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1Summary Safety failures in high-hazard industries can be catastrophic and lead to deaths and injuries, environmental damage, and property loss. To prevent such failures, governments in the United States and abroad regulate the safety performance of industries such as pipeline transportation, chemi- cal manufacturing, and offshore oil and gas development. These safety regulations are often scrutinized after an incident, but their effectiveness is inherently difficult to assess when their purpose is to reduce catastrophic failures that are rare to begin with. Nevertheless, regulators of high-hazard industries must have an informed and reasoned basis for making their regulatory choices. Regulators can design their regulations in several ways. They can regu- late at a micro-level by imposing highly targeted requirements on firms to mitigate specific contributors to risks. They can regulate at a more macro- level by focusing their requirements less on individual pathways that lead to risks and more on overall catastrophic risk. For example, firms may be required to develop and manage organizational- and system-level processes that focus managersâ attention on catastrophic risk. Whether they have a micro- or a macro-level emphasis, regulations can be designed in a âpre- scriptiveâ manner, by specifying means that firms must adopt or implement, or in a âperformance-basedâ manner, by specifying ends to be achieved (or outcomes to be avoided). These alternative regulatory designs often are used in combination. In this report, the study committee, which was asked to compare prescriptive and performance-based regulations for promoting safety in high-hazard industries, points out ambiguities in the meanings and incon-
2 DESIGNING SAFETY REGULATIONS FOR HIGH-HAZARD INDUSTRIES sistencies in the uses of these common regulatory labels. The report avoids labeling regulations as prescriptive versus performance-based and instead focuses on the most salient design features of regulations. Distinctions are made between micro- and macro-level regulations and between means and ends. On the basis of these distinctions, four main types of regulatory design are identified (see Table S-1), and the rationale for and challenges associated with each are examined under different applications. The impetus for this report, one that suffuses the debate about how best to regulate high-hazard industries, is a particular interest in regulations that require firms to establish management systems to identify, prioritize, and mitigate their safety risks. Often mischaracterized as âperformance- based,â these regulations are more aptly described as having a macro- means design, because they require firms to address overall riskâthat is, at a macro-levelâby using the specified means of a management system. Notably, these regulations do not require firms to achieve specified ends, or performance outcomes, such as a demonstrable reduction in major inci- dents. Such an outcome would be particularly difficult to demonstrate for regulations that are intended to prevent catastrophic failures, given their complexity and rare occurrence. The regulations instead presume that consistent attention to organizational dynamics and emergent risks should reduce the probability of such failures, even if that reduction may not be provable empirically. Requirements for management systems are often flexible in the sense that they give regulated firms the ability to customize their systems in ac- cordance with the firmsâ circumstances. For example, macro-means regula- tions often give firms considerable latitude to develop and execute their own internal methods for risk analysis and prioritization, systems for facility and equipment monitoring and maintenance, and procedures for managing change. This flexibility may have led to the mislabeling of these regulations as performance-based, because of the resemblance to the flexibility afforded by ends-based regulations that mandate performance outcomes but give firms discretion on overall means of achieving them. As explained in this report, the common rationale for requiring the use TABLE S-1 Four Basic Regulation Design Types with Examples of Commonly Used Descriptors Means Ends Micro Micro-means âPrescriptiveâ Micro-ends âPerformance-basedâ Macro Macro-means âManagement-basedâ Macro-ends âGeneral duty/liabilityâ
SUMMARY 3 of management systems to promote safety in high-hazard industries is that safety risks, especially catastrophic risks, can arise from interactions among conditions and activities that are difficult to anticipate and may be specific to each firm or work site. Such context-specific risks will be unknown to the regulator, especially in view of the diverse and complex operations char- acteristic of high-hazard industries. Although the design of management regulations is more means-based than performance-based, these regulations can serve a valuable purpose by addressing risks that cannot be controlled by highly targeted micro-level regulatory interventions. How well they serve this purpose can depend on a number of factors, including the details of how the regulation is structured; the capabilities of the regulator in sup- porting and motivating compliance; and the capacity of the regulated firms to plan, assess, and act in ways that fulfill the purpose of the regulation. KEY OBSERVATIONS AND ADVICE The report is informed both by academic research and by insights from case studies of the regulatory regimes of four countries governing two high-hazard industriesâthe pipeline and the offshore oil and gas sectors. The case studies show how safety regulators from different countries rely on a combination of highly targeted micro-level regulations and more flex- ible macro-level regulations, such as those requiring management systems. The report emphasizes that simple comparisons of the advantages and disadvantages of regulatory designs offer little more than a starting point for regulatory decision making. All regulations, including macro-level regu- lations that require management systems, can be structured in ways that affect these advantages and disadvantages. The use of such macro-level regulations may be advantageous in situations where the sources of risk are complex and context-specific, as is characteristic of low-frequency, high- consequence events. However, any decision to use macro-means regulations must take into account the regulatorâs own ability to enforce and motivate compliance (through methods such as auditing and field inspections) as well as the capacity of regulated entities to meet their obligations. If these preconditions are missing or cannot be created, the regulator should be concerned that this form of regulation will be less effective than desired. In considering the use of macro-level regulations that provide firms with flexibility in the means of compliance, regulators must take into ac- count not only their own ability to enforce and motivate acceptable levels of compliance but also opportunities for assisting or collaborating with the regulated industry so that all parties can transition more effectively to these regulations. For example, to promote the effectiveness of such regulations for use in high-hazard industries where regulatory impacts on catastrophic risk can be difficult to discern, regulators may work with industry to iden-
4 DESIGNING SAFETY REGULATIONS FOR HIGH-HAZARD INDUSTRIES tify, track, and analyze data on incident precursor events (e.g., near misses) and other conditions that may be indicative of catastrophic risk. Precur- sor or related data may not be sufficiently correlated to the risk of major incidents to aid in creating enforceable ends-based requirements. However, the data may help regulators monitor the effects of their regulatory inter- ventions and inform operator self-assessments of their risk management programs. The report concludes that too much emphasis is placed on simplistic and often misconstrued lists of generic advantages and disadvantages of different types of regulations. Claims about the advantages and disadvan- tages of regulatory types are too often anecdotal, and systematic empirical research into their applicability and effectiveness for different regulatory problems under different conditions is lacking. A safety regulatorâs interest in choosing among regulatory designs should be to select those best satisfy- ing the regulatorâs overall policy criteria, which may include objectives such as efficiency, cost-effectiveness, or equity in addition to risk reduction. To further these objectives, the regulator will want to choose a design that is suited to the nature of the problem and the characteristics of the regulated industry, as well as the regulatorâs capacity to promote and enforce compli- ance. As the case studies in the report show, regulatory regimes often con- tain a mix of regulation design types, rather than a single type, to address the objectives underlying safety regulation. Regulators should therefore consider whether the best approach to the achievement of their regulatory goals may be to combine various regulatory approaches. Finally, labels that are commonly given to regulatory types, such as âprescriptiveâ and âperformance-based,â are often used inconsistently in a confusing and misleading manner that complicates comparisons of regu- latory tools and choices. Regulators, analysts, and researchers need clear concepts for regulatory designs. A systematic and commonly accepted regu- latory design taxonomy, such as the one offered in this report, is needed to guide future research, analysis, and regulatory decision making.