Now, I am pleased to be on the panel this morning with the Environmental Protection Agency, because we would certainly agree with the previous panel that the EPA has been absolutely tops in the Federal Government in trying to incorporate not only the Regulatory Flexibility Act but also general principles of regulatory analysis onto its procedures.

In fact, I think it is probably the case that some of the principles of the Reg Flex Act were taken from examples of EPA practice from several years ago, and EPA is really, I think, a pioneer agency here in Washington in attempting to calculate what the cost impact of its rules are.

They generally have good processes for addressing small business impacts, and they generally perform economic analysis of proposed rules.

Where we differ with EPA, by and large, is where they have said we think there is an impact and we say we think there is a greater impact and we would suggest that the rules be changed in certain ways.

My statement goes into some specifics. The two major issues have both been mentioned: the UST regulations both technical standards where some of our suggestion have been adopted and financial liability standards. The final rule has not been proposed, but we are hopeful that EPA has taken some of our suggestions to modify the proposed financial responsibility requirements for small entities, both small business and small government.

We have also, I think, had a very productive give-and-take with EPA in the process for writing rules for threshold standards for the Superfund amendments on community-right-to-know. We do not agree with EPA's decisions in all matters, but I think that they have done a tremendous job in trying to be responsive to our concerns which reflect those of the small business community and their trade associations.

I will also say that not represented here this morning are some agencies where, frankly, we are really swimming upstream. We have a real hard time getting the Department of Agriculture's Agriculture Marketing Service to write any rules that say that they have any impact on small business. For example, the USDA regulates the amount of navel oranges that growers in California both large and small can sell concludes that those regulations do not have any particular impact on small business and therefore they are not required to do any analysis.

The Internal Revenue Service certainly writes regulations every week that have a tremendous impact on small business but, because of some administrative technicalities in the way those rules are written and issued, they frequently, if not almost always, avoid doing an analysis of the impact of those rules on small business.

The Federal Communications Commission is an example of an agency that in a couple of instances seeks to certify rules as having no impact, where we think they broadly do have an impact, and we have a hard time in some cases convincing them that they need to do some further analysis.

My testimony is my own personal opinion-this is not a statement that is cleared by every other Administration agency because

clearly it would strengthen the Reg Flex Act and be more of a problem for them.

My own personal opinion is that the Reg Flex Act needs a judicial review section. It is a hortatory statute. It allows the Office of Advocacy of the SBA to point a finger at EPA and try to convince them to do something better. We do not have the power of the OMB. We cannot refuse to permit a regulation to be issued. Of course, it is arguable whether OMB has that power. They claim to have it, some others do not agree, but we know we do not have it under the Reguatory Flexibility Act. The result is that if an agency does choose to ignore moral suasion or the mandate to develop a good rule-making record to defend itself in court, we really have no alternative except to issue our annual report, which we are submitting to this Committe as well as to the Judiciary Committee today. However, if there were a judicial review section that said that failure to perform certain of these analyses, did trigger the right of a court to examine that deficiency in the rulemaking process, I think we would be a little bit better off.

Thank you for the invitation. I would be happy to respond to any questions now or later.

Chairman GLENN. Thank you.

Dr. Morgenstern, go ahead.

TESTIMONY OF RICHARD D. MORGENSTERN, DIRECTOR, OFFICE OF POLICY ANAYLSIS, ENVIRONMENTAL PROTECTION

AGENCY,' ACCOMPANIED BY LOUISE JACOBS, CHIEF COUNSEL FOR ADVOCACY

Mr. MORGENSTERN. Thank you, Senator.

I have asked Ms. Louise Jacobs, Chief Counsel for Advocacy at EPA, to join me here, as she plays an important role in the agency in the matters under discussion today.

I appreciate the opportunity to be here today to discuss the way EPA has used Reg Flex, to evaluate and, where possible, reduce the impacts our regulations have on small entities, including, of course, small businesses, small government jurisdictions and small organizations.

The primary mission of EPA is to protect human health and the environment. In working to accomplish that goal, we strive to avoid undue adverse impacts on the economy in general and on small entities in particular, where this does not conflict with the statutory requirements.

Since the Act does not amend or repeal other statutory mandates, however, compliance with the Act must not compromise adherence to the requirements of other statutes. In early 1981, we establish an agency work group to plan for implementation of Reg Flex. Since that time, we have concentrated our most careful review of Reg Flex impacts on small businesses, in the small business area for each of the 200 to 250 rule-makings that are typically under way at the agency and that are subject to the notice and comment provisions of the Administrative Procedure Act.

1 See p. 324 for Mr. Morgenstern's prepared statement.

More recently, we have increased our attention to small communities by including them in a study of the impacts of environmental regulations on several sectors of the American economy. The study has been referenced by the previous speakers, and I will discuss it a bit later in my testimony.

The Reg Flex analysis summarizes the economic impact of regulation on small entities and discusses alternatives that might minimize the impact and still accomplish the statutory objectives.

The EPA endeavors to address this by building flexibility into the rule in how small entities can meet the environmental standards without actually weakening them. Impacts on small entities are weighed against risks to health and the enviroment that would result from reducing requirements on these entities.

Consequently, small business in different industries may end up being treated rather differently. For example, under the Clean Water Act, a less stringent standard was set for a particular ferrous sub-category of the metal foundries industry. On the other hand, the effluent guidelines formulated for the electroplating industry did not include any exemptions, even though most of the industry is composed of small plants.

One particular impact analysis which has also been referenece earlier is our proposed rule for lead and copper in drinking water. We group water systems in this analysis into 12 categories, based on the number of people served by each system. We determine the cost of the regulation within each category for each household in the system, as well as categorical and total national costs.

The analysis showed that the cost of this regulation would not be significant, and therefore no special action was warranted. However, we recognized that, due to their inability to benefit from economies of scale, the smallest systems suffer proportionately greater cost impacts. Therefore, we have included numerous provisions in the proposal which would enhance a small system's ability to implement and comply with the regulations. I will list a few of them here for you. They are listed more fully in my testimony.

We are proposing that the monitoring requirements of the rule be phased in over an extra 2 to 3 years for small systems. We are proposing that small systems require fewer samples for compliance. We are proposing that small systems be required to monitor less often than large systems. We are proposing that States may take system size into account when determining appropriate elements of the treatment plant, and so on.

Of course, we are taking broad public comment on these and related issues which affect both large and small systems. Now, EPA has issued many regulations that have less stringent standards for small entities when the agency's environmental and health objectives would not be compromised.

In my testimony, I reference sections 311 and 312 of SARA, I reference work on new source performance standards for new residential wood heaters developed under the Clean Air Act, I reference effluent guidelines for organic chemicals and plastics under the Clean Water Act, I reference various provisions of the safe drinking water regulations, and I reference pesticide registration fees collected under FIFRA.

Quickly, however, I would like to turn to two other initiatives that the agency has undertaken under Reg Flex. The first relates to the Small Business Ombudsman. One of the first actions that EPA took was to set up this Ombudsman. The primary function is to aid the small business community in its efforts to comply with the environmental regulations. Toward this end, the Ombudsman has sought to meld a cooperative working relationship with both the regulated community and key offices throughout the agency.

A second area I touch on briefly is the Small Communities Ombudsman. Presently, EPA is trying to establish a full-time focal point for small communities. This is particularly one of the requests that was made by Mr. Schiff and the NATaT group, and the Administration in a recent speech committed to try to move this proposal forward.

The Ombudsman would serve as a focal point for small community concerns by representing their interests within the agency as well as working directly with small government representatives. This would include the insuring, as we go forward developing regulations, that we look at flexibility for small communities, financially and technically, without weakening the environmental standards in question.

Finally, Mr. Chairman, I would like to discuss briefly the sector study which has been referenced by several of the other speakers. Last fall, Administrator Thomas asked agency staff to conduct an analysis of the costs and risks of environmental controls across different sectors of the economy, primarily concentrating on municipal, small business and agricultural sectors.

The Administrator's request arose from the concern that EPA's regulation review processes only focus on one regulation at a time. Yet, when examined individually, the impact of each regulation may be small, but the cumulative impacts may be much more

severe.

The sector study examined costs for 85 recent and pending regulations and for many of them estimated their impacts upon the agriculture, small business and municipal areas. Let me just quickly touch on the conclusions for municipalities and for small business

es.

For municipalities, a significant proportion of communities with under 2,500 persons may be required to raise user fees significantly to finance new capital requirements and expand monitoring, operation and maintenance practices to levels that exceed what most communities have traditionally paid for environmental services.

The largest costs per household to meet the environmental requirements tend to fall ironically on the smallest and the very largest communities in our society. Smaller communities have typically not invested as heavily in some environmental services and technologies, yet they must meet the same technological standards. For small businesses, a review of nine industries suggests that environmental costs may be high for businesses in three particular industries and in segments of five others. The three which we focused on or in which we found the highest costs were wood preserving, electroplating, and pesticide formulation.

Over all, small businesses with significant environmental problems, such as leaking underground storage tanks or hazardous

waste contamination, will face the greatest expenditures in coming years.

The EPA initiated the study in order to provide a critical selfexamination of how we as an agency collectively effect certain sectors of the national economy. The information is just one of the factors which can help guide future agency decisions and it will help us in our job of informing Congress and the public about regulatory impact.

Accordingly, we have explored whether our current method of looking at actions one at a time misleads us about cumulative impacts. We also wanted to see if particular cumulative impacts appeared large for any one of the sectors of the economy.

The study is now in the final stages of review and it should be available to the public within the next month.

In conclusion, a major benefit of Reg Flex is that it has significantly increased the agency's awareness of and response to the impacts of its regulations on small entities. In recent years, however, we have seen legislation, such as the Hazardous and Solid Waste Amendments, that limit the exemptions that the agency can grant for small entities.

Although the agency must give primary consideration to reducing risk to health and the environment, we do pay attention to the special burdens small entities bear in adapting to regulatory requirements. Increasingly, education and technical assistance, as well as other efforts to support compliance, have become important ways to achieving the objectives of Reg Flex.

Thank you, Mr. Chairman.

Chairman GLENN. Thank you, Dr. Morgenstern.

Ms. Jacobs, do you have anything to add?

Ms. JACOBS. I think I am here mainly to try to answer questions or to balance the panel. I have the same title as Frank Swain.

Just very briefly, we think at the agency that has some connection with the agency's success, which has been mentioned today, in implementing the Reg Flex Act. We are-▬

Chairman GLENN. You have received a number of compliments today about how you have moved in some of these areas. I am sure you were glad to hear those in some of the earlier testimony.

Mr. JACOBS. We certainly were. We feel very friendly with our colleagues at this point.

EPA is the only agency in government, outside of the Small Business Administration, with an Office of Advocacy or an advocacy ombudsman function, and I oversee that function. My office works closely with Frank Swain, but we are also able to work within the agency with Dr. Morgenstern and with the program offices in implementing the Act. We can serve on both the staff and policy level, and we work on policy strategies and implementation, as well as regulatory development. We think that that helps to carry out the spirit as well as the letter of the Act.

During the year that I have headed up this office, I have become aware of some real differences that the office has been able to make in helping out small entities and still meeting the goals of environmental protection. We have been a member of all of the work groups and the policy groups, when one existed, for the regs which were listed as success stories in Dr. Morgenstern's main tes