TCS Daily

An Ominous New Era

By Andrew P. Morriss - October 17, 2002 12:00 AM

Pity the poor Environmental Protection Agency. Regulating industries is a slow and cumbersome process, frustrating for officials because it often fails to achieve the results they want. So the agency has come up with a new strategy, one that turns the Constitution on its head and gives unelected regulators the power of the sovereign. It's called regulation-by-litigation, and a lot of industries had better watch out.

Despite awesome powers, EPA regulation typically operates under legal constraints. Congress requires that new rules must be published in the Federal Register when they are proposed, and all interested parties must have a chance to comment. Congress even has the power to block agency rules. Chafing under those controls, the EPA has found a more powerful weapon. In recent years, the agency has sued and settled with firms in wood products, chemicals, petroleum refining, pulp and paper, electricity generation, and the diesel engine manufacturing industries.

Companies targeted by the EPA have a strong incentive to settle because the EPA often has life-or-death power over other aspects of their business. Another advantage of lawsuits is that hardly any president or congressman will meddle with the courts once federal attorneys have a case underway.

The EPA's lawsuit in 1998 against heavy-duty diesel engine manufacturers illustrates regulation-by-litigation at its blitzkrieg best. The agency alleged that it had just discovered that the engine manufacturers had been evading clean air rules. According to the EPA, the companies used the engines' electronic controllers (necessary to make the engines function) to minimize pollution only during the urban operating conditions under which the EPA tested the engines. On the open highway, the EPA claimed, the engines maximized fuel mileage, rather than minimizing emissions. As EPA Administrator Carol Browner put it, the manufacturers "programmed the engine so that it knew when it was being tested and when it was on the road."

Actually, as a House Commerce Committee investigation later uncovered, the EPA had known about, and even approved, this use of the controllers for decades. Nonetheless, the engine makers were in a weak position. To sell new engines, the firms must have the EPA's approval every year. A Mack Truck Company vice president said that the EPA "held a gun to our head by threatening to withhold certification for 1999."

The agency got what it wanted: a high-profile victory. The firms agreed to new regulatory controls - possibly including some that the agency was barred from imposing through traditional regulation. The engine manufacturers also paid about $1 billion in fines and settlement-specified environmental activities. Said then-Attorney General Reno, "Every polluter in America had better take note of these record penalties-if you pollute America's air, you are going to pay a very high price."

What could be wrong with forcing the development of cleaner truck engines? First, Congress had explicitly forbidden EPA to change the rules governing emissions on the schedule the settlement imposed. The EPA litigation sidestepped the four-year stability period required after each regulatory change.

Second, the suit denied opportunities for other affected industries to bring their concerns to the table. The Truck Manufacturers Association, which is the largest buyer of diesel engines, sought to enter the action but was turned down.

Third, the settlement led to an entirely predictable reaction by truck buyers. Anxious to avoid the more expensive and potentially less reliable new engines, they engaged in a massive "pre-buy" of trucks before the settlement rules take effect. So, even if the new truck engines are cleaner as the EPA claims, there are now tens of thousands of extra older, dirtier engines on the highway today - solely because of the EPA's action. With these trucks on the road for ten years or more, any net benefit from the new standards will be postponed for years.

Fourth, the engine and truck manufacturing industries have been disrupted by wild swings in production induced by EPA's actions. From full capacity operations before the deadline, many truck manufacturers are now laying off workers and closing plants as orders decline precipitously.

The EPA and other regulatory agencies have enormous authority over the economic survival of most American firms today. With so much at stake, many firms cannot withstand the demands of regulators, even when those demands would be illegal under traditional regulation. President Bush and Congress should blow the whistle on regulation-by-litigation and rule it out-of-bounds.

Andrew Morriss is Galen J. Roush Professor of Business Law and Regulation at Case Western Reserve University School of Law and Bruce Yandle is Distinguished Alumni Professor Emeritus at Clemson University. Both are senior associates of PERC - the Center for Free Market Environmentalism in Bozeman, Montana.

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