On Jan. 18, President George W. Bush issued amendments to Executive Order 12866 on Regulatory Planning and Review. The most notable of the changes will require federal agencies to: implement a stricter market failure criterion for assessing the need for regulation; require agencies to develop a summation of total costs and benefits each year for all proposed regulations; install a presidential appointee as agency Regulatory Policy Officer; and subject "guidance documents" to the same White House Office of Management and Budget (OMB) review process as regulations. Bush's amendments do not have the force of law but significantly change E.O. 12866, which figures prominently into the nation's regulatory process. The amendments will impact the way in which federal agencies go about creating rules and enforcing laws.

The first of Bush's amendments places greater emphasis on the identification of a "specific market failure" before an agency can assess whether or not to regulate. This amendment gives examples of market failures as externalities, market power and lack of information.

The previous text of the E.O. called for agencies to identify a problem in need of regulation and only suggested market failure as an example. The amended text calls first for identification of a "specific market failure" and then other "specific problems," such as the failure of public institutions. The amendment occurs in a section titled "Statement of Regulatory Philosophy and Principles."

Agencies will also now be required to evaluate all of their proposed regulations as a whole, according to the amended E.O. Under the status quo, agencies are to prepare a Regulatory Plan each year. The Plan is to include the most significant regulations upon which an agency will endeavor. Each proposed regulation is to include a cost-benefit analysis, as well as cost-benefit analyses for reasonable alternatives.

Bush's amendments require one additional obligation of federal agencies in the preparation of their Regulatory Plans. Agencies are now to prepare an "estimate of the combined aggregate costs and benefits of all … regulations planned for that calendar year to assist with the identification of priorities."

Another amendment changes the status of an agency's Regulatory Policy Officer. Under the E.O., each agency is to have a designated Regulatory Policy Officer reporting directly to the agency head. According to the original E.O.: "The Regulatory Policy Officer shall be involved at each stage of the regulatory process to foster the development of effective, innovative, and least burdensome regulations."

Bush's amendments do not alter the responsibilities of the Regulatory Policy Officer, but do require each agency to designate a presidential appointee to that position. Each agency will have 60 days to comply with this requirement.

Several amended sections of the E.O. move agency "guidance documents" closer in status to that of agency rules. Federal agencies use the term "guidance document" to classify statements that clarify or interpret rules. Agencies often use these statements to guide agency regulators in the hands-on enforcement of rules. Unlike agency rules, they are not mandatory.

Bush's amendments subject guidance documents to the same review process as agency rules. In effect, this means agencies will submit guidance documents to OMB's regulatory arm, the Office of Information and Regulatory Affairs (OIRA), where administrators will scrutinize them in the same way as they do regulations. OIRA will manage guidance documents in order to ensure a stated need for, and consequences of, the proposed guidance.

Much in the same way as it treats regulations, OIRA will subject "significant" guidance documents to a more strenuous review. Among other criteria, "significant" regulations and guidance documents are those expected to cause an annual effect of $100 million or more on the economy. OIRA will exert greater influence in the issuance of significant guidance documents by requiring an advanced draft of the statement. OIRA also reserves the right to request consultation with the agency before final issuance of the guidance document.

These amendments mark the second time Bush has altered E.O. 12866, and are by far the most significant amendments made to the E.O. since President Clinton issued it in 1993. The E.O. sets the regulatory philosophy for the federal government, mandates the use of market tools for promulgating regulations, and calls for the OIRA review of agency rules. Though the Administrative Procedure Act outlines the formal rulemaking process, in practice, formal rulemaking procedures are rarely used; E.O. 12866 has been the basis for the regulatory process since Clinton used it to replace two Reagan administration executive orders.

There had been rumblings about modifying the E.O. over the past year or so as OMB had proposed changes in the way guidance documents are handled by agencies. However, it was a surprise to see the amendments include the addition of the market failure criterion.

Bush's amendments will affect the regulatory process in several ways. First, the new emphasis on a market failure criterion codifies a free-market ideology in the E.O. Though this criterion is not a requirement, its appearance in the "Statement of Regulatory Philosophy and Principles" allows it to set the tenor for the entire federal regulatory process. Presumably, OMB will need to provide information to agencies on how to interpret this new analytic requirement. Many in the public interest community fear this addition to the E.O. will become another means to reducing public protections.

Second, aggregating the costs and benefits of rules may change the standard by which proposed rules are prioritized. This amendment may make cost-benefit analysis the preeminent tool for determining which regulations to pursue even when the comparison of rules crosses agency lines. Former OIRA administrator John Graham, current nominee Susan Dudley, and other proponents of free-market solutions have suggested aggregating total costs and benefits as a step toward a regulatory budget. A regulatory budget is a way of choosing where to regulate based upon economic impact, rather than public need.

Third, the new Regulatory Policy Officer requirement mandates the designation of a political appointee to the position of regulatory chief within each agency. Many agencies already have political appointees reviewing and approving proposed rules. Yet the amendment to the E.O. suggests a further politicizing of the regulatory process. Currently, the Officer is to report directly to the agency head, often a cabinet-level Secretary.

Last, OIRA's stricter controls on guidance documents may hinder an agency's ability to enforce law by slowing down the process by which agencies issue these guidelines. This amendment provides OIRA with an opportunity to take a greater role in agency procedures.

With that in mind, the same day that Bush issued these amendments, OMB issued its "Final Bulletin for Agency Good Guidance Practices." The Bulletin sets forth policy and procedures agencies should follow internally when formulating guidance documents. The Bulletin works in concert with Bush's amendments, outlining ways in which agencies can write guidelines that better meet the new E.O. procedures.

OIRA's role in the issuance of agency guidance documents is likely to be the most significant of Bush’s amendments. Rick Melberth, Director of Regulatory Policy for OMB Watch, says, "By mandating a review of interpretive documents like guidance documents and manuals, OIRA is adding another means of delaying agency actions required by Congress and further threatening public health and safety protections."