Regulatory And Legal Reform: What Does Business Want?
Kenneth T. Derr, Chairman of the Board and Chief Executive Officer
On this site, you can find a press release that highlights Mr. Derr's speech.
I'm intrigued by the motto of the Comstock Club -- "Searching for facts." I've got a few facts that are searching for an audience, so hopefully, we'll all come away from this talk with some satisfaction.
My mission today is to get you involved in a discussion about regulatory reform, and also civil justice or "tort" reform. That discussion has been going on in Washington and here in Sacramento for a long time, but it's really heated up this year. I believe the decisions that come out of it will have major consequences for the business climate in California and in the nation as a whole.
Meaningful reform of the regulatory process and the civil justice system could do more to invigorate the U.S. economy and restore the competitiveness of U.S. industry than any other government action I can think of. Of these two issues, tort reform has received the least attention. So maybe we can start with that.
Finally it seems that Congress is about to pass legislation that will help bring some sanity to this area. Just last week, the Senate passed a bill in the securities area that really is a kind of tort reform. The bill would limit some of the more abusive or frivolous shareholder lawsuits.
Another important piece of new legislation will bring some relief in the area of product liability. The bill will impose uniform federal standards of liability throughout the nation. Up till now, manufacturers have had to deal with a crazy quilt of individual state standards. The bill will also put a time limit of 15 years on the right to sue, and it will put a sensible cap on punitive damages.
All of these are badly needed reforms. The only drawback to this new legislation is that it's focused only on this one area of product liability. I would argue that the same type of reform to prevent abusive lawsuits is needed throughout our civil justice system.
The Manhattan Institute recently placed the nation's annual tort bill at $80 billion in direct costs. That's more than the total profits of the 200 largest corporations in the country. The real cost of this is tremendous. Unnecessary litigation and punitive damages boost companies' costs of doing business. They inhibit innovation and productivity and create an environment where good business decisions are compromised.
California businesses and residents suffer from an especially harsh tort environment. For example, the average wrongful termination jury award in California today is $1.3 million. That amount is triple what it was just six years ago. A recent study by the RAND Corporation found that this state's automobile liability claims are wildly out of control. Excessive claims add between $2.5 and $3.5 billion a year to insurance premiums -- or more than $200 a year for each policy holder.
California has also seen an explosion of huge punitive damage awards from 1990 through 1994, including seven jury awards ranging from $57 million dollars up to $386 million. These enormous awards have created an incentive for some attorneys to sue -- on almost any pretext -- in the expectation of extracting a settlement rather than actually winning a judgment. All too often, companies conclude it's cheaper to settle than to fight in court and win.
Chevron's position is that reasonable limits must be set on punitive damages in civil suits -- not just in product-liability cases, but in all civil lawsuits involving interstate commerce. A couple of months ago, it looked like we might see some meaningful tort reform here in California. There were as many as ten measures initiated in the legislature, proposing everything from caps on punitive damages to penalties for frivolous lawsuits. But all of them were killed in committee. Actually, "killed" may be too strong a word to use about any piece of legislation in California. Let's say that tort reform has had a "near-death experience." I understand an attempt to revive some of these issues in committee will be made this week, but meaningful tort reform in California certainly faces a difficult road.
There is better news elsewhere. Several other states -- Texas, Illinois and New Jersey-- have all passed versions of civil justice reforms recently. And California can do it too if enough of us keep pushing for it. If you're involved in a business in this state -- large or small -- you owe it to yourself to look into the issues and find out what you can do to curtail lawsuit abuse.
Now let's turn to the broader issues of regulatory reform. The debate has generated plenty of heat in the media, and not a whole lot of light. I'm sure you've seen the stories and heard the claims. Their essence is that the new Republican majorities in Congress and in many state legislatures are out to undo -- actually, the word that shows up repeatedly is "gut" -- all the environmental health and safety regulations of the last quarter century. Directly or indirectly, the further claim is made that these representatives have the backing of business and that what business really wants is the freedom to pollute.
A New York Times story quotes Michael Bean of the Environmental Defense Fund as saying, "The task of rewriting our nation's most important environmental laws is being done by the major corporate interests whose practices created much of the problem in the first place." We're so used to extreme rhetoric and outrageous claims in this day and age that the actual meaning of such statements may pass us by. But these are very serious charges being leveled against America's business sector. I believe they demand an honest response.
We have to ask, "Is this true?" Is it true that the new generation of legislators, backed by corporate interests, are out to gut 25 years of protection? The answer is, "absolutely not." The alarmist language makes for powerful sound bites, but it runs against common sense.
I don't know anyone in the business community who thinks a major "rollback" could or should happen. I don't know anyone in the business community who wants that to happen.
And by the way, when I say the business community, I don't just mean the major corporate interests that Mr. Bean referred to. He's wrong about that, actually. The people in Congress who are working hardest for regulatory reform see themselves as responding to the demands of small business people all over America. In fact, several of the key reform leaders come from a small business background.
So what does business want? Well, for starters, it wants some acknowledgment that the U.S. has made tremendous progress in addressing its environmental problems over the last 25 years.
Take the tough problem of air pollution. The air in virtually all urban areas in the U.S. is far cleaner than it was in 1970. Sulfur dioxide emissions are down 53 percent; carbon monoxide down 57 percent; particulate matter -- smoke and soot -- down 59 percent; low-level ozone down 39 percent.
And yet the gross national product in this country has grown 69 percent in that time. This is a very impressive accomplishment and a real example of sustainable development. It's proof that growth does not have to come at the expense of the environment.
At Chevron, we've spent literally billions of dollars over the last 25 years to comply with environmental, health and safety regulations. The facilities and equipment and process improvements we've put in place represent an enormous investment and an asset, in every sense, to our business. We're not about to start tearing scrubbers out of our refinery stacks or removing the effluent controls that clean our waste water or doing things that put our employees or our neighbors in danger.
At this point in our evolution as an organization, we're committed to sound environmental, health and safety practices as an essential part of our way of doing business. We've developed a company policy that expresses that commitment in no uncertain terms. If you're interested, you can read more about it in the brochure we've brought along called Protecting People and the Environment.
What's true for us generally is true for all industry. The communities we work in demand high standards of environmental, health and safety performance. Our employees and our shareholders overwhelmingly demand them too. That's the main reason no one has to worry about rewinding the tape to 1970.
As for the intent behind the proposed reforms, I don't believe the Congress is out to remove the vital organs of protective legislation. Instead, the operation they seem to have in mind is more like liposuction. The objective is simply to get some of the fat out of a regulatory process that's grown bloated on an unbalanced diet of zero-risk thinking.
Now, you may think that's an exaggeration on my part, so let me offer just a few facts. In 1935, the federal register contained 4,000 pages of regulations. Today, there are 65,000 pages of such regulations. The total economic cost of these regulations is now estimated to be somewhere between $450 and $700 billion per year. If you look at regulation as a hidden tax, the tab works out to nearly $6,000 per household per year. Twenty years ago, those big expenditures bought big improvements, as I noted. But that was, in essence, picking the low-hanging fruit.
Unfortunately, our regulatory system does not have a principle that says "enough is enough." And as the regulatory machinery grinds on toward that ultimately impossible threshold of zero risk, as it tries to eliminate the last traces of automobile tailpipe emissions or incinerator flue gases, the costs rise astronomically, while the incremental benefits drop toward "too small to measure." As applied to real people in real life, this system has produced rulings so absurd as to defy logic:
- The town of Columbus, Ohio, was forced to spend $16 million to lower atrazine levels in its water supply because a dose equivalent to drinking 3,000 gallons in one day was toxic to laboratory rats.
- Or take Columbia, Miss., which was required to spend $20 million hauling away dirt from an old lumber mill site so the soil would be clean enough for a child to safely eat a teaspoon of dirt per day for 70 years.
Closer to home -- and far more complex -- we have the case of the California Clean Air Act and its requirement to begin phasing in vehicles using alternative fuels, including so-called "zero-emissions vehicles" (ZEV). The law requires the major auto makers to produce and offer for sale what it calls zero-emissions vehicles equal to 2 percent of their total sales in the state in 1998.
So far, the only thing that qualifies as a ZEV is electric. The percentage ratchets up over time, reaching 5 percent in 2001 and 10 percent in 2003. Offhand, I can't think of another instance of a law that requires a manufacturer to make a specified percentage of any product.
The ZEV tag is inappropriate. A more accurate label might be EEV -- for "elsewhere-emissions vehicles." In fact, electric cars do cause air emissions -- but they cause them at the power plant instead of at the tailpipe.
Virtually all of the alternative fuel and vehicle combinations are much more costly than conventional cars burning reformulated gasoline. But the most costly by far are the electrics. There are different ways to express the extra cost, but I'll just pass on to you what Bob Eaton, the CEO of Chrysler, said in an interview last year. He said his company will be forced to sell its electric minivans for less than $18,000, even though they actually cost up to $45,000 to build. And he said that he'd make up the loss by charging an extra $2,000 for every other car and truck sold in California. And what do the people of Sacramento or Los Angeles or San Jose get for these hefty charges? Virtually nothing.
The L.A. area, for example, will get essentially the same reduction in emissions by the year 2010 whether electric cars are part of the solution or not. At best, the electric vehicle mandate could remove an additional 14 tons of emissions per year from a 2,000 ton per day load -- less than 1 percent.
Let me ask you a question: Are you willing to pay an extra $2,000 on your next car for that? Or try another question: Are you willing to trade in your conventional car -- with all of its features, its range, its carrying capacity -- for a smaller, lighter car that you have to plug in to an outlet and leave overnight every 50 or 60 miles?
Most people aren't willing to, and that's what really makes the scheme so crazy. Who do they expect will buy these cars? Who's willing to put up with the inconvenience? When the technology really arrives, maybe electric cars will be supported by the marketplace. But trying to force that arrival by government fiat has to go down as one of the most absurd solutions ever proposed. "Let them drive electrics," is right up there with Marie Antoinette's solution for the starving masses of Paris: "Let them eat cake."
What regulatory reform is all about, essentially, is trying to introduce some common sense improvements into the process that has produced such absurd distortions. There are many different opinions about precisely what sort of reforms are needed. One industry may have concerns that others don't share. But a few concepts have emerged as central, and I think those are worth discussing.
The first reform that business wants is an improved use of risk assessment in formulating regulation. Before we subject an activity or process or substance to regulatory control, let's determine what risks it actually poses.
Realistic risks, based on plausible assumptions, that relate to real people in real life. Maybe that sounds obvious, but that isn't necessarily how it's done now. Instead, risks are typically determined by starting with worst-case scenarios, the most extreme exposures imaginable, and trying to protect against that. That's how they come up with measures like eating a spoonful of dirt every day for 70 years. Or drinking 3,000 gallons of water in a day.
Another essential reform principle would require the use of cost/benefit analysis in all regulatory decisions. In some cases -- such as parts of the Clean Air Act -- the EPA is prohibited from taking costs into account.
Just think about that for a moment. No consideration for costs! No wonder then that society seems to be getting smaller and smaller benefits from greater and greater regulatory costs.
The counterargument, of course, says, "The issue is human health. Are you trying to put a price on a human life?" But the point is not that a human life is not worth saving if it costs several hundred million dollars or any other sum. We all feel that the value of a human life is infinite. The point is that, unfortunately, society's resources are not. It is only common sense that we should try to allocate our resources where they will do the most good -- and that means save the most lives.
That line of questioning points to another principle that the business community is stressing in regulatory reform -- the notion of comparative risk analysis. We want to make sure that we allocate our efforts and our dollars to tackle the worst problems first.
Another feature of the pending reform legislation at the federal level is a requirement that these other essential features -- cost/benefit analysis, risk assessment and comparative risk analysis -- be based on a solid foundation of good science. The best insurance is to require not just scientific testimony and evidence, but also peer review of that testimony and evidence.
Finally, business would like to see the regulatory process shift from a rigid "one-size-fits-all" to a more flexible performance-based approach. This has been a sore point for a long, long time.
We think it's appropriate for the legislators to determine the desired goal. But we know from painful experience it's wasteful and counterproductive for them to mandate the means of achieving that goal. Instead of putting industry in a straitjacket, they should let our self-interest and capacity for problem-solving work for them. We have strong financial incentives to achieve the desired result by the most cost-effective route.
So there you have the key concepts in proposed federal regulatory reform: risk assessment using good science, cost/benefit analysis to set priorities and performance standards, and then flexibility on how we meet the standards.
I've tried to see what exactly it is about these proposals that have stirred up such panic in the environmental community, and I have to admit I'm puzzled. Part of it, I guess, is just the shock of being in the passenger seat instead of behind the wheel. We in industry have been in that position for a long time, and I can understand that you tend to shout a little louder just to get a hearing.
But looking more closely, I can see a couple of aspects of the proposed federal legislation that might cause special concern and, if not understood, give rise to the rollback rhetoric that I quoted earlier.
One is the so-called "supermandate" provision that would allow cost/benefit analysis to be applied to new regulations being promulgated under existing statutes.
The rationale for this seems elementary -- these major laws, such as the Clean Air Act, still generate new rules each year. If we can't apply the newer common sense process to all new regulations, we won't have achieved meaningful reform.
The other provision, sometimes called "look back," would allow people to petition agencies to revise existing rules and would require agencies to respond within a specified time frame. This probably does raise some valid concerns. It's possible that such a petition process could clog the agencies' workloads, for instance, and thereby add to the red tape everyone wants to get rid of. And it's also possible that, under "look back," some rules could be modified.
Ironically, the biggest risk here is probably to industries that have made heavy investments in pollution controls which might, on review, be deemed unnecessary. But I don't think this provision really poses any great threat to health, safety, or the environment. It's intended to be a means of getting the truly absurd rules off the books. No agency is going to set aside rules that shield the community from genuine risks. And no court would let them if they wanted to.
I'd like to recommend to all of the people who are really afraid of regulatory reform that they step back and look at the general intention as I've sketched it here. We all undoubtedly disagree about some of the details and can commit ourselves to work out those differences through the political process. But it would help tremendously to move this country forward if we could all accept the rationality, the common sense philosophy of the movement for reform.
In just a moment, I'm going to turn this monologue into a dialogue. I'll stop and try to respond to your questions. But before I do, I just want to make a couple of final points about regulatory and civil justice reform. These two issues are two key items in an agenda of change that really came up from the grass roots in last November's elections. They represent the concerns foremost in the minds of business people in this country and not just big business.
The United States is now a competitor in a global economy. Whether we have lots of new jobs or rising unemployment, economic growth or economic recession, rising prosperity or deepening poverty, these things are increasingly shaped by events happening halfway around the world and by our response to them.
The days when we could allocate large portions of our wealth to unproductive ends and suffer no harm are long past. With annual tort costs in the range of $100 billion and regulatory costs five or six times that amount, the United States is carrying a severe and unnecessary handicap compared with its global competitors.
The reform measures now emerging hold the prospect of freeing up significant fractions of those wasted dollars and returning them to true productivity -- spurring innovation, providing investment capital -- and growing new jobs for our people.
I urge you to get involved in this effort. Take an interest. Read up on it. Write letters. Talk about it. This is a special chance, an opportunity to get our nation back on track. Don't let it pass us by.
Updated: July 1995