[House Hearing, 107 Congress] [From the U.S. Government Publishing Office] EPA RULEMAKING: DO BAD ANALYSES LEAD TO IRRATIONAL RULES? ======================================================================= HEARING before the SUBCOMMITTEE ON REGULATORY REFORM AND OVERSIGHT of the COMMITTEE ON SMALL BUSINESS HOUSE OF REPRESENTATIVES ONE HUNDRED SEVENTH CONGRESS FIRST SESSION __________ WASHINGTON, DC, NOVEMBER 8, 2001 __________ Serial No. 107-35 __________ Printed for the use of the Committee on Small Business _______ U.S. GOVERNMENT PRINTING OFFICE 76-760 WASHINGTON : 2001 ____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800 Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001 COMMITTEE ON SMALL BUSINESS DONALD MANZULLO, Illinois, Chairman LARRY COMBEST, Texas NYDIA M. VELAZQUEZ, New York JOEL HEFLEY, Colorado JUANITA MILLENDER-McDONALD, ROSCOE G. BARTLETT, Maryland California FRANK A. LoBIONDO, New Jersey DANNY K. DAVIS, Illinois SUE W. KELLY, New York BILL PASCRELL, Jr., New Jersey STEVE CHABOT, Ohio DONNA M. CHRISTENSEN, Virgin PATRICK J. TOOMEY, Pennsylvania Islands JIM DeMINT, South Carolina ROBERT A. BRADY, Pennsylvania JOHN R. THUNE, South Dakota TOM UDALL, New Mexico MICHAEL PENCE, Indiana STEPHANIE TUBBS JONES, Ohio MIKE FERGUSON, New Jersey CHARLES A. GONZALEZ, Texas DARRELL E. ISSA, California DAVID D. PHELPS, Illinois SAM GRAVES, Missouri GRACE F. NAPOLITANO, California EDWARD L. SCHROCK, Virginia BRIAN BAIRD, Washington FELIX J. GRUCCI, Jr., New York MARK UDALL, Colorado TODD W. AKIN, Missouri JAMES R. LANGEVIN, Rhode Island SHELLEY MOORE CAPITO, West Virginia MIKE ROSS, Arkansas BILL SHUSTER, Pennsylvania BRAD CARSON, Oklahoma ANIBAL ACEVEDO-VILA, Puerto Rico Doug Thomas, Staff Director Phil Eskeland, Deputy Staff Director Michael Day, Minority Staff Director ------ Subcommittee on Regulatory Reform and Oversight MIKE PENCE, Indiana, Chairman LARRY COMBEST, Texas ROBERT BRADY, Pennsylvania SUE KELLY, New York BILL PASCRELL, Jr., New Jersey SAM GRAVES, Missouri CHARLES GONZALEZ, Texas ROSCOE BARTLETT, Maryland DAVID D. PHELPS, Illinois TODD AKIN, Missouri JAMES R. LANGEVIN, Rhode Island PAT TOOMEY, Pennsylvania ANIBAL ACEVEDO-VILA, Puerto Rico Barry Pineles, Professional Staff Member C O N T E N T S ---------- Page Hearing held on November 8, 2001................................. 1 Witnesses Lutter, Randall, Resident Scholar, AEI-Brookings Joint Center for Regulatory Studies............................................. 3 Abrams, Fern, Director of Environmental Policy, IPC--Association Connecting Electronics Industries.............................. 5 Bopp, Andrew, Executive Director, Society of Glass & Ceramic Decorators..................................................... 7 Conrad, James, Counsel, American Chemistry Council............... 10 Giesecke, Anne, Director, Environmental Activities, American Bakers Association............................................. 12 Appendix Opening statement: Pence, Hon. Mike.............................. 20 Prepared statements: Lutter, Randall.............................................. 23 Abrams, Fern................................................. 30 Bopp, Andrew................................................. 34 Conrad, James................................................ 39 Giesecke, Anne............................................... 49 Additional material: Submission of Harold Koenig, The Annapolis Center for Science-Based Public Policy................................ 55 Letter to Chairman Pence from American Farm Bureau Federation 87 EPA RULEMAKING: DO BAD ANALYSES LEAD TO IRRATIONAL RULES? ---------- THURSDAY, NOVEMBER 8, 2001 House of Representatives, Subcommittee on Regulatory Reform and Oversight, Committee on Small Business, Washington, DC. The subcommittee met, pursuant to call, at 10:25 a.m. in room 2361, Rayburn House Office Building, Hon. Mike Pence (chairman of the subcommittee) presiding. Chairman Pence. The Subcommittee on Regulatory Reform and Oversight will come to order on the topic of EPA Rulemaking: Do Bad Analyses Lead to Irrational Rules? I would like to apologize to the gentleman from Illinois and also to the distinguished panel of witnesses that we have for my tardiness. Ironically, I was attending a briefing with EPA officials regarding the cleanup of my congressional office from an anthrax contamination, which suffice it to say that there are good things the EPA does. Today we may hear a different perspective from some of our witnesses, but I am grateful for my colleague's patience and for the patience of all of those attending. On June 21, I convened a roundtable on regulation to hear more than 30 small business trade associations describe for this Chair the struggles that they and their membership face from the regulatory state. Despite the diversity of concerns raised at the roundtable, one constant theme was evident; the inadequacy of the regulatory analyses that agencies use to support rulemakings. One agency in particular that was singled out for its poor regulatory analyses was the Environmental Protection Agency. Today's hearing will attempt to address those flaws. Small business owners are very familiar with burdens that federal regulations place on them. Many studies, including those sponsored by the Office of Advocacy of the United States Small Business Administration, have shown that small businesses face disproportionately higher costs to comply with federal regulations, including those issued by the EPA, than their larger business counterparts. Thus, accurate estimates of cost, if derived from the experiences of large businesses, may paint a false picture of the economic impact of an EPA regulation on small businesses. If the EPA misjudges the economic impact, will it produce a rational rule if the vast majority of businesses in America cannot comply? The polestar of the rulemaking process is that the regulations must be rational. When Congress passed the Administrative Procedure Act in 1946, it believed that the process of notice, comment and agency response to the public comment would be sufficient conditions to insure a rational outcome. After the regulatory onslaught of the 1970s, which saw the creation of the EPA and the enactment of many statutes that EPA implements by rulemaking, Congress and the executive branch determined that further refinements were necessary. Congress imposed new analytical requirements to assess the impacts on small businesses and other small entities. Presidents Reagan, Bush and Clinton produced Executive Orders mandating analysis of costs and benefits beyond those required by the Administrative Procedure Act or specific statutes such as the Clean Water Act. In 1980, Congress enacted the Regulatory Flexibility Act. The Act represents another tool in the decisional calculus designed to develop rational rules. The RFA requires federal agencies to consider whether their proposed or final regulations will have a significant economic impact on a substantial number of small businesses. If the regulations do have a sufficient impact, the agencies are required to consider whether less burdensome alternatives exist that achieve the same objective. The authors of the RFA expected that if an agency had two equally effective alternatives to achieve its regulatory objective it would logically select the one that is less burdensome on small businesses. Of course, a critical element of this analytical filter is the agency's proper assessment of the impact of the regulation on small businesses. If the agency's cost estimate is incorrect, then its assessment of the burdens on small business will not be accurate, and the agency will not seek more effective cost alternatives. Therefore, the analytical requirements of the Administrative Procedure Act and the Regulatory Flexibility Act are crucial. They have been supplemented by regulatory review mandates by each President since 1980. While the details are somewhat different, each Executive Order requires federal agencies like the EPA to conduct cost- benefit analysis for significant regulations, usually those with more than $100 million impact on the economy. If the costs of the proposed or the final rule outweighs the benefits, then the regulatory action would be detrimental to the overall welfare of society, and the rational policy maker, barring statutory imperative to the contrary, would not seek to implement that particular regulation. More importantly, regulatory analysis which demonstrates that the cost of a particular regulation outweigh the benefits should give policy makers greater pause. That should be a signal for them to seek other alternatives to meet their statutory objectives, but that do not impose unnecessary costs on society or commerce. Thus, inadequate and incorrect regulatory analyses, including the scientific underpinnings of the estimates of costs and benefits, are detrimental to rational rulemaking and that mandated by the Administrative Procedure Act. Today's hearing focuses on a cross section of regulations from the EPA that highlight the problems that can arise from incorrectly constructed regulatory analyses. They often lead into a realm of irrational rulemaking such as the proposed cross media electronic reporting and record keeping rule, which would in essence require replacement of a substantial amount of existing information systems that currently keep track of more than 216 pages worth of EPA mandated record keeping. Proper application of the tools available to the EPA should eliminate such results. I look forward to the recommendation of all of our witnesses today on the corrective actions that the EPA can take to avoid poor analyses and would now turn to the Ranking Minority Member who joins us today, the gentleman from Illinois, for any opening comments that he might have for this panel or on this topic. Mr. Phelps. I do not have any. I am just anxious before the vote to hear from this panel. Thank you. Chairman Pence.. Thank you very much. With that, I will introduce Randall Lutter or Lutter? Mr. Lutter. Lutter. Chairman Pence. Lutter, thank you, is a resident scholar at the American Enterprise Institute and a fellow at the AEI- Brookings Joint Center for Regulatory Studies. He previously served as senior economist for the environment and regulation on the President's Council of Economic Advisors and as staff economist for regulatory affairs at the OMB. Mr. Lutter is recognized for five minutes. We thank you for being with us today. STATEMENT OF RANDALL LUTTER, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE, AND FELLOW, AEI-BROOKINGS JOINT CENTER FOR REGULATORY STUDIES Mr. Lutter. Thank you, Mr. Chairman. Thank you, Members of the Committee. I am pleased to appear before you to provide my views on how to improve regulatory analysis at the Environmental Protection Agency. For more than ten years I have worked inside and outside government on regulations to reduce risks. I am now with the AEI-Brookings Joint Center for Regulatory Studies. A primary objective of the Center is to hold lawmakers and regulators accountable by providing thoughtful, objective analyses of existing regulatory programs and new regulatory proposals. You have asked me for my views on whether EPA's benefit- cost analyses are adequate to support sound rulemaking. I would like to start by making a distinction between two separate purposes of these analyses. One is to inform decision makers at EPA and elsewhere in the Administration about the economic effects of regulation. From the perspective of the decision makers who already control the resources and have the authority to get the quality of analyses that they want, these analyses may well be adequate. They have control of the resources, and they can get the answers to the questions that they are interested in learning the answers to. A second purpose of EPA's regulatory analyses is to inform Congress and the public about the economic effects of its regulatory decisions. A significant number of EPA's analyses are inadequate for this purpose, primarily because the incentives for EPA to prepare high quality analyses are poor. As an institution, EPA faces incentives to overstate the net benefits of its rules, particularly those rules that have very small or negative net benefits. The biggest cause of poor economic analysis at EPA is the lack of incentives for more forthright research. The absence of independent review of EPA's benefit-cost analysis illustrates the lack of incentives. Courts rarely review EPA's benefit-cost studies because environmental laws generally authorize EPA to regulate without full consideration of the benefits and the costs. No government body outside the executive branch assesses analytic quality. There are private sector critiques of EPA analyses, but these are often ineffective because they also comment on the regulations themselves. Independent observers tend to think that such comments on the regulations motivate the critiques of the analyses rather than the other way around. I would like to make four specific recommendations on how EPA's regulatory analyses could be improved. First, Congress should create a separate Office of Policy Analysis within EPA and charge that office with doing all risk assessments and all benefit-cost analyses of significant regulations. Currently, EPA program offices charged with administering particular programs oversee most of the economic analysis supporting these new regulations, but these offices suffer from a conflict of interest; tunnel vision, if you will. The air office naturally supports air regulations. This conflict of interest could be substantially mitigated if there were a separate office in charge of regulatory analyses within EPA. Second, Congress should require that EPA's benefit-cost analyses adhere to established principles for high quality. The Office of Management and Budget, where I used to work, has developed guidelines for doing sound regulatory analyses, yet it is clear from a careful review of EPA's economic analyses that the agency has not taken these guidelines seriously. To add political weight to the guidelines, Congress should adopt the kinds of principles contained in them and require that an agency such as OMB certify that EPA adheres to such principles. Third, Congress should ask an agency other than EPA to conduct peer review of the economic analyses and of the risk assessments supporting EPA's significant rules. Most of the economic analyses in the risk assessments supporting EPA's decisions do not go through any sort of outside peer review. Peer review may be no guarantee of absolute quality, but mandatory peer review of EPA's analyses of economically significant rules could provide an important new incentive for EPA to improve the quality of its analysis. Fourth, Congress should fund regulatory analysis at the General Accounting Office in accordance with the Truth In Regulating Act of 2000. It is important that there be a federal office outside the executive branch that is capable of assessing the analyses supporting federal regulations and the regulations themselves. The reason that the Truth In Regulation Act project is appropriate in discussing the improvement of regulatory analysis at EPA is that EPA is responsible for a very large share of all costs associated with new federal regulations. Congress could use the information generated by the General Accounting Office to improve regulation and the regulatory process. In conclusion, a significant number of EPA's benefit-cost analyses, while technically very sophisticated, fail to comply with established principles for sound analysis. Improving the quality of the analysis requires establishing incentives for the agency to do high quality work. There are four steps likely to be effective. Congress could create a separate policy office to conduct the analysis, it could mandate adherence to sound analytic principles in each of the benefit-cost analyses and risk assessments prepared by EPA, it could ask an agency other than EPA to conduct peer review of EPA's economic studies and the associated risk assessments, and it should fund the Truth In Regulating Act research at the General Accounting Office. Thank you very much. I would be happy to take any questions. [Mr. Lutter's statement may be found in the appendix.] Chairman Pence. Thank you, Mr. Lutter. Now Fern Abrams, who is the director of environmental policy for IPC, which is the Association Connecting Electronics Industries, responsible for advocating a number of positions in the areas of environment, health and safety. Prior to joining IPC, she served as manager of environmental affairs at the American Trucking Association, where she focused in particular on Clean Air Act and hazardous water issues. We thank you for being with us today. You are recognized for five minutes. STATEMENT OF FERN ABRAMS, DIRECTOR OF ENVIRONMENTAL POLICY, IPC--THE ASSOCIATION CONNECTING ELECTRONICS INDUSTRIES Ms. Abrams. Good morning, Chairman Pence and Members of the Committee. My name is Fern Abrams. I represent IPC, the trade association for the electronic interconnection industry. Our 2,800 members manufacture and assemble printed circuit boards, which are the backbone of the nation's high tech industries, including consumer, industrial and defense electronics. On behalf of our members, I would like to thank you and your staff for organizing this important hearing. Ninety percent of IPC members that manufacture printed circuit boards are small businesses. As you know and stated in your opening, the cost of regulatory compliance often has a disproportionate impact on small businesses. Environmental regulations must be based on sound scientific and regulatory analysis so that they do not create unnecessary burdens while failing to achieve their goal of environmental protection. IPC members, along with many other industries affected by the EPA's proposed effluent limit guidelines for industries that manufacture and maintain metal products, or more commonly known as MP&M, are deeply concerned that the agency has overestimated the benefits of the proposed regulation while significantly underestimating the economic impact. The Clean Water Act requires that effluent limits be based on best available technology that is economically achievable, yet the agency has proposed limits that are neither affordable nor achievable. A review of discharge monitoring data indicates that none of the facilities on which the proposed limits are based could meet the limits consistently. In fact, some of the proposed limits are so low that incoming drinking water would not meet them. These are not achievable limits. The proposed limits also fail to credibly meet the requirement that they be economically achievable. The agency has significantly underestimated the cost of compliance. Their errors include faulty assumptions concerning technology capabilities, monitoring costs and facility space constraints, just to name a few out of dozens. For example, the agency has incorrectly assumed there will be no increase in monitoring costs when IPC member expected increases range from $1,000 to $350,000 per facility. The agency's economic analysis also fails to meet common sense inspection by projecting that many firms will remain profitable despite facing compliance costs that are several times greater than their profit margins. This unreasonable analysis is made possible only because the agency's economic analysis assumes that compliance costs will be passed on to customers through a 90 percent increase in prices. This assumption was apparently based on analysis of other unrelated industries conducted over five years ago in a vastly different economic climate. In reality, over 72 percent of our members have stated that they would not be able to raise their prices at all. In addition, the rule's economic analysis assumes that 50 percent of printed circuit board facilities will be able to remain in business without being able to replace worn out equipment or modernize for 15 years. That is an astounding assumption, given that printed circuit board manufacturers must constantly invest in new equipment to meet customer demands for increasingly smaller electronics. In addition to underestimating the cost of the proposed regulations, the agency has significantly overestimated its environmental benefits. Unlike previously effluent limitations rulemakings which use actual facility wastewater data to estimate the benefits of the proposed rule, the agency relied upon models to simplify the task of estimating costs and pollution benefits of this complex regulation covering 18 different industrial sectors under 200 SIC codes. By using inadequately detailed models populated with data borrowed from unrelated industries, the agency has fabricated an environmental benefit that does not exist. Pollution removals calculated from actual facility data are 98 percent lower than those predicted by the agency's flawed models. In conclusion, we believe that the agency has not demonstrated that the rule is cost effective. The agency has estimated the social costs of the proposed rule are $2.1 billion annually, while the total benefits that can be valued in dollar terms in categories traditionally analyzed for effluent guidelines are only in the range of $400 million to $1.1 billion annually. The agency should not promulgate a rule with costs that exceed its benefits. The agency should follow the recommendations of the Small Business Regulatory Enforcement Fairness Act panel and remove from this rulemaking industries for which regulation is not cost effective. Fortunately, the MP&M effluent limits have not yet been finalized. In fact, the agency has been working constructively with affected industries, including printed circuit boards, to try to improve the quality of its regulatory analysis prior to issuance of a final rule. Going forward, the agency must make a better effort to get regulatory analysis right the first time around. It should not be standard practice to propose a rule based almost entirely on faulty analysis and poor assumptions and then depend on industry to try to uncover mistakes in the very short time for public comment. A more open regulatory process with regular data exchange between the agency and affected industries, combined with the early use of reality checks, would make both proposed and final rules more accurate and effective. Thank you again for giving IPC the opportunity to express our concerns, and we welcome any questions. [Ms. Abrams' statement may be found in the appendix.] Chairman Pence. Thank you very much, Ms. Abrams. We have a journal vote on the Floor. What we will do is recess very briefly and do so now. That will permit me and the gentleman from Illinois to go and record our vote. The Chair will return. I know Mr. Phelps will return if his schedule permits, and we will continue with the testimony. I thank you for your forbearance, and we will return quickly. [Recess.] Chairman Pence. We will return to our testimony in this hearing of the Subcommittee on Regulatory Reform and Oversight. Andrew Bopp has been the executive director of the Society of Glass & Ceramic Decorators since 2000. He previously served as SGCD's director of communications from 1995 forward. Mr. Bopp was also communications director for the Association of Incentive Marketing in Union, New Jersey, and is gratefully recognized for five minutes. Thank you for your patience. STATEMENT OF ANDREW BOPP, EXECUTIVE DIRECTOR, SOCIETY OF GLASS & CERAMIC DECORATORS Mr. Bopp. Thank you. Thank you for the opportunity to testify on the TRI lead rule today. As you said, my name is Andrew Bopp. I am the executive director of the Society of Glass & Ceramic Decorators. We are the trade association of companies that decorate glass and ceramic tableware, souvenir mugs and other items. This is a sample of what our members produce, this type of thing. S.G.C.D. represents 650 companies and a manufacturing segment that is facing increasingly fierce competition from overseas production facilities, especially in China. Most SGCD members are small, often family owned companies that have more in common with the average local print shop than with a large industrial facility. Many of these companies are into their third generation of family ownership. SGCD has members in 37 states, including Indiana, Pennsylvania and Illinois. The colors used by glass and ceramic printers contain various metal bearing borosilicates. Some colors cannot be produced without lead. When fired, they become chemically part of the glass or ceramic ware. Almost all of these lead bearing colors are used to produce the product. Very little ends up as waste. SGCD and member companies work closely with FDA and other federal and state agencies to guarantee the safety of all wares. I am testifying today to point out major flaws in EPA's economic analysis of changes to its toxic release inventory reporting threshold for lead and lead compounds. It is important to note that SGCD has made every attempt to work with EPA as it developed the rule. This included testimony at the agency's December 1999, hearing after the original TRI rule was issued. It is obvious, however, that the economic analysis was developed without any consideration of the rule's impact on glass and ceramic decorators. I can understand why EPA would balk at evaluating every industry that might possibly be required to complete TRI reports under the new standard. However, EPA listed stone, clay, glass and concrete products, SIC 32, as being among the five largest lead reporting groups in the 1998 TRI reporting year at the 10,000 pound threshold. Even after recognizing the significance of this industry group, Mr. Chairman, EPA chose to examine glass and ceramic decorators as part of a wide range of unrelated industries. This was done even though the other four top 1998 filers were evaluated separately. In so doing, EPA failed to consider the situation in the glass and ceramic industry where TRI reporting burdens and costs are dramatically greater for small companies than large companies. It is possible that in some industries the differences in tracking lead usage may not be great between companies of varying sizes. However, the use of lead bearing colors in the glass and ceramic decorating industry is fairly unique. It is important to first note that every lead bearing color may contain a different quantity of lead. Every decorator must trace every lead bearing color used and make different calculations for that color. You must also consider that large glass and tableware plants produce and decorate millions of matching plates, bowls, glasses and related items using a limited number of colors. These colors are likely to be used in large quantity, though. Some of these colors do contain lead, and the steps required to trace the lead used are confined to the numbers of colors used. Such tracking and reporting can be handled efficiently by a large decorator that employs an environmental compliance department. On the other hand, the small contract glass and ceramic decorator fills orders that typically number in the dozens or hundreds of pieces. These small plants may use a greater variety of colors in a day than a large decorating facility will use in a month. It is important also to note that none of these small businesses employ environmental compliance staff to handle such complicated burdens. There is no indication that EPA even considered the possibility of such a situation for small glass and ceramic decorators. As a result, EPA's estimate of the time necessary to compile and complete the TRI forms of 111 hours per year does not remotely correspond with reality for small glass and ceramic decorators. Remember, this is a rule that is supported by more than 500 pages of instructions and guidance. As a further result, EPA's compliance cost estimates are correspondingly low. This directly affects the number of companies that the agency believes will feel an impact beyond the one percent and three percent annual revenue thresholds that are used to determine the rule's small business impact. To add insult to injury, EPA's economic analysis also includes the ridiculous assertion that there will be no first time filers in SIC 32 based on their research efforts such as they are. In reality, there are hundreds of small decorators that have never completed a TRI form for lead or any other TRI substance who must now comply. Problems started when EPA failed to conduct small business outreach before first issuing the TRI proposal. From the appearance of the agency's economic analysis, it is obvious that SGCD's efforts to work with the agency after that point were ignored. I also want to point out that the drastic reduction in the lead TRI threshold from 10,000 pounds to 100 pounds is based on a scientific premise that EPA has still not sent for independent peer review as it had promised. Given the massive effort and costs required to comply with the new TRI rule, one must ask what purpose do reports of this low threshold serve. There is no evidence whatsoever that glass and ceramic decorators present an environmental problem in their operations. In conclusion, I urge the Committee to require federal agencies to meet with and learn from small businesses before regulatory proposals are issued. Early outreach will insure that federal agencies properly assess small business impacts and develop proposals that are tailored to meet agency objectives with the smallest business impact. In terms of the TRI proposal, EPA's failure to conduct early small business outreach and the resulting inadequacy of its economic analysis deprived small businesses of the opportunity to have their unique situations considered. Due to these omissions and the large number of scientific uncertainties, I urge you to request the agency to reconsider the lead TRI rule to comply with the letter, as well as the spirit, of SBREFA while also conducting a prompt and thorough review of the scientific premise upon which the rule is based. Thank you for the opportunity to testify before you today, and please ask if you have any questions. [Mr. Bopp's statement may be found in the appendix.] Chairman Pence. Nicely done, Mr. Bopp. Thank you. We will have questions, I and my colleague, for each of you at the conclusion of the testimony. James Conrad, Jr., is counsel with the American Chemistry Council, where he provides legal and policy advice to the regulatory and legal innovation team. Jamie leads the council's advocacy regarding environmental innovation, legislation programs, compliance and enforcement issues, governmental management of environmental information and the use of information as a regulatory or policy tool. He spent eight years in private practice with the Washington, D.C., office of Davis, Graham, Stubbs & Cleary where his practice encompassed regulatory advocacy counsel and litigation. He also developed and edits the Environmental Science Desk Book, which is published by West Group. With gratitude, he is recognized for five minutes. STATEMENT OF JAMES CONRAD, JR., COUNSEL, AMERICAN CHEMISTRY COUNCIL Mr. Conrad. Thank you, Mr. Chairman and Mr. Phelps. I am pleased to testify before you today regarding EPA's recently proposed Cross Media Electronic Reporting and Record keeping Rule or ``CROMERRR''. While many American Chemistry Council members are Fortune 500 companies, we estimate that between a third and a half of our members--or between 60 and 90 percent--meet the SBA standards for a small business. Many of these members have only a single manufacturing plant. These smaller companies stand to benefit the most from the efficiencies made possible by information technologies. Most of these companies already keep records electronically. Unfortunately, CROMERRR would do nothing to help that process. In fact, it would have the opposite effect, driving businesses back to using paper records. It would also cost $48 billion in initial costs--and that is based on EPA's own numbers. What exactly is CROMERRR, and why is it so expensive? In a nutshell, the proposal imposes elaborate technical requirements on electronic information systems to guard against the remote prospect that data might be tampered with. For example, records must have secure, computer generated, time stamped audit trails that identify anyone who ever created or modified the record, when they did it and what changes they made. No off-the-shelf software does this now. Mr. Chairman, the Food and Drug Administration imposed essentially the same regulation on drug companies in 1997. Most of them are still struggling, four years later, to comply with it. The average cost of compliance with this rule for drug companies is over $100 million apiece. E.P.A. and authorized states regulate a lot more entities than the FDA does. In fact, EPA's own cost-benefit analysis estimates that about 1.2 million facilities file reports under EPA administered laws. These facilities keep a lot of records for EPA as well. What will it cost for these 1.2 million facilities, most of them small businesses, to comply with CROMERRR? E.P.A.'s own analysis estimated that the up-front costs, on average, would be about $40,000, with annual costs thereafter of $17,000. $40,000 times 1.2 million facilities is $48 billion up front. That is almost seven times EPA's annual budget. $17,000 times 1.2 million is $20 billion in annual costs. That is over four times what the OSHA ergonomics rule would have cost annually. Now, EPA's cost-benefit analysis does not contain these $48 billion or $20 billion figures because EPA contends that CROMERRR is entirely voluntary. In fact, their cost-benefit analysis assumes that very few companies would even adopt these requirements because of the great cost. The problem, though, is that most people would have no choice but to comply. We are not accusing EPA of dishonesty. They just did not analyze their own regulation well enough to understand how it would work. Here is how it would work. Under CROMERRR, as long as a piece of information has ever passed through a computer, at any time in its life, it is an electronic record. Next, the proposal says that any electronic record has to meet all the technical requirements of CROMERRR or else that record no longer satisfies the obligation to keep records. You are basically in violation of your record keeping obligation. You either comply with CROMERRR, or you switch to paper. What an ironic result: an EPA rule designed to implement the Government Paperwork Elimination Act driving people to using paper record keeping. What is worse, if a regulation is generated by a computer in the first instance, then it is an electronic record from the get go, and printing it out on a piece of paper does no good. For example, one of our smallest members has only 100 employees in two plants. In one of those plants they monitor the pressure on a pump in their air pollution control equipment. That data is generated by an electronic sensor, and it goes directly into the company's distributed process control system. Under CROMERRR, that data is an electronic record from the moment it is created, and paper is not an option to comply. That company would potentially have to redo its entire electronic control system. Mr. Chairman, we agree that EPA has some legitimate concerns about protecting the integrity of data, but insuring integrity has an impact, and how much impact depends upon how secure the system needs to be. That is why OMB's guidance for implementing the Government Paperwork Elimination Act calls for agencies to do a risk analysis to decide how much security is appropriate. That guidance specifically says not to adopt a one-size-fits-all approach. EPA never completed that analysis, and they ended up instead adopting a single, high-security approach. It may be too late for the drug companies that are spending hundreds of millions of dollars to comply with another rule that was also supposed to be voluntary. Let's not make the same mistake twice. We encourage EPA to withdraw CROMERRR immediately so that they can sit down with regulated entities large and small and learn about how these entities keep records and what sort of a problem there is, if one at all, in this case. The American Chemistry Council is ready and willing to engage in that discussion. Thanks very much. I would be happy to answer any questions. [Mr. Conrad's statement may be found in the appendix.] Chairman Pence. Thank you, Mr. Conrad. Our final witness is the vice-president of environmental activities at the American Bakers Association, Dr. Anne---- Ms. Giesecke. Giesecke. Chairman Pence [continuing]. Giesecke. Thank you for your assistance. As vice-president of environmental activities with the American Bakers Association, Dr. Giesecke has been in charge of identifying and managing environmental issues and projects related to the baking industry. Dr. Giesecke is on the governing boards of the American Society of Baking and Baking Industry Sanitation Standards Committee. Her career focus on environmental issues began in 1980 with the Department of the Interior and continued with the U.S. Environmental Protection Agency as an environmental specialist from 1986 to 1991. She is the author of more than 60 articles related to resource management published in a variety of law reviews and environmental journals and is gratefully recognized for five minutes. STATEMENT OF ANNE G. GIESECKE, VICE-PRESIDENT, ENVIRONMENTAL ACTIVITIES, AMERICAN BAKERS ASSOCIATION, AND CO-CHAIR, CLEAN WATER INDUSTRY COALITION Ms. Giesecke. Thank you, Mr. Chairman and Mr. Phelps. On behalf of the Clean Water Industry Coalition chaired by myself and Meg Hunt of Edison Electric--we call it CWIC--we would like to thank you for this opportunity. CWIC is made up of more than 250 companies and associations representing the nation's major manufacturing and service industries. CWIC is pleased that this Subcommittee is exploring the quality of EPA regulatory analyses and whether those analyses are adequate to support rational rulemaking. At the onset, it is important to remind everyone that millions of people working to make our economy function share basic American environmental, health and safety values and want them applied to their workplaces, their homes and their communities. We certainly support strong environmental and health rules that are founded on sound science and developed in a deliberative and public process that includes working with the states and the regulated community so that the requirements achieve the rules' goals and are both effective and cost conscious. The members of CWIC, and I would like to acknowledge the National Association of Manufacturers for their help with this testimony, believe that last year's rulemaking pursuant to the Clean Water Act to revise the total maximum daily load, TMDL, regulations was hastily issued and seriously underestimated the available science and the economic impacts on state and local governments and the regulated community. Among the rule's many problems, it did little to address serious concerns with current 303(d) lists of impaired waters arising out of poor or nonexistent available water quality data, thereby establishing a potential for a gross misallocation of scarce resources. The Clean Water Act requires each state to identify waters that are not meeting water quality standards after the application of technology controls on point source dischargers. The resulting list is often referred to as the state's 303(d) list, and states are required to establish total maximum daily loads, TMDLs, for all waters on this list. Establishing a TMDL requires a state to determine how much reduction each point and non-point source of pollution on the water body must make for water quality standards to be met. It is a complex, difficult and expensive calculation that needs science based monitoring data to be effective and presents a resource management issue for the federal government, the states and the regulated community. We believe, therefore, that the process should be targeted toward those waters clearly established as impaired based on good data and upon sound scientific analysis. Manufacturers, particularly those of us in the food sector, need a clean, abundant and affordable water supply. CWIC has supported many state and local concerns expressed during this rule writing process. For example, the Association of State and Interstate Water Pollution Control Administrators, ASIWPCA, the national professional organization of state and interstate water quality program officials, stated in their June 20, 2000, comments to EPA that, ``State TMDL development and implementation to date clearly demonstrates that the cost estimates developed by EPA are inadequate, incomplete and misleading. Far more will be required to develop a TMDL than the $25,000 the EPA envisions.'' ASIWPCA members testifying before Congress have estimated the costs to states of preparing nearly 40,000 TMDLs over 15 years, as presently required, to be between $1 billion and $2 billion annually. Moreover, in a recent draft cost report mandated by Congress, the National Cost of the TMDL Program, the EPA estimates that the average annual cost for developing TMDLs will be $63 million to $69 million. In a recent General Accounting Office study, only six states responded that they have a majority of the data needed to fully assess all their waters. Forty-five states reported a lack of resources, and several states pointed out that they are operating under state imposed staffing restrictions. Others said that they are limited in how many samples they can analyze because of the shortage of laboratory funding. EPA staff admitted that fewer resources are being devoted to monitoring and assessment at the state level than ever before. In addition to these program costs are the costs that will be incurred by the regulated community to participate in TMDL development and even more significant costs of compliance. The capital and annual operating and maintenance cost for companies is staggering. The Advent Group, a wastewater consulting company, estimates the cost of the TMDL regulations on the regulated community to be between $20 billion and $80 billion over a ten year period. Was the TMDL rule the result of bad analysis? In a recent National Academy of Sciences National Resource Council study, the NRC listed numerous errors, the lack of sufficient data and unscientific rationale for proposing the rule. These issues must be addressed in any revision of the TMDL promulgated in July, 2000. We are hopeful that during the next 18 months steps can be taken to revise the rule and to establish a framework that is technically, scientifically and programmatically sound. We applaud you for holding this hearing, and I would be glad to answer any questions. Thank you. [Ms. Giesecke's statement may be found in the appendix.] Chairman Pence. I am going to break protocol and recognize the patient gentleman from Illinois who awaited the Chair for the initial round of questions. The Chair will reserve the opportunity to question the panel after Mr. Phelps is done. Mr. Phelps. Thank you, Mr. Chairman. No apologies necessary. It is a tough schedule sometimes, so we appreciate your indulgence. Mr. Conrad, first, industry groups have a paramount job of record keeping standards, strict standards that should be met. Why should EPA not have specific requirements for measuring or making sure that your records are legally kept and legally I guess would be tested in some way, but an alternative? Mr. Conrad. You are absolutely right. Our members have legal obligations to retain records and to preserve them and not change them, and they do that. They are at the risk of criminal prosecution, certainly, if they monkey with them intentionally. It is also appropriate, I think, in the area of electronic records to have some degree of security so that the records are not immediately accessible by anybody, but in fact our members have some sorts of security procedures in place now. The computers where these data are kept are not accessible to just about anybody. They have PIN numbers and other kinds of access restrictions. They have been doing all this for years, and there is, to our knowledge, no evidence that any of this is insufficient. We are not aware of any cases where electronic data have been manipulated or, perhaps more to the point, where the government has had any difficulty in prosecuting any of these kinds of cases, so I guess our plea is that we sit down with EPA--and apparently the Justice Department as well--and sort of talk through how we keep these records and what the concerns are, what would be a cost effective approach to guaranteeing their security. Mr. Phelps. Are you satisfied with the opportunities that groups were given to participate in public comment meetings, written comments, on the regulations about electronic record keeping? If so, what concerns were raised by your group at any of the meetings? Mr. Conrad. Well, the ironic thing is that this rule actually was developed in a fairly open fashion, and the EPA did have a couple of public meetings in the summer of 2000 to lay out what was going on. Folks actually spoke up. I happen to have a reliable paper copy of the handout of that meeting and my notes from it, and I wrote up at the top 16 months ago with a star next to it, ``People are freaked about not being able to print out computer documents and sign them. Few people have or can afford all the electronic audit trail stuff to ensure no changes.'' People were raising these concerns at the meeting. I mean, I knew nothing about this issue until I went to this meeting. I gathered from what I heard over the course of that day that people had tremendous heartburn about what this could mean from the record keeping. We assumed that, having heard that, the agency would take those concerns into account, and yet the proposal is essentially exactly the same as they talked about back then. Mr. Phelps. So what was the agency's response when these concerns were raised at the meeting? Mr. Conrad. They sort of just took notes. I mean, it was sort of a one-way thing. People explained how they felt, and they wrote them down, but there was never really a give and take. Mr. Phelps. Kind of one of those things the doctor puts down when you are getting diagnosed. Hmmm. Kind of like that? Mr. Conrad. Maybe they couldn't read their own handwriting. Mr. Phelps. Dr. Lutter, you have been an outspoken critic of the cost-benefit analysis obviously. Would you think it would be most efficient in some cases for an agency to do an economic analysis even knowing that data gaps exist and make corrections based upon public comment? Mr. Lutter. I am not sure I understand your question. Currently the agencies prepare economic analyses of regulations, publish them at the proposal stage and solicit comments on that analysis along with comments on the rule at the proposal stage. I think that is an appropriate procedure. Mr. Phelps. Well, what I am getting at is when a rule is trying to be substantiated, the expenditures can be compared with the final projected benefits. The question is would it be just as cost effective to proceed with publishing the rule and allowing the industry to fill in the gaps? Mr. Lutter. Sir, to fill in the gaps in the analysis? No. I think that is a role for the government to undertake, provided that there is adequate opportunity for the public and the affected industries to comment on the appropriateness of the analytic procedure the agency is following. Mr. Phelps. So adequate reliability you think could be achieved. I think it has been noted that you have established that it cannot be achieved by peer review, adequate reliability, to replicate agency analysis, but by systematic, independent efforts to replicate agency analyses. Do you believe that the taxpayer is best served using replicating agency analyses, or is this a theory based on resources and time? Mr. Lutter. I would like to focus attention on the key and often neglected purpose of the economic analysis, which is to inform Members of Congress and the public about the merit of the regulatory decisions. I think that the existing institutional incentives that the agency faces do not really promote forthright and neutral analysis from the agency. The question is how does one improve those incentives? There are several procedures. One would be peer review. Surely that is worth doing. Currently there is no adequate independent peer review of EPA's regulatory analysis. A separate one in addition to that--these are complementary approaches--would be for Congress to fund the Truth In Regulating Act project at the General Accounting Office. I think that that office could, as part of its work, seek to verify whether or not agency estimates are replicable. My inspiration for that comment is largely based on longstanding work in the community of academic economics. Even peer reviewed articles are not always replicable in the sense that other researchers trying to ask whether identical methods applied to identical data lead to identical answers discover that they do not. It is for that purpose that I think it would be very useful to have a TIRA project at GAO seek to ascertain the replicability of analyses by regulatory agencies. Mr. Phelps. Thank you. Ms. Abrams, representing a large rural district--I have the largest geographic district east of the Mississippi, a lot of small counties with 4,000 or 5,000 in the whole county--one of the greatest challenges I have had as a state legislator, as well as a congressman now, is to try to work with those people, you know, at whatever degree or level of wastewater treatment plants they have. It is a Catch-22 in trying to attract industry to small areas that need jobs that do not have the tax base for other mandates and obligates for the people to get industry to come in. One of the first things they are looking at is what kind of, of course, infrastructure totally, but water and sewer and waste treatment plants. In Illinois, most of the small communities, to be able to access government grants it is based on a matching system like an 80/20 for local, for state, federal flow through money to the economic commerce agencies, or sometimes 70/30, 90/10. These small communities, you know, by the mere nature of the cost of wastewater treatment and those infrastructure needs cannot attract or do not do a very good job--I should not say cannot--by their own limitations industry, and yet where industry does exist the question is when we get into your industry, the metal products and machinery, do you think your industry avoids passing along the cost to the townspeople of treating the waste? Ms. Abrams. The industry is already 100 percent regulated by pre-treatment standards under the existing 413 metal finishing and 433 standards, so I think to the extent that the EPA has seen fit, the industry is already pre-treating and covering the large cost of treatment pursuant and resultant from their processes. I think it is important to note in the case of this proposed rule that it is a re-regulation of industries already fully regulated and that it is opposed by the trade associations representing the publicly owned treatment works because they feel that it imposes a large cost completely underestimated by EPA on the POTWs to implement a federal effluent limit guideline. They feel that existing effluent limit guidelines fully protect them and allow them to do the job that they need to protect the community's water sources. They also already have fully delegated authority to impose local limits that are higher when they see fit to protect either environmental quality or their own economic viability, so they feel that these standards are wholly unneeded and in fact present a burden, not a benefit for them and for the communities that you are speaking of. Mr. Phelps. Is that a major concern, though, for your industry, the wastewater treatment cost, or is it just pretty much accepted? Ms. Abrams. Right now it is the cost of doing business. Those regulations have been around for over a decade. I am not sure there is a company out there that could tell me off the top of their head what percentage of their environmental compliance costs it represents. It is a significant cost, but it is part of being a corporate citizen in America that you need to treat your wastewater. The issue at hand is that the proposed regulation has no environmental benefit and would increase costs to the extent that we fully believe over 50 percent of the domestic printed circuit board industry would be unable to compete globally and that there would never be a new circuit board plant constructed in this country. Mr. Phelps. Thank you very much. I may have questions later. Chairman Pence. The Chair would also like to thank the panel for some very provocative and thoughtful presentations. A few questions starting with Dr. Lutter; not to put you on the spot after that good exchange. What agency do you think should be charged with selecting peer reviewers for EPA's regulatory analyses? Mr. Lutter. The simple answer is not EPA. Chairman Pence. Okay. Mr. Lutter. The more complete and truthful answer and much more informative answer is much harder. In discussions with other people, NAS or NRC has come to mind, but it is not clear what would be the perfect answer to that question. I think what one can say is that it should not be EPA because the process of picking peer reviewers, and the process of managing the questions given to the peer reviewers is one that can be controlled in such a way as to make analysis look like it is blessed when in fact people continue to have serious reservations about its credibility. This suggests that some non-EPA agency would be more apt to do that job well. Chairman Pence. Ms. Abrams, I have the impression that you believe the EPA did not perform an effective outreach in developing and seeking comments on the proposed MP&M rule. What should EPA have done to improve the outreach in specific recommendations? Ms. Abrams. I think that the EPA made a good effort to outreach. They convened a SBREFA panel, which they do not do for every proposed rule. They also held public hearings. I think with respect to the SBREFA panel that there was just not enough data presented to the SBREFA panel for them to make adequate review and assessment, and even after the rule had been published in the Federal Register a good bit of the background data and analysis was not available in the public record for several months after that, resulting in an extension of the rulemaking period. Chairman Pence. Mr. Bopp, I found some of your testimony really breathtaking. Mr. Bopp. So do our members. Chairman Pence. The estimate of 111 hours per year to make their way through 500 pages of instruction. I guess my question is you essentially are saying the EPA failed to assess the impact specifically on ceramic and glass decorators, not understanding the nature of the industry essentially as a subset of the regulated class. Do you have any recommendations about if the EPA did identify your industry in particular how we would insure that they would develop regulatory analyses based on the correct data and a correct understanding? Mr. Bopp. That is a good question because the correct data was there. I mean, the rule was first announced and then pulled back, and then several of our members, small members, testified before a panel, so it was not a question of them being unaware of us. One way or the other, it just was not considered, or if it was considered it did not come out in the research at all. I guess it would get down to better peer review of the research. Again, I mean, to come out with something like this, as flawed as it is. And in the end it was a very, very rushed rule. It was pushed through officially finally January 17 of this year. There were a lot of rules that went through that way, and I think not enough care was given at that point for whatever reasons. It was not a question of them not getting the information from us. It was a question of for one reason or another it did not enter into their economic reports. Therefore, it did not enter into consideration. I guess better peer review, like some others have mentioned, would really help that and, again, someone other than EPA reviewing their research. Chairman Pence. Thank you. Dr. Giesecke, the EPA originally estimated that the total incremental cost of TMDL was going to be about $220 million, and then one year later in a draft economic report the cost estimate was raised to a minimum of $10 billion over ten years. With your background in this area, how do you account for that kind of almost logarithmic difference in estimates? Ms. Giesecke. They had taken advantage of a regulatory interpretation and determined that they did not have to fully account for expenses that might be incurred by the states because this was a delegated authority in most cases, so they simply used a number limited to what EPA headquarters and regional offices might be expected to incur and not consider what the delegated states and certainly not even in the next estimate what the regulated community would be subject to in terms of costs. Chairman Pence. Thank you. Mr. Conrad, did the EPA recognize in the CROMERRR circumstances any substantial differences between the chemical industry and the pharmaceutical industry? In your testimony you indicated that 60 to 90 percent of the businesses in your association are small businesses. I do not have testimony or information about the nature of the pharmaceutical industry, but it seems to me there are very few companies that can survive in that industry that would qualify for any of this Committee's jurisdiction. Mr. Conrad. Right. Of course, CROMERRR does not just affect us. I mean, essentially it affects anybody who is required to keep records under any EPA requirement under any statute, so Clean Air, Clean Water, RCRA. I mean, you have all kinds of regulated entities down to the size of gas stations, as well as all of the consultants and analytical labs and so on who work for them whose computers have to mesh with them and who are all affected, so it is a much wider range of facilities. I am not really familiar with the size distribution of businesses in the drug industry, but certainly my experience kind of off the cuff is that drug companies tend to be pretty big, and that they are gobbling each other up and have a lot more capacity to absorb a regulation like that. Frankly, the things they are regulating, I mean, these are things people eat, as opposed to materials which certainly people have the potential to be exposed to, but it is a much more attenuated chain from a regulated facility under EPA to a person than in the case of drugs. Chairman Pence. Thank you. Having conferred with the gentleman from Illinois, my colleague, that he does not have any additional questions, we will move to adjourning this hearing with a word of gratitude to each one of you for greatly illuminating our understanding of the challenges in the area of the analyses the EPA uses. I particularly appreciate Dr. Lutter's comment with regard to using established principles for sound analysis, which will be very much of a lodestar. Mr. Phelps. I would also like to thank the panelists for their very well designed testimony. Thank you. Chairman Pence. With that, again my gratitude for your patience with my schedule today. Enjoy your lunch. 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