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Mr. Chairman, members of the committee, I would be happy to answer any questions you may have.
Senator DECONCINI. Thank you very much.
[The prepared statement of Assistant Attorney General John H. Shenefield follows:]
PREPARED STATEMENT OF JOHN H. SHENEFIELD
Mr. Chairman and members of the committee, I appreciate the opportunity to appear before the committee today to testify on the Competition Improvements Act of 1979. Senate bill 382 reflects an idea that is important and timely. It would establish a uniform standard to guide consideration by Federal agencies of the effects of regulation on competition. Its goal is to require agencies to accurately assess such effects, to opt for the least anticompetitive alternatives that would accomplish regulatory goals, and to be prepared to defend their decisionmaking where challenged. The administration strongly supports consideration of competition by Government decisionmakers and the goals reflected in S. 382. The administration is committed to implement them in appropriate legislation; however, the views I express today on S. 382 are solely those of the Department of Justice.
The Department of Justice believes that legislation along the lines of S. 382 is in fact overdue. The long and the short of it is that competition is the fundamental policy on which our economy is based, and Federal Government agencies should be the first to say so. When Federal agencies undertake direct, economic intervention in markets, they should recognize potential competitive dangers and avoid as many as practicable.
In my statement this morning, I would like to place this legislation in proper historical perspective, outline the rationale underlying its essential features, and submit our recommendations to the committee as to its appropriate scope.
Before describing them in detail, I would like to outline our recommendations regarding the scope of S. 382. We propose that the bill require specific consideration of competitive effects and the least anticompetitive alternative whenever a Federal agency:
(1) Regulates entry under a scheme in which the level of entry is limited; (2) sets or reviews prices; (3) sets, limits, or allocates economic output; or (4) reviews agreements among competitors.
We also recommend that agency attention to competition in such circumstances be subject to judicial review under existing procedures and standards. We believe that these recommendations will enhance the ability of the bill to achieve its objective, as well as minimize the possibility of inadvertent derogation of important, legitimate regulatory goals.
THE NEED FOR LEGISLATION
The costs and benefits associated with regulation have become an increasingly important subject of public debate and congressional attention. The goal of S. 382, which follows similar bills introduced in the 94th and 95th Congresses,' is to focus this attention on a key issue-should we continue the current haphazard approach to economic regulation, or try to go back to basics, and establish a presumption in favor of the competitive alternative? We have addressed several regulatory schemes in recent years, and have made some significant progress. However, we have yet to enact needed across-the-board reform, perhaps because of a concern for legitimate social or economic goals that might be accidently lost in the shuffle. The essence of S. 382 is such reform.
Two major types of regulation have been confronted by those seeking regulatory reform. Some schemes reflect congressional decisions to replace competition in free markets with regulatory controls. These programs, such as motor carrier regulation, are the legacy of an earlier era, in which competition was viewed with much suspicion. Indeed, in those days of depression much regulation was designed to increase prices. It is not surprising that such regulatory schemes have often
1 Senate bill 382 is an amended version of S. 2625 introduced in the 95th Congress and S. 2028 introduced in the 94th Congress. Senate bill 2028 was supported in concept by former Assistant Attorney General Kauper in testimony on behalf of the Department of Justice and was favorably reported by this committee. The concept was also endorsed by the recently completed National Commission for the Review of Antitrust Laws and Procedures.
been carried out in a way which gives short shrift to competition and the role that a dynamic marketplace might play in achieving an efficient, equitable allocation of society's economic output.
Today's perception of the appropriate role of economic regulation differs markedly from that of times gone by. We have learned that direct Government intervention is an inadequate substitute for the marketplace in determining the mix of goods and services most suitable to the desires and well-being of the consuming public. We have also learned an unfortunately expensive lesson-direct Government intervention in markets is likely to have unintended effects, such as increased costs, decreased innovation and poorer quality of service.
The second type of regulation is intended not to substitute economic controls for competition, but rather to achieve social goals as to which the market process is basically irrelevant. For example, in the area of environmental protection, or the safety of workers and consumers, it would appear that the market process is not fully able to take into account the total costs to society that the production or sale of a particular commodity may impose. In such instances, regulatory standards regarding safety or mitigation of pollution may be necessary to ensure that these "externalities" are nevertheless taken into proper account. Such regulatory schemes are intended neither to enhance nor suppress competition; their intended effect on the market process is neutral. Nonetheless, regulation of this type can take economic form and where it does should be scrutinized to determine the effects that it may have on competition, and, consequently, on the price and the quality of goods and services.2
Over the last decade, Congress has conducted a detailed review of several regulatory schemes and has consistently decided to enhance the role of competition. For example, in the Airline Deregulation Act of 1978, the CAB was directed to make competition rather than protection of the airline industry its chief regulatory goal; entry and price regulation was sharply curtailed, and the Board was directed to reject potentially anticompetitive mergers and intercarrier agreements if necessary regulatory objectives could be accomplished in a less anticompetitive manner. The Securities Act Amendments of 1975 mandated the establishment of a national market system for securities based on maximum reliance on competition consistent with the objectives of the securities laws, and directed the SEC to eliminate anticompetitive rules and regulations of self-regulatory organizations in the securities industry. In the important energy area, Congress has mandated competitive review of Federal energy leases 5 and required that the licensing of crucial energy facilities include close scrutiny of their competitive impact.®
Thus, our case-by-case regulatory reform experience to date leads to a straightforward conclusion: we can make real progress in improving all types of regulation by allowing competition to play its fullest practicable role, and do so without sacrificing any of the improvements we are making in the quality of life of our citizens.
THE ESSENTIAL FEATURES OF THE LEGISLATION: A COMPETITIVE REVIEW STANDARD OF GENERAL APPLICABILITY
A statute of broad applicability such as S. 382 must be carefully drafted if it is to apply in appropriate fashion to economic and noneconomic regulatory decisions. The Department believes that with improvements S. 382 can reach those agency actions with the greatest potential for competitive injury and at the same time avoid jeopardizing legitimate social goals of regulation.
We believe that there are three key objectives of the bill: (1) To identify the agency decisions having anticompetitive potential, (2) to set a uniform competitive standard applicable to those decisions, and (3) to require that agency decisions which implement the competitive standard be subject to judicial review. These objectives can be achieved in a way that will enhance the ability of the statute to meet its essential goals.
THE REGULATORY DECISIONS TO BE COVERED
The plain intent of S. 382 and its predecessor legislation is to apply only to those regulatory decisions that threaten serious anticompetitive effect. As pres
National Commission for the Review of Antitrust Laws and Procedures, report, p. 181. 1 See § 412 of the Federal Aviation Act, as amended, Airline Deregulation Act of 1975, Public Law 95-504.
15 U.S.C. § 78f (e) (1).
See e g., Coal Leasing Act amendments of 1975, 30 U.S.C. § 184 (1).
ently written, S. 382 defines covered decisions in terms of their effects, that is, whether they may substantially lessen competition, tend to create a monopoly, or create or maintain a situation involving a significant burden on competition. This standard has considerable merit when applied to purely economic regulation, for example, ICC regulation. However, we are uncertain as to how such a standard would affect agency decisions whose goals are social, not economic. If, for example, the setting of health or safety standards should become entangled in the procedural requirements of S. 382, as currently drafted, important social regulation could be exposed to significant delays.
This result is clearly unintended and can be easily avoided without interfering with the effectiveness of S. 382. The history of prior regulatory reforms provides the key to the changes in language we suggest. A review of those efforts reveals that Congress' prime concern has been with agency decisionmaking that effectively substitutes direct economic regulation for the free operation of the marketplace, and not with Federal regulation that sets standards to protect health, safety, and the environment. Primary attention has been directed toward regulatory actions that limit entry, control price, set output or permit groups of competing businesses to engage in collective activity. Of course, such actions can be undertaken by agencies whose basic mandates are social as well as those with economic orientation. The competitive concern would be the same in either case, regardless of the agency's ultimate goal.
We believe that the jurisdictional language of S. 382 should be refined to cover precisely four types of direct economic intervention-entry, pricing, output allocation, and agreements. Such a refinement would satisfy concerns about the costs of attempting to impose a uniform competition standard on regulatory actions not directly regulating the marketplace, or whose impact on competition is only indirect. At the same time regulatory actions that are potentially most injurious to competition would be reached.
ADOPTION OF A UNIFORM COMPETITIVE REVIEW STANDARD
Section 3(a) of the bill requires that each covered regulatory decision be justified as necessary to accomplish an overriding statutory purpose, that the benefits to the general public of such purpose be shown to outweigh the anticompetitive effects of the action, and that such purpose cannot be served in substantial part by less anticompetitive alternatives. Section 3(a) would require that injury to competition be balanced against the benefits of the regulatory objective-a task that would be quite burdensome if the goals sought were noneconomic. We believe that a uniform standard can be fashioned to apply to economic and social regulation without imposing such a burden, and thus ensure that competition is not needlessly sacrificed without subordinating social goals to competition.
We strongly agree that a uniform competitive review standard is necessary. At the present time, Federal agencies are subject to potentially confusing guidelines as to the role that competitive considerations are to play in their actions. While courts have required agencies that are subject to a broad "public interest" mandate to take competition into account in their decisionmaking, the precise manner in which anticompetitive consequences are to be dealt with once such consequences have been "considered" is unclear. In one case, the Supreme Court indicated that where private activities subject to agency approval may give rise to a violation of the antitrust laws, they are to be presumed not in the public interest unless other benefits are shown. In another case, however, a court ruled that under the Federal Aviation Act, prior to its recent amendment, the CAB was not required to explore less anticompetitive alternatives before approving a capacity limitation arrangement, a per se violation of the Sherinan Act.10 The D.C. circuit has ruled that the Federal Communications Commission was not required to adopt the least anticompetitive alternative in approving a regulatory framework for cable television having potentially anticompetitive effects; the same circuit court held that a standard analogous to the no less anticompetitive alternative test was required before the FCC could license a satellite communicacations joint venture raising competitive concerns.12
7 See, e.g., Senate Committee on the Judiciary, Competition Improvements Act of 1976; S. Rep. No. 1045, 94th Congress, 2d session (1976). See. e.g., Gulf States Utilities Co. v. Federal Power Commission, 411 U.S. 747 (1973); Federal Maritime Commission v. Akteilbolaget Svenska Amerika Linien, 390 U.S. 238 (1968); United States v. FCC, (SBS case), F. 2d (D.C. Cir. 1978).
Federal Maritime Commission v. Akteilbolaget Svenska Amerika Linien, supra. 10 United States v. CAB, 511 F. 2d 1315 (D.C. Cir. 1975).
11 Home Box Office v. FCC, 567 F. 2d 9 (D.C. Cir. 1977).
12 United States v. FCC,
In this situation, it would not be surprising to find that regulatory agencies would be uncertain of the appropriate tests they should use in making their decisions. Moreover, for those agencies uninterested in the competitive impact of their decisions, the current absence of a uniform competitive standard makes it easy to avoid meaningful consideration of competition.
For that reason, we support a statutory requirement that each agency weigh the competitive consequences of actions falling within the categories I have previously described and choose the least anticompetitive alternative practicably and legally available to effectively achieve the agency's regulatory objective. Such an approach would not threaten the agency's ability to carry out the congressional mandate to achieve objectives in, say, the health or environmental area, nor would it detract from the ability of a regulatory agency to establish, within a broad legislative mandate, appropriate goals for its regulatory activities. This result is at the heart of S. 382.
THE NECESSITY FOR JUDICIAL REVIEW
Finally, S. 382 establishes the principle that a competitive review standard should be enforceable through judicial review. We agree that such a requirement is essential if adoption of a uniform competition standard is to have a meaningful impact on the agency decisionmaking process. It is the Justice Department's experience that legislative or administrative exhortations to consider a particular factor remain simply exhortations if agency decisionmakers recognize that they are not accountable to the judiciary. We agree with the observation that a statutory standard that accords weight to a specific policy objective constrains perceived agency biases, facilitiates judicial review by narrowing the relevant issues, and provides further guidance for the agency.13 Such an impact upon regulatory consideration of competition would be beneficial.
Since most regulatory decisions are subject to judicial review under existing statutes, and most controversial decisions are, in fact, likely to be appealed, it would not appear that making a competition standard reviewable would materially delay affected regulatory actions. In this regard, I note that the language of S. 382 does not provide any new provisions for standing, but merely relies upon existing statutes and case law to determine whether an individual is an aggrieved party for purposes of judicial review.
As presently drafted, however, S. 382 places the burden of establishing that the requirements of section 3(a) have been met (based on substantial record evidence) on the agency or other party defending the agency action. Such a provision would appear to be an unnecessary complication. The Administrative Procedure Act, most regulatory statutes, and existing case law make a clear distinction between normal rulemaking, which is subject only to reversal under an "arbitrary and capricious" standard, and "on the record" decisionmaking which must be supported by substantial evidence. Moreover, courts reviewing agency actions currently operate under the presumption that the agency decision is lawful unless a party to the proceeding can demonstrate to the court that the agency's decision was not in accordance with law.
I see no great advantage to be gained by modifying the existing standards for judicial review or reversing the presumption of regularity accorded agency decisionmaking. The basic purposes of S. 382 can be served under existing judicial
The Justice Department thus believes that S. 382, reduced to its essential elements, would embody the following concepts:
1. For each agency action specified below the agency shall consider the competitive effects of such action and choose the least anticompetitive alternative legally and practicably available to achieve the agency's statutory goals. 2. The foregoing standard shall apply to agency action that
(a) Regulates or licenses entry under a scheme in which the level of entry is subject to limitation; (b) Sets or reviews with authority to accept, reject, or modify the monetary price charged for the provision of goods or services; (c) Sets, limits, or allocates the economic output of providers of goods or services; or (d) Reviews, approves, rejects, or regulates the terms and conditions of agreements among competing providers or purchasers of goods or services.
13 See, Stewart, "The Reform of American Administrative Law," 88 Harv. L. Rev. 1667 (1975).
3. Agency compliance with the above standards would be subject to judicial review under existing procedures; no change would be made in the standards governing an agency's choice of adjudication or formal or informal rulemaking as the means of making its regulatory decisions nor would on-the-record proceedings be mandated where none are now required.
I have attached an appendix detailing the anticipated coverage of S. 382 if it is focused according to our recommendations. I should stress that this language is intended to illuminate a concept: we welcome the opportunity to work with the committee on how to improve these provisions.
Mr. Chairman, in my letter to you of March 5, 1979, I pledged the active support of the administration in your effort to eliminate unnecessary regulatory burdens on the competitive market processes of our economy. In so doing, I stated my commitment to cooperate with this committee in the development of legislation that will ensure that Federal regulatory programs preserve and enhance competition to the maximum feasible extent and also ensure that vital public purposes served by such regulation will not be made subject to unnecessary procedural complexities.
My testimony today represents the Department of Justice's efforts to set out clarifications to the language of S. 382 that will enable this committee and those who may have had initial concerns about the impact of S. 382 on particular regulatory decisions to agree on specific statutory language.
I believe that there is not a more important task facing this Congress than the adoption of legislation that will, at long last, ensure that all regulation directly supplanting competition in the marketplace will be adopted only if it is the least anticompetitive way available to effectively achieve an agency's regulatory objectives. I look forward to working with the committee to fulfill our shared commitment to this end.
ADDITIONAL SUBMISSION OF JOHN C. SHENEFIELD
APPLICATION OF 382 STANDARDS TO REGULATORY DECISIONS
This appendix discusses the ways in which the essential elements of S. 382, as set out on page 13 of the Department of Justice testimony, might apply to various types of agency decisionmaking, and provides specific examples of regulatory activities of Federal agencies that would be included in-and excluded from-its coverage.
The number of Federal regulatory statutes is, of course, enormous. Consequently, this appendix is not intended to provide a comprehensive catalogue of these laws and the likely effect of S. 382 on them. Rather, it simply lists some of the major agencies and regulatory functions affected by S. 382 for the purpose of demonstrating the scope of the proposed standard.
A. IMPLEMENTATION OF THE LEAST-ANTICOMPETITIVE-ALTERNATIVE STANDARD
Under the least-anticompetitive-alternative test agency decisionmakers are not required to balance the benefits of a particular regulatory objective against the adverse effects that its achievement might have on competition. Rather, after determining the regulatory goal sought and the various ways in which the objective could effectively be achieved, they are required to select from among the available alternatives the one which would bring about the desired result in the least anticompetitive manner.
A key part of the test is the term "legally and practicably available." This means that an agency need only make a reasoned search for alternatives, it need not consider methods beyond its powers to implement, be forced to adopt approaches which impose materially greater costs on society, nor be required to formulate an endless number of obscure or extreme hypotheticals for the purpose of convincing a reviewing court that it has followed the proposed mandate.1 The practical impact of the least-anticompetitive-alternative standard can be shown by reference to a hypothetical example of an EPA decision to set an absolute ceiling on the volume of particular emissions which could be pro
1 See S. Rept. 95-931, at 80 (discussion of application of least anticompetitive alternative standard contained in "Airline Deregulation Act of 1978").