2. Chapter Key Points Understanding the “fourth branch” of government Executive, legislative and judicial duties of agencies Executive, legislative and judicial constraints on agencies Policy issues: Criticism and deregulation 8 Administrative Agencies and The Regulatory Process

3. Central Theme of this Chapter Our lives arguably suffer from excessive government regulation, but some regulation is necessary in an increasingly complex society. Where do we draw the line? McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

4. History 1887: First federal regulatory agency established (for the purpose of regulating railroad routes and rates) 1930s: Federal regulation became pervasive in response to the Great Depression 1960s-’70s: New agencies created directed to social, as opposed to economic, reform 1980s: Strong deregulation movement McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

5. Agency Duties  Control of Supply: Some agencies control entry into certain economic activities, by granting licenses, for example.  Control of Rates: Historically, those federal agencies charged with regulating utilities and carriers set the prices to be charged for the services. There has been a general decline in agency rate-setting, such as over the price of airline tickets, cable TV rates and long-distance telephone rates.  Control of Conduct: A major element of government regulation is through requiring information, establishing minimum performance standards and banning certain products. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

6. Operating the Agencies Executive Functions: The basic executive duty of the various agencies is to implement the policy provided for in the enabling legislation and in the agencies’ own rules and regulations. Legislative Functions: Agencies create rules and regulation that are, in effect, laws. Judicial Functions: Adjudicatory administrative hearings are used to enforce the agency’s rules and regulations. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

7. Legislative Functions: Rules  Procedural rules delineate the agency’s internal operating structure and methods.  Interpretive rules offer the agency’s view of the meaning of those statutes for which the agency has administrative responsibility. They do not have the force of law, but they are important expressions of opinion as to what the governing legislation requires.  Legislative rules are policy expressions having the effect of law. The agency is exercising the law-making function delegated to it by the legislature. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

8. Legislative Function: The Rule-Making Process Informal rule making:  Publication of a Notice of Proposed Rule Making in the Federal Register  Written comments on the proposal submitted by the public  Agency may hold open hearings  Agency either discontinues the process or prepares the final rule  Final rules are published in the Federal Register and later compiled in the Cod of Federal Regulations Formal rule making:  Publication of a Notice of Proposed Rule Making in the Federal Register  Agency must hold a public hearing conducted with most of the procedural safeguards of a trial, where all interested parties may call witnesses, challenge agency evidence, etc.  Agency decision based only on the formal record  Final rules are published in the Federal Register and later compiled in the Cod of Federal Regulations McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

9. Administrative Hearing  After an investigation, a violation of a statute and/or rule may be alleged.  Affected parties are notified.  An effort is made to reach a settlement via a consent order.  Failing settlement, the case is heard by an administrative law judge (ALJ).  ALJ decides all questions of law and fact and then issues a decision.  Order may be appealed to the agency or commission.  After exhausting opportunities for review within the agency, appeal may be taken to the federal court system. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

10. Controlling the Agencies Executive Constraints: The president appoints the top administrators and has great influence in the budget process. Congressional Constraints: Congress creates and can dissolve the agencies and controls agency budgets. It can directly intervene by amending the enabling legislation or by passing laws that require agencies to take specific directions. Judicial Review: Agency rules and orders may be challenged in court, probably the chief constraint on agency power. However, historically, the courts have taken a rather narrow approach to judicial review, by giving deference to the presumed expertise of the administrative agencies. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

11. The FDA: A Case Study  Regulates food, drugs and health products.  Examples from text include:  Sunscreen labels  Direct drug ads  Marketing approval for all drugs  Inspection of food imports  Some regulation over nicotine (but not over tobacco)  Review of prescription drugs for safety and effectiveness McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

12. Excessive Regulation?  Direct Cost: Estimates put the total cost of federal government regulation at about $7,410 per family of four per year.  Indirect Cost: One estimate places the regulatory cost (in 1999 dollars) to the economy in unrealized growth annually at $1.5 trillion.  Business Complaints:  Overlap and conflict among agencies  Overextension of agency authority, not merely in setting goals but in dictating how those goals are to be met  Adversarial attitudes toward business  Agency delay in issuing required permits, rules and standards  Escalating reporting  Federal agency claims of duties that the business community believes are best left to states and localities McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

13. Insufficient Regulation  We have many regulatory success stories: Cleaner air, child labor laws, etc.  Our reliance on government intervention is restrained by worldwide standards.  Reduced regulation may just result in increased litigation.  What role did insufficient regulation and/or enforcement play in the events of September 11, the scandals of Enron, WorldCom, etc. and the California energy crisis? McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

14. Excessive Industry Influence Have our regulatory agencies been captured by industry and operated for its benefit?  Licensing restrictions to reduce competition  The personnel revolving door between the regulators and the regulated  Underrepresentation of the public voice McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

15. Deregulation Assessed: One Size Fits All  Deregulation has brought lower prices, more innovation and consumer benefits in some areas.  Deregulation has created mega-firms, loss of service to smaller markets and new opportunities for abuse in other areas. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.