Briefing Report: The Riveting Regulatory Process - A Study in Bureaucracy

Wednesday, March 13, 2013

Regulatory Blight

“This state is regulated to death!” We’ve all heard it before, and versions thereof. Overregulation by government, it is said, drains the life out of a business and is blamed by many for California’s unemployment rate hovering around 10 percent. Regulations often seem arbitrary, capricious, and appear nonsensical in the face of the entrepreneurial spirit. Duplicative and contradictory regulations promulgated and enforced by vying state agencies add a heavy burden for the business community to overcome – not to mention the additional weight of federal and local regulations. Job creation and economic activity are hamstrung by a regulatory system that some perceive as unpredictable at best and paralyzing at worst.

So, how did this regulatory environment come about? What exactly are regulations? Why are they necessary? Who writes them and how do they get implemented? This Briefing Report will attempt to provide an overview of the regulatory process and offer an account of the varying types of regulations and how they are promulgated.

The Who, What, Where, When, and Why…

So, what exactly is a regulation? The Government Code defines “regulation” to mean, “[E]very rule, regulation, order, or standard of general application or the amendment, supplement, or revision of any rule, regulation order or standard adopted by any state agency to implement, interpret, or make specific the law enforced or administered by it or to govern its procedure.”[1] That seems pretty simple, right? Regulations simply clarify the statutes to make sure they get implemented properly.

Well, it depends. Over 200 state entities have regulatory authority – from the Department of Alcohol Beverage Control to the Board of Pilot Commissioners (Bar Pilots) to the Gambling Control Commission. Often, they have wide discretion on how to interpret statutory language and the need for regulation. The latitude of authority that an agency has to regulate depends on the degree of permission given by the Legislature in the enacting legislation. Generally, there are three types of statutes: “self-executing,” “wholly-enabling,” and “susceptible to interpretation” statutory provisions.[2]

Self-executing provisions are specific and require no implementing regulations in order to take effect. They provide the agency no discretion in interpreting the statutes, for example, “A license to operate an intrastate Internet gambling Web site shall be issued for a term of five years.”

Wholly-enabling provisions give the agency wide discretion on implementing statutes, such as, “The California Gambling Control Commission shall establish a regulatory framework for the operation of Internet poker Web sites within the borders of the state.”

Susceptible to interpretation provisions establish performance standards and requirements with which the agency must comply in its interpretation of the statute. For instance, “Factors to be considered in evaluating a license applicant shall include, but are not limited to, quality, competence, experience, past performance, efficiency, reliability, financial viability, durability, adaptability, timely performance, integrity, security, and the applicant's subcontractors for core functions.”

Generally, the promulgation of regulations must follow the rule-making procedures outlined in the Administrative Procedures Act (APA). The APA requires all rule-making agencies to, among other things: (1) find that no alternative would be more effective or would be as effective and less burdensome to private persons than the adopted regulations; (2) describe the potential cost impact of a regulation; and (3) assess to what extent the regulation will create or eliminate jobs and businesses.

The Office of Administrative Law (OAL) is charged with the orderly review of adopted regulations. Its purpose is to ensure that agency regulations are clear, necessary, legally valid, and available to the public. OAL is responsible for reviewing administrative regulations proposed by over 200 state agencies for compliance with the standards set forth in the APA, for transmitting these regulations to the Secretary of State and for publishing regulations in the California Code of Regulations.

When an agency seeks to impose new regulations, it is required to issue a statement of the specific purpose for each proposed regulatory change it intends to make. The statement must include a listing of the problems the agency aims to address and the rationale for the determination that the change is reasonably necessary. The statement must enumerate the benefits anticipated from the regulatory action including the benefits or goals provided in the authorizing statute. Agencies are required to issue a “Standardized Regulatory Impact Analysis” (SRIA) when considering “major” regulations that might have an economic impact of $50 million or more. For “minor regulations” an “Economic Impact Assessment” (EIA) is required. The SRIA must include reasonable alternatives to the regulation and the agency’s reasons for rejecting such alternatives, if it does.

To initiate a rulemaking action, an agency first publishes a notice in the California Regulatory Notice Register, and alerts interested parties by posting the text of the proposed regulation and an Initial Statement of Reasons on the agency’s website. Once the notice is published, the APA rulemaking procedure officially starts. The agency has one year to complete the process. It must provide for at least 45 days for a public comment period during which time public hearings are held.

If, after the comment period, the agency makes major changes to the proposal, another 45-day comment period is initiated with more hearings. However, if the regulation is “substantially changed but sufficiently related”, the agency is only required to offer a 15-day comment period. The agency must summarize and respond on the record to comments and explain how it has amended the proposal to accommodate the comments, or the reasons for making no changes. A Final Statement of Reasons is then filed with OAL, which has 30 days to conduct its review and determine whether the rulemaking agency satisfied the procedural requirements of the APA. Following the review, OAL files the regulation with the Secretary of State and it takes effect 30 days thereafter.

Emergency Regulations

The regular rulemaking process, as fascinating as it is, pales in comparison to the excitement of the emergency rulemaking process. Under the regular rulemaking process, state agencies must meet certain public hearing and notice criteria. The Emergency rulemaking process significantly truncates the public notice and comment period. It provides for a shortened review and decision making timeframe by OAL. The Government Code defines “emergency” for the purpose of promulgating regulations as, “[A] situation that calls for immediate action to avoid serious harm to the public peace, health, safety, or general welfare.”[3]

There are two ways to initiate the drafting of emergency regulations. The Legislature can enact a statute that expressly authorizes an agency to establish emergency regulations. For instance, “Within 120 days, the commission, and any other state agency with a duty to perform under this chapter, shall adopt emergency regulations to implement it.”[4] The second way is for the regulating agency to make a finding of emergency by describing specific facts supported by substantial evidence that demonstrate the existence of an “emergency” and the need for immediate adoption of the proposed regulation.

A finding of emergency cannot be based upon expediency, convenience, best interest, general public need, or speculation.[5] The public comment period on proposed emergency regulations is only five calendar days after OAL posts the notice of the pending emergency action. The agency is not required to respond to public comments submitted but, if it does, it must submit its response to OAL within eight calendar days after the date of submission of the proposed emergency regulations.

Once filed with the Secretary of State, the emergency regulations become effective for up to 180 days. OAL can approve a reauthorization of the emergency regulation if the agency submits a request at least 10 calendar days prior to the expiration of the emergency effective period. The time period of effectiveness for each re-adoption is 90 days and no more than two reauthorizations are permitted. Because of the limited public input, emergency regulations can be dangerous. The regulated community has little opportunity to respond and comment.

Good Intentions…

The requirements set forth in the APA are designed to provide the public with a “meaningful opportunity to participate in the adoption of state regulations and to ensure that regulations are clear, necessary and legally valid.” It intends to bring the regulated and regulators together to work out mutually beneficial rules that comply with the letter and spirit of the statutes created by the Legislature. But, it is certainly not perfect.

Recently, the Little Hoover Commission issued a report that indicated,

“California’s approach to developing regulations is uneven, lacks coordination and, despite an independent agency to enforce the Administrative Procedure Act, lacks the kind of thorough oversight that ensures efficiency and accountability. The way California state departments develop regulations varies widely, particularly in their use of economic analysis to determine what burden a proposed regulation will have on a person or business affected by it. California has been reluctant to adopt and use analytical tools employed in other states and at the federal level. This has produced a regulatory approach that can focus intensely on solving problems in a single arena without taking into consideration the broader context or consequences of the solution it imposes or developing regulations that maximize benefits in a systematic way.”[6]

This narrow focus and inability to comprehend the unintended consequences argues for reform of the process. In 2011, legislative Democrats offered a minor reform effort, SB 617 (Calderon) which “beefed-up” the economic impact statement requirements and provided that agencies had to articulate why proposed alternatives to regulations promulgated were not acceptable.  Although SB 617 was quite limited in scope, it gave the Democrat Caucus cover to claim that the state’s regulatory problem had been addressed with no need for further action. It was a step – a baby-step perhaps, but a step in the direction of reforming the regulatory system in California. However, it was not an all-encompassing solution to the very complex and burdensome regulatory process that hinders business development in this state.

Over several legislative sessions, Senate Republicans have proposed a package of substantive regulatory reform bills– serious proposals to help bring the burdensome regulatory process under control and make it more responsive to the needs of Californians. Nearly all were “deep-sixed” by the Democrat majority. With proper reform, such as those suggested by Senate Republicans, businesses could find more certainty in the California business climate.

For more information on this report or other Governmental Organization issues, contact Richard Paul, Senate Republican Office of Policy at 916/651-1501.



[1] Government Code Section 11342.600.
[2] Office of Administrative Law: Overview of the Administrative Procedure Act.
[3] Government Code Section 11342.545.
[4] SB 1463 (Wright) 2012.
[5] Government Code section 11346.1(b)(2).
[6] Little Hoover Commission, Better Regulation: Improving California’s Rulemaking Process (Report #209, October, 2011).