Regulatory and quasi-regulatory activity without OMB and cost-benefit review.

Author:Graham, John D.
Position:Office of Management and Budget - The Conflict Between Executive Discretion and the Rule of Law

Whenever a federal agency proposes a significant regulatory action, that action must be reviewed by the Office of Information and Regulatory Affairs in the White House Office of Management and Budget (OMB). (1) OMB review is designed to ensure that the action is consistent with presidential priorities and is coordinated with the related actions of other federal agencies. (2) In addition, the federal agency must provide a rationale for the action and an assessment of its potential benefits and costs. (3) OMB clears the regulatory action if there is a reasoned determination that its benefits justify its costs. (4) This review, coupled with the cost-benefit requirement, is designed to ensure that federal agencies have carefully considered all the consequences of the regulations they propose. (5)

Although OMB and cost-benefit review are required for significant regulatory actions, a substantial amount of regulatory activity occurs without any OMB or cost-benefit review. Some of this activity is clearly regulatory in nature, in the sense that it creates binding legal obligations on regulated entities, while other activity might best be described as "quasi-regulatory," because the actions shape the regulatory environment and impact regulated entities but are not necessarily or directly binding.

This Article illustrates four types of regulatory and quasi-regulatory activities that operate outside OMB and cost-benefit review: (1) agency issuance of quasi-regulatory documents such as memoranda, policy statements, and guidance documents; (2) agency approval of state regulatory policies under federal laws that authorize selective waiver of federal preemption of state regulation; (3) federal agency issuance of hazard determinations related to technologies, substances, and practices that impact the litigation and regulatory environment; and (4) federal agency decisions to enter into binding agreements with pro-regulation litigants favoring certain regulatory outcomes, where settlements create nondiscretionary agency duties to initiate new rulemakings. This Article illustrates how these four types of regulatory and quasi-regulatory activities have had a profound effect on important areas of the economy such as coal mining, automobile production, and housing construction, and suggests that Congress should consider subjecting all or some of these regulatory activities to routine OMB and cost-benefit review.


    Federal regulators often issue informal, quasi-regulatory documents such as memoranda of understanding, policy statements, and guidance documents. These quasi-regulatory documents can create major policy shifts that impose significant burdens on industries or compel those industries to engage in costly litigation if they intend to protect their rights under administrative law.

    A vivid illustration of this phenomenon is the recent use of quasi-regulatory documents to institute dramatic policy changes in the granting of permits for surface coal mining operations in Appalachia. In the mid-1900s, the most prevalent form of coal mining in Appalachia was underground mining. (6) But over the past twenty years, the coal industry increasingly has engaged in surface mining in Appalachia, even at the tops of mountains, a practice called "mountaintop mining." (7) Today, surface mining accounts for about thirty-seven percent of the coal mined in Appalachia. (8)

    Proponents of surface and mountaintop mining argue that it is safer and more efficient (on a cost-per-ton basis) than underground mining. (9) Mountaintop mining avoids the subsidence issues that periodically have caused environmental harm to communities located above abandoned underground mines. (10) In addition, it is a valuable source of economic activity in Appalachia. Mountaintop mining has created about 14,000 mining jobs with salaries that are high for rural Appalachia, and an additional 60,000 jobs that are related to the mining industry. (11) Those jobs also bring revenues to state and local governments. In West Virginia, for example, almost nine percent of the state's tax revenue is linked to mountaintop mining. (12)

    Critics of mountaintop mining object to its adverse effects on the environment. (13) Mountaintop mining levels the tops of mountains, and the excess dirt and rock are disposed of in the valley fills on the mountainsides. (14) Entire streams are sometimes buried. (15) Although mines should be reclaimed and the impact on streams should be mitigated under the Surface Mining Control and Reclamation Act, reclamation and mitigation efforts are not always effective. (16) Recent evidence suggests that some reclaimed areas have become significant sources of surface water contamination, and the extent of contamination has been proportional to the amount of mountaintop mining in the area. (17) Even with the best of reclamation efforts, mountaintop mining creates ecological disturbances, at least temporarily. (18)

    Under the Clean Water Act, the Army Corps of Engineers has the authority to issue five-year permits for mountaintop mining activities. (19) In 1982, the Corps issued Nationwide Permit 21, which was most recently renewed in 2007, authorizing all mountaintop mining activities that will have a minimal impact on the aquatic environment after reclamation and mitigation. (20) Historically, the determination of whether a mountaintop mining project is authorized by Nationwide Permit 21 occurred through a project-by-project analysis performed at the state level under the guidance of federal officials. (21) From 2000 to 2008, about 511 mining reclamation projects were approved in West Virginia alone under the procedures Nationwide Permit 21 spelled out. (22)

    In June 2009, the Environmental Protection Agency (EPA) issued a press release titled "Obama Administration Takes Unprecedented Steps to Reduce Environmental Impacts of Mountaintop Coal Mining, Announces Interagency Action Plan to Implement Reforms." (23) The press release was accompanied by a memorandum of understanding signed by the EPA, the Army Corps of Engineers, and the Department of the Interior, which oversees the Office of Surface Mining Reclamation and Enforcement. (24) The memo affected a significant shift in regulatory policy toward greater restrictions on mountaintop mining by allowing the EPA, in addition to the States, to make project-by-project determinations about water-quality issues. (25) In effect, it suspended the existing procedures set forth in Nationwide Permit 21, a policy shift that occurred without any public comment, OMB review, or cost-benefit analysis. Although the Corps eventually proposed a formal suspension of Nationwide Permit 21 in July 2009, (26) that action was not finalized until June 2010, months after regulators had already changed their approach to issuing permits. (27)

    The mining industry complained that the EPA's criteria for project-by-project determinations were not clear, and that mining developers did not know what was expected of them. (28) After months of uncertainty, on April 1, 2010, the EPA issued a thirty-one page guidance document. (29) This document stated that the EPA did not intend to bring a complete halt to mountaintop mining, but that it was forcing the mining industry to adopt a practice of minimal or zero filling of valleys with mining debris. (30) In addition, it set strict limits on water conductivity levels that would take effect immediately. (31) Again, no public comments were solicited, and no cost-benefit analysis was conducted. (32) The mining industry responded that the EPA's new, unprecedented regulatory approach was an arbitrary and unlawful expansion of power beyond its statutory authority. (33) The guidance document is now the subject of lawsuits brought by Kentucky and West Virginia, which argue that it attempts to write new rules unlawfully by not following the notice-and-comment procedure of the Administrative Procedure Act. (34) The mining industry won a federal district court case against the EPA when the EPA decided to revoke an existing permit, but the EPA won on appeal, and the entire matter has been returned to the federal district court to address other issues raised by the industry that were not resolved in the original case. (35)

    Our point is not that the Obama administration is not entitled to initiate changes in federal policy toward mountaintop mining. Indeed, both John McCain and Barack Obama indicated during the 2008 presidential campaign that they were opposed to mountaintop removal mining. (36) Rather, if a president or agency seeks to change regulatory policy, there are some basic administrative procedures that should be followed.

    A change in regulatory policy accomplished through a memorandum of understanding, policy statement, or guidance document can have the same costly (or beneficial) impacts, at least in the short run, as an official rulemaking under the Administrative Procedure Act. When agencies use such quasi-regulatory documents to make major shifts in regulatory policy, these shifts should be subjected to routine OMB review and a cost-benefit analysis that is informed by a public comment process. In other words, what is currently required for informal rulemakings should also apply to policy shifts initiated through memoranda of understanding, policy statements, and guidance documents.


    Under the principle of federalism, there is often a strong case for allowing each state to develop its own public policies. Local conditions in the States will vary, the preferences of their citizens may vary, and state policy is seen as a source of innovation and learning that is lost with uniform federal action. Even if the federal government develops policy on an issue, allowing each state to consider policy innovations that go beyond the federal...

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