S. manufacturers to protect their intellectual property so early in the product development stage, since this targets chemicals prior to them entering commerce – i.e., before anyone outside the workplace could be exposed to them. This effort also runs directly contrary to the Obama Administration’s goal of promoting domestic manufacturing. The majority of Freedom of Information Act (FOIA) requests to EPA come from companies, not curious members of the public. Disclosing chemical identity would only serve as an opportunity for competitors, many of which are overseas, to mine U.S. intellectual property. Industrial espionage is a serious and omnipresent threat to American manufacturing. We see no benefit in facilitating it. We are willing to work with the Agency to increase transparency, but we also need adequate protection of our intellectual property. We ask that you look into the potential impact of this issue and the importance of protecting intellectual property in the chemical industry. Congress should consider convening hearings on the costs and benefits of implementing this rule as it could have serious negative impacts. Providing protective safeguards to U.S. intellectual property should be a priority that garners broad support.
- EPA’s Chemical Data Reporting (CDR) Final Rule. In August 2011, EPA amended the TSCA section 8(a) Inventory Update Reporting (IUR) rule and changed its name to the Chemical Data Reporting (CDR)2 rule. The IUR was a periodic reporting requirement affecting many sectors involved in chemical manufacturing and importing. Its purpose is to collect recent information on the manufacture, importation, processing, and industrial, commercial, and consumer uses of certain chemical substances currently on the TSCA Inventory. The CDR introduces a number of new requirements, including using EPA’s Central Data Exchange (CDX) to file reports. In other words, data 2 76 FR 50816; TSCA Inventory Update Reporting Modifications; Chemical Data Reporting.
Submissions must now be made via the Internet. The submission period for reportable data currently falls between February 1, 2012 and August 13, 2012 (recently extended from June 30), and therefore is ongoing. Unfortunately, as we come down to the wire, SOCMA has been gathering feedback from member companies on difficulties they are facing using EPA’s new electronic reporting system. On the week of May 13th we received numerous reports from members that the forms they are required to submit to EPA were not accessible. Consequently, an entire week of reporting was lost. They continue report glitches with the system. In addition, our members have many unanswered questions about the new reporting 5 requirements, leaving them to question whether they will be in compliance even if they can file on time. We do not see how EPA can expect the regulated community to meet the August 13 deadline, and do not want our members to face unjust penalties and fines. SOCMA has asked the Agency to grant an extension of 90 days, till September 30, 2012. This would align with future submission periods and provide needed relief to the regulated community.
SOCMA highlighted these examples in two letters (January 2011, and June, 2012) to Representative Darrell Issa (R-CA), the Chairman of the House Government Reform and Oversight Committee, in response to solicitations from the Chairman for examples of burdensome regulations affecting the chemical manufacturing industry. The letters can be found here:
IV. Reports and Studies
- "Regulation and the International Competitiveness of the U.S. Economy" September 18, 2012
- "Macroeconomic Impacts of Federal Regulation of the Manufacturing Sector" August 21, 2012
In December 2011, SOCMA’s Board of Governors approved a policy statement on regulatory reform. The statement explains why the issue is so important to SOCMA members, and highlights some provisions which SOCMA would like to see adopted in any related legislation which passes Congress. Many of those recommendations follow below, and the statement can be found here.
In order to improve the regulatory process, and reduce regulatory burdens, we urge policymakers to adopt the following recommendations (this will be a continually updated list):
- Any review of a significant rule should be required to assess the rule’s actual impact on small business.
- Furthermore, that impact should then be contrasted with the projected impact when the rule was first promulgated.
- Significant discrepancies between the two impacts should then trigger further agency action to mitigate those unforeseen costs.
Improved cost/benefit analysis:
- Increase congressional oversight of regulatory costs and benefits, for example by creating a Congressional Office of Regulatory Analysis, or by funding the GAO pilot established by the Truth in Regulating Act.
- Enhance the Regulatory Flexibility Act (RFA)’s requirements for reviews of rules that are projected to have a significant economic impact on a substantial number of small businesses; for example, by taking into account indirect effects
- Mandate that the Office of Information and Regulatory Affairs also review the cost-benefit analyses prepared for rules triggering the RFA
- Establish a Committee for the Cumulative Analysis of Regulations that Impact Manufacturing in the United States to analyze and report on the cumulative and incremental impacts of covered rules.
Greater regulatory flexibility
- Require regulatory flexibility analyses to include alternatives to the proposed rule that would maximize net economic benefits or minimize net economic costs on small businesses
- Enact measures that provide administrative regulatory relief for small businesses
1 The Impact of Regulatory Costs on Small Firms, Nicole and Mark Crain, Lafayette College for the SBA Office of Advocacy, September 2010
2 Improving Regulation and Regulatory Review, Executive Order 13563, President Barack Obama, January 18, 2011
3 Identifying and Reducing Regulatory Burdens, Executive Order 13610, President Barack Obama, May 10, 2012
4 Promoting International Regulatory Cooperation, Executive Order, President Barack Obama, May 1, 2012
5 SOCMA Letter to Representative Darrell Issa, January 10, 2011