Towards a Regulatory Budget:
Jim Tozzi, ed. 1979.
PART 8: ILLUSTRATIVE REGULATORY BUDGET FOR SELECT AGENCIES
ENVIRONMENTAL PROTECTION AGENCY
The programs of the Environmental Protection Agency have been chosen as a basis for developing one example of a regulatory budget. EPA programs were chosen because of the existence of the time series data on pollution control costs compiled by the Bureau of Economic Analysis and because of the comprehensive cost analyses performed by EPA. It is unlikely that any other Federal regulatory agency has any greater knowledge of its compliance costs than does EPA.
There are a wide range of choices in establishing a program level to be used in a regulatory budget. Some of the options include:
(A) Program Total -- A ceiling on total environmental expenditures at the local, Federal and State levels,
(B) Incremental Program Total -- A ceiling on the maximum allowable incremental change in environmental expenditures at the local, Federal and State levels between any two fiscal years.
(C) Incremental Program Total -- Federal Regulations Only -- A ceiling on the maximum allowable increase in total environmental expenditures at the local, Federal and State level which can be attributed solely to Federal regulations.
(D) Incremental Program Total -- New Federal Regulations Only -- A ceiling on the maximum allowable increase in total environmental expenditures at the local, Federal and State levels resulting from Federal regulations promulgated in FY 81.
Utilization of option "A" would maximize control over the total magnitude of expenditures but it w be difficult to implement because of lack of control over expenditures not related to Federal environmental regulations; option "B" has the same shortcomings. Option "D" could unduly restrict coverage of the regulatory budget and would not encourage sunset reviews of existing regulations.
For these reasons, we have chosen option "C" -- Incremental Program Total -- Federal regulations as the basis for establishing the Federal regulatory budget.
Time series data for expenditures on environmental programs is one of the most exhaustive in the Federal Government. The Bureau of the Census and the Bureau of Economic Analysis have been compiling cost data since 1972. These data, and the resultant analyses, have been published periodically in the Survey of Current business. Consult for example, "Pollution Abatement and Control Expenditures in Constant and Dollars, 1972-1977," Survey of Current Business, February 1979. The following chart represents a compilation and summary of the information collected as of this date.
Expenditures For Pollution Abatement
In a recently completed report, "The Cost of Clean Air and Clean Water Report to Congress" (August 1979), the environmentalist has estimated the compliance cost of its regulations. It is probably the most comprehensive cost analysis performed by a regulatory agency. It contains estimates of both investment and annualized costs by sector affected.
The summary data set forth in the above chart comes from three sources:
Bureau of the Census -- Collects capital expenditures and operating costs made by industry.
Bureau of Economic Analyses-- Collects capital expenditures and operating costs made by industry and commercial establishments.
Office of Management and Budget -- Collects expenditures made by Federal agencies.
Bureau of the Census
Each year the Bureau of the Census conducts a survey of manufacturers. The survey is aimed at collecting information with respect to expenditures made by industrial firms for plant and equipment. Title 13 of the U. S. Code requires a response to the Survey. The same law requires that the data submitted to the Census Bureau, by each respondent, be seen by only sworn Census employees.
In 1973, the Bureau of the Census began to issue an annual supplement to collect expenditures for pollution abatement. The data collected by the Bureau of the Census are compiled from a survey or probability sample of about 20,000 manufacturing establishments selected as a subsample of the annual survey of manufacturers.
The annual survey of manufacturers is, in turn, a probability sample of about 70,000 establishment selected from a total of about 312,000 establishments.
Bureau of Economic Analysis
In 1973, the Bureau of Economic Analysis began a comprehensive program to estimate private and public spending for pollution abatement. Their estimates of these expenditures are made within the framework of national economic accounts. BEA estimates cover expenditures by consumers, business and government and this covers a wider range of respondents than covered by the annual survey of manufacturers.
The BEA estimates are based on questions incorporated in their annual new plant and equipment survey which is mailed to approximately 10,000 companies. Each company receives one report form to supply data for its entire operation. The companies are designated either as manufacturing or non-manufacturing based upon their primary activity as classified by the 1967 Census of Enterprise Statistics. Currently, the BEA survey has about 4,000 companies classified in the manufacturing sector of which about 60 percent respond with data. Nonrespondents are imputed.
Prediction of Outyear Expenditures
If one were to assume that yearly expenditures for pollution abatement are to increase at the previous average annual increase of 16% per year which took place over the past seven years, then the projected expenditures for pollution abatement for FY 81 would be as follows:
Projected Expenditures for Pollution Abatement.
An examination of the yearly increases in the period 1972 through 1978 suggests that not only is t arithmetic mean of the increases equal to 16% but the mean and mode of the data are nearly 16%. During the same time period, Federal expenditures increased by 10% each year. The inflation rate during the 1972-1978 period for pollution abatement expenditures averaged some eight percent; expenditures for environmental programs have increased at a real rate of eight percent per year.
The growth in pollution abatement expenditures between 80 and 81 is estimated to be $10 billion. CEQ estimates that approximately 50% of these expenditures would have occurred in the absence of Federal legislation. Consequently, a $5 billion increase attributed to Federal regulations--in current dollars-- will occur in FY 81 if one accepts as a policy decision that the growth of the past seven years shall continue for the next three years. Consequently, the FY 81 program level (the incremental change) could be $5 billion. An adoption of this level for an environmental regulatory budget means that expenditures related to:
(a) continued funding of existing, and
would not exceed $5 billion in FY 81.
The Cost of Existing Regulations
In any fiscal year, the major expenditures are associated with regulations which have been promulgated in a previous year, this occurs for a number of reasons.
In some instances a regulation requires that capital equipment be installed. The design and placement of such equipment usually takes place over a multi-year period. The first year expenditures--that is expenditures associated with "new" regulations--are thus minimal. In other instances regulations result in the continued placement of pollution abatement equipment on an annual basis, for example, the use of catalytic converters on automobiles. In these instances the regulations usually provide for a "start-up" period.
The Wastewater Treatment Program is one such pollution abatement program which is driven by Federal regulations. Federal regulations set forth the equipment that must be placed on certain types of sources. There is usually a time lag of at least a year between the time a regulation is issued and construction is initiated. It is the rare case in which first-year expenditures exceed 5 to 10% of the total cost of the project. Using this statistic, at least $4.5 billion of the expected $5 billion increase in FY 81 expenditures for pollution abatement resulting from Federal regulations can be attributed to existing regulations. A summary of the data collected by Census and BEA is set forth in Table I below.
The term first-year expenditures is used in the context of the first-year the regulation is implemented-- not issued. The time difference is attributed to the aforementioned factors such as the time required to build and purchase pollution abatement equipment and time allowed between the date a regulation is issued and the date it is to become effective.
Table 1- National Expenditures for pollution Abatement
The Cost of New Environmental Regulations: FY 81
The term "new" regulations applies to those regulations which have not been promulgated as final regulations. Their first-year cost occurs in a subsequent fiscal year. The regulatory calendar, issued by the Regulatory Council (11388 FR; Feb. 28, 1979) sets forth the major environmental regulations to be issued during the remainder of FY 79 and during fiscal year 80.
"Major" is defined in terms of Executive Order 12044, Improving Government Regulations (43 FR 12661 March 14, 1978) and includes regulations that:
The following chart identifies the major environmental regulations in FY 81 (Oct. 1980 thru Oct.1981), their first year cost and total cost (when available) and the expected date of promulgation. With only a few exceptions, they will be issued in calendar year 1979. All of the data on the following chart is derived from the Regulatory Calendar.
Table 2- Major Environmental Regulations FY 81
An analysis of the above data suggests that the first year cost of new regulations could be at least $6 billion. This number is derived by adding the estimated first year cost or the total cost divided by the number of years so indicated. It excludes costs associated with regulations for which these are no first year or total cost estimates.
Summary: Base Data
Estimated FY 81 expenditures for pollution abatement which are attributable to:
Federal regulations if a 16% ceiling is not placed upon the total increase in environmental expenditures:
Since the FY 81 incremental expenditures which are not attributable to Federal regulations is estimated to be $5 billion, the total incremental increase in FY 81 expenditures could be $15.5 billion, a 25% increase in lieu of 16%.
The following analysis is based upon the assumption that the previous 16% growth rate in annual expenditures for pollution abatement will not be changed between FY 80 and FY 81. If this assumption were to be modified then the analysis which follows must be changed to reflect either an increase or decrease in the 1evel of a regulatory budget.
The FY 81 increase in expenditures resulting from Federal regulations is expected to be $5 billion if the previous annual growth rate of 16% continues in the future. This $5 billion covers both new and existing regulations. The preceding section shows that the first year cost of implementing only a portion of the new regulations scheduled for promulgation in FY 81 is $6 billion.
The options in any particular fiscal year include:
1. Reducing the regulatory budget level for non-environmental programs and providing a commensurate increase in the regulatory budget for environmental programs.
Within an Agency
2. Finding lower first-year cost options for the regulations to be promulgated.
3. Defer the issuance of some of the regulations permitted by law.
4. Establish a multi-year regulatory budget level and determine whether some of the first-year costs incurred in the current fiscal year can be spread into a future fiscal year.
The above options are not mutually exclusive, but will be analyzed as if they were.
Option 1-- Reduce Regulatory Budgets of Other Agencies
Reducing another agency or agencies regulatory budget is always an option-- whether one is working on regulatory budgets or appropriations. In fact, the introduction of zero based budgeting on an agency-by-agency basis has lead to the conduct of a government-wide ZBB by the Office of Management and Budget. In the case of government-wide ZBB, 0MB takes the marginal programs of each agency--those programs which were ranked in the last x% of an agency's budget--and puts them into competition with the "marginal" programs of all other programs, holding the program level constant. This process clearly allows for the funding of one agency's program at the expense of another agency.
In arriving at a decision whether another program area should be decreased to allow for an increase in the regulatory budget of environmental programs, the following items might be considered.
In the absence of a regulatory budget, there is no mechanism in the Federal Government which would allow a tradeoff among the non-Federal costs associated with the Federal regulations of different agencies.
Option 2 -- Funding Lower Cost Options for Regulations Promulgated in the Current Fiscal Year
One of the major thrusts of E.0. 12044 on regulatory reform has been to require regulatory agencies to identify alternatives to a proposed action. However, this is probably the one requirement of the Executive Order which requires the greatest amount of improvement. For example, Federal environmental statutes--as much as any other area of Federal legislation--are replete with directives requiring that regulations be promulgated on a certain date and that the regulations address specific problem areas. In some instances, the statutes are written in such a degree of detail that their content approaches that of a regulation.
Notwithstanding this degree of specificity in the statute nor the court decisions which are equally specific, there is considerable discretion conferred upon regulatory agencies in developing rulemakings.
This discretion includes the authority to balance benefits and costs, to choose the least cost alternative, and to consider non-environmental factors such as economics and energy. For these reasons, analyses could be performed which would identify measures that could be taken to reduce the first-year expenditures of the proposed regulations. These analyses would be aimed at reducing the cost of new and existing regulations. Since the estimated first-year cost of new regulations does not include the cost of many of the regulations for which a cost estimate is not available, additional analyses may have to be performed to fund additional reductions.
In the absence of a regulatory budget, regulatory agencies have relatively few macro-economic incentives reducing the cost of their regulations.
Option 3 -- Defer the issuance of regulations to the extent permitted by law.
In some instances, a regulation need not be proposed on a date certain. In this instance, the effective date of a regulation could be defined or the regulation could be issued but with a deferred effective date. In instances where it is mandatory that a regulation be issued--and to the extent the least cost alternative has been identified and chosen--then either the environmental regulatory budget ceiling must be increased and the regulatory budget of another sector decreased or the level of the total Federal environmental budget must be incurred.
In the absence of a regulatory budget, there are no explicit mechanisms which require establishing priorities among regulations competing for the same limited resources in the private sector or at the State and local level.
Option 4 -- Develop a multi-year regulatory budget.
Under this option, a multi-year regulatory budget level would be established. In other words, not only would a FY 81 regulatory budget level be established, but a FY 82 and beyond regulatory budget level would be established; to the extent it is decided to increase the FY 81 regulatory budget level for a particular agency over its allowed ceiling, then an off-setting decrease would be made in the outyear program level for other programs.
The time lag between the issuance of a regulation and the time its results in the expenditure of funds is a phenomenon that occurs in federally appropriated programs as well as regulatory programs. There is one significant difference, however, namely that in the case of federally appropriated programs, an agency is limited--by law--not to spend more funds than is appropriated. Presently this is not the case in terms of a regulatory budget.
This time lag between the promulgation of a regulation and the occurrence of expenditures in the non-Federal sector can be addressed in several ways. First, for the regulations under consideration in FY 81, there is a 30 month period between this date and the end of FY 81, the last day for incurring an expenditure in FY 81. A time frame of this magnitude gives a regulatory agency ample time to develop reasonable estimates of first year costs.
The second way that this time lag can be addressed Is thru the use of a multi-year regulatory budget. If it is decided that the expenditures for environmental programs should continue to increase at a 16% annual rate in the post 81 period, then national expenditures for environmental programs would be as follows:
Expenditures for Pollution Abatement
The last column represents that portion of the total national increase which is attributable to Federal regulations and assumes that 50% of the expenditures are attributable to Federal regulations. Consult the Annual Reports of the Council on Environmental Quality for the derivation of this percentage.
Graph I--on the following page--presents an illustration of the pertinent data. The first line, entitled "total" represents the projected environmental expenditures assuming a decision Is made that such expenditures are to continue to increase at 16% per year.
The second line, entitled "allotted annual increase" represents the regulatory budget level for each fiscal year. The dotted bar graphs indicate the projected expenditures from existing regulations. These data were derived based upon the assumption that no more than 10% of the incremental expenditures in any one fiscal year are associated with "new" regulations issued in that fiscal year. As a first approximation this percentage can be derived in the following manner.
Many of the expenditures associated with the Implementation of Federal regulations are a result of putting capital equipment on line to abate pollution. The EPA wastewater treatment program is one such program. It is also driven by regulatory requirements. The wastewater treatment program differs from private sector expenditures primarily in that its costs are internal to local, State and Federal governments. First year expenditures associated with new requirements on recently appropriated funds are usually in the range of 5 to 10% of total expenditures.
In the absence of a regulatory budget, national pollution expenditures are expected to be $74.2 billion in FY 81. In the absence of a regulatory budget, expenditures associated with the implementation of new regulations are expected to be in the neighborhood of $6 billion. Consequently, in the absence of a regulatory budget establishing an increase of 16% in pollution abatement expenditures between FY80 and FY 81 as a ceiling in growth in pollution abatement expenditures, it is likely that the national expenditure in FY 81 will be around $80 billion (74.2 + 6.0) in lieu of 74.2. This represents an increase of 25% in lieu of 16%.
One might argue that the expected expenditures in FY 81 are $74.2 billion and that this total figure includes the $6 billion estimated to be spent in FY 81 as a result of the new regulations to be issued in FY 81. The occurrence of such an event is highly unlikely. First, it is counter to the experience gained from the construction grants program and secondly, included in FY 81 are several of the most costly environmental regulations ever promulgated by the Federal Government, in particular, the new source performance standards for coal fired steam generators and effluent guidelines for thermal discharges.
In terms of option 4 under discussion--the utilization of a multi-year regulatory budget--the range of policy choices include the opportunity to increase the FY 81 regulatory budget level by $6 billion but make an offsetting reduction in the regulatory budget level for the outyears. A decision to act in this manner could result in either or both of the following actions:
The point to be made is that there are several remedies for coping with the time lag in expenditures these include:
Consequently, this regulatory budget Is not premised on modifying regulatory requirements in existing or new regulations on a year-by-year basis, although in select programs this may be a viable option, including for example, granting statutorily authorized time waivers.
It is clear that if all pollution abatement programs were subject to the Federal appropriation process the policy choices which we have highlighted in this regulatory budget would have to be made. However, this is not the case and the Federal Government has established a process which results in the passage of laws which empower Federal agencies to promulgate regulations requiring the expenditure of private sector funds. In most instances, the Congress does not know of the magnitude of the resultant private sector expenditures which will result from the enactment of a new regulatory program. A similar lack of information exists in the case of the statutory enactment of a new program which is to be financed solely from Federal funds. However, in this instance the Federal Government. has instrumented a system of checks and balances by having all such expenditure requests compete for the same limited resources within the Federal appropriations process.
The regulatory budget is one mechanism for implementing a comparable check and balance system on expenditures that the Federal Government mandates on local and State governments and the private sector through the issuance of regulations.
DEPARTMENT OF ENERGY
Presently there are no government studies which attempt to quantify the total compliance costs associated with regulations promulgated by the Department of Energy.
The accounting firm, Arthur Anderson and Company, did attempt to quantify the compliance costs incurred by 48 major industrial firms. These compliance costs were collected for a number of Federal agencies including the Department of Energy.
The compliance costs for the 48 major companies was estimated to be $2.6 billion, 5% of which was attributed to DOE regulations and 77% to EPA regulations. If the relative relationship between the compliance costs associated with EPA and DOE regulations is held constant, and extrapolated to nationwide expenditures for environmental programs, then the total compliance cost associated with DOE's regulations could easily be in the neighborhood of $2 billion annually.
Any estimate for DOE's compliance costs are incomplete for a number of reasons.
First, DOE issues a wide range of regulations, some of which it is difficult to estimate compliance costs. They issue energy conservation regulations, such as energy performance standards for new buildings, economic regulations in the crude equalization program aimed at equalizing the cost to U.S. refiners of purchasing crude oil from various price-controlled and non-price controlled sources and the regulatory program aimed at curtailing the use of natural gas.
Second, DOE, unlike EPA, has no statutory mandate to report the total compliance costs associated with its regulations.
The following chart, prepared by the Arthur Anderson Company, presents, albeit incomplete, the most comprehensive analyses of DOE compliance costs.
Table- Department of Energy: Incremental Cost by Regulation Group and Cost Class
INTERSTATE COMMERCE COMMISSION
There are two classes of transportation programs which can be included in a regulatory budget: those related to social objectives such as health and safety and those related to economic regulations--regulatory actions aimed at minimizing cost of transportation to the consumer.
Emerging theoretical work supports the inclusion of those transportation programs related to health and safety considerations into a regulatory budget. These programs would include rulemaking related to safety considerations, such as the mandatory use of air bags, the impact of energy related rulemakings on transportation such as, for example, fuel economy standards, and a number of rulemakings related to either of these two subject areas, such as regulations which limit the length of trucks. In each of these instances the regulations are designed to create a product which is consumed by the public but which cannot be produced by the private sector working alone without government intervention.
On the other hand, the theoretical bases for including economic regulations is not as clear. Most, if not all, of the rulemakings are aimed at curtailing monopolistic trends which in the long run would run counter to the economic interests of the consumers. One might argue that economic regulations in transportation sector no additional costs and for this reason they have no compliance costs. Consequently, economic regulations in the transportation sector could be excluded from the regulatory budget.
There are, however, different opinions in the economic community on whether many of the economic regulations actually work to the economic betterment of the consumer. Notwithstanding this disagreement, some argue that the answer to the issue is not the imposition of a regulatory budget but instead, a reform of the economic regulation rulemaking apparatus. These reforms could range from an abolishment of rules to major modifications of such rules.
Arguments for including economic regulatory programs in a regulatory budget could be made along the following lines. First, there always has been, and probably always will be a disagreement over whether the actions of the economic regulatory agencies result in long run economic savings. Second, there is considerably more information to support the argument that many of the rules of the economic regulatory agencies do result in short run compliance costs even if such costs result in a long run savings to the consumer. If in fact this is the case, then additional analyses need to be performed with respect to the inclusion of exclusion of the "compliance costs" associated with economic regulations.
In order that these resultant analyses focus in part upon pending policy issues, the illustrative regulatory budget for transportation programs developed herein incorporates, to the maximum extent possible, the expenditures related to compliance with economic regulations in the transportation sector.
The economic regulatory programs are limited to actions taken by the ICC.
Cost of Existing Regulations - Economic Regulations
In a recent study, the National Transportation Policy Study Commission (NTPSC) concluded: "The net cost of regulation to consumers is virtually impossible to estimate, but Federal economic regulations may amount to billions of dollars annually." This conclusion is not unique to this study in that other studies in the past have reached a similar conclusion.
The Brookings Institution, through the services of Professor Thomas Moore, estimated the economic loss from the regulation of surface freight. The results are summarized below:
The above estimates were based on data of the 1966-1968 timeframe. Since that time, prices have increased some 62 percent. Consequently in current dollars the low estimate would be $6.2 billion, the medium estimate would be $9.0 billion and high estimate would be $14.4 billion.
Cost of New Regulations - Economic Regulations
At this time it is difficult to codify a list of new regulations which govern the operations of the ICC since in large part, its "new" regulatory actions are often case-by-case determinations made under existing regulations.