Opinion ID: 70274
Heading Depth: 3
Heading Rank: 1

Heading: The Cost and Benefits of the New Standards

Text: 62 In the Final Rule, HUD acknowledged that the new regulations would increase costs to consumers, but justified those increases on the grounds that the stricter standards would reduce losses from wind damage to manufactured housing occupants and the general public, and because they would help to avoid the inestimable costs of devastation to people's lives and emotional health and to the communities caused by severe hurricanes. Final Rule, 59 Fed.Reg. at 2457-58. HUD explained that its statutory mandate required it to look at more than economic considerations in promulgating regulations. It also concluded that the new regulations were in the optimal societal interest because the savings in storm damage repair, loss of personal property, and potential personal injury or loss of life, in addition to other expected benefits, exceeds the cost differential for the new wind standards. Id. at 2461-62. 63 HUD quantified these costs and benefits in its Regulatory Impact Analysis (RIA). Using data from the damage caused by Hurricane Andrew, the RIA delineated three types of benefits that would result from the new standards: (1) reductions in property damage borne by residents and insurers; (2) reductions in federal disaster relief expenditures; and (3) reductions in deaths and injuries. According to the RIA, the new standards would reduce 75% of the property damage sustained by manufactured housing during severe wind events in Wind Zone II, and 83% of the damage in Wind Zone III. Balanced against these benefits were increased costs of production caused by compliance with the new standards, although HUD determined that only a portion of the increased costs would be passed on to consumers in the form of higher prices. 5 HUD concluded in the RIA that the new standards would produce an annual benefit of $83.8 million and an annual cost of $51.7 million, resulting in an annual net benefit of $32.1 million. 64 After the Final Rule and the RIA were issued, the manufacturers submitted their Application for Stay to HUD, requesting that the agency stay the effective date of the new regulations pending judicial review. The manufacturers contended that two reports submitted with the Application for Stay (the Meeks Report and the De Alessi Report) demonstrated that the data and methodology HUD used to calculate the costs and benefits were fundamentally flawed. HUD rejected the manufacturers' arguments and denied the Application for Stay. 65 Before this Court, the manufacturers again challenge HUD's determination in the Final Rule and the RIA that the new wind standards would produce a net economic benefit, and claim that HUD has not adequately addressed the arguments made in the Application for Stay and the Meeks and De Alessi Reports. The manufacturers do not contend that the Act requires the agency to undertake a cost-benefit analysis before promulgating new regulations; in fact, as discussed in the preceding section, they argue that HUD as a matter of law should not subsume consumer costs into a general analysis of societal costs and benefits. However, to the extent that HUD relied on projections indicating that the benefits of the new standards will outweigh the costs as the primary basis for issuing the new standards, the manufacturers assert that these figures relied upon are flawed, making adoption of the new regulations arbitrary and capricious. 66 Before considering the manufacturers' challenge, we address the dispute between the parties as to what materials are properly included in the rulemaking record. HUD argues that the Meeks and De Alessi Reports and the arguments first made by the manufacturers in their Application for Stay should not be considered by this Court on appeal because the studies and arguments were submitted after HUD issued its Final Rule. HUD also contends that the RIA is not an appropriate object of attack because it was undertaken pursuant to an Executive Order 6 solely as an internal managerial tool for the federal government. In response, the manufacturers argue that the Application for Stay and the accompanying reports should be included in the rulemaking record because the economic data and analysis used by HUD to support the new wind standards were not disclosed to the public until the Final Rule and the RIA were issued. They also state that the RIA should be open to challenge because it was cited by HUD in the Final Rule to demonstrate that the agency had considered consumer costs as mandated by the Act. 67 We need not resolve this dispute about the rulemaking record, because HUD's reliance on its cost and benefit figures as support for the new wind standards is not arbitrary and capricious, even assuming that the manufacturers' Application for Stay and the two economic reports accompanying it are included as part of the rulemaking record. Because we assume for the manufacturers that the studies and arguments contained in their Application for Stay are part of the record, we must also assume that HUD's denial of the Application for Stay, which responded to these studies and arguments, is part of the record, too. With these twin assumptions, we proceed to explain why the agency's cost and benefit analysis was not arbitrary and capricious. 68 In the Application for Stay, the manufacturers first challenged the RIA's projections of the cost increases associated with the new standards. Using estimates from an industry study instead of the figures calculated by HUD, the manufacturers argued that the cost of producing manufactured houses complying with the new wind regulations would be double that of HUD's predictions. Moreover, they asserted that the RIA underestimated the amount of the cost increases that would be passed on to consumers as higher prices. According to the De Alessi Report, the latter error resulted from HUD's use of the national housing market, instead of the individual manufactured housing submarkets of Wind Zones II and III, to measure the elasticity of supply of the manufactured housing industry. The elasticity of supply measures how the market supply will respond to changes in price and is an important factor in forecasting how much consumer prices will rise when production costs are increased. 69 Arguing that the RIA overstated the extent of losses inflicted on manufactured housing by Hurricane Andrew, the manufacturers also contended that HUD's estimates of the benefits accruing from the new standards were significantly exaggerated. Specifically, the Meeks Report criticized HUD's estimate of insured losses from Hurricane Andrew, because more recent data indicated that the actual amount of insurance payments caused by that storm was almost half the figure used by HUD. In addition, the manufacturers argued that HUD's projections of uninsured losses and federal disaster relief expenditures caused by Hurricane Andrew were incorrectly calculated. Because the only available data on uninsured losses and federal relief payments induced by Hurricane Andrew were for all types of housing, HUD estimated the amounts directly attributable to manufactured housing by multiplying the total figure by the ratio of the number of destroyed manufactured houses to the number of all destroyed houses. The manufacturers claimed that that ratio was methodologically unsound, because the median cost of a manufactured house is only 37% of the median cost of conventional housing. Accordingly, they asserted, the actual amount of uninsured losses and federal relief payments attributable to manufactured housing should have been much smaller than that projected by HUD. 70 Applying their adjusted cost and benefit calculations, the manufacturers contended in the Application for Stay that the new standards would result in a net loss to society of $61.3 million per year. On appeal, they argue that because there will be a net societal loss rather than gain as a result of the new standards--and because HUD's regulations were justified by its determination that the standards would be economically beneficial--the new wind standards are arbitrary and capricious and should be set aside. 71 We disagree. We believe that HUD has given a logical explanation for the cost and benefit figures it relied on in promulgating the new wind standards, and that it provided in the Final Rule and the denial of the Application for Stay a reasoned response to the manufacturers' comments and criticisms. Specifically, we conclude that HUD is entitled to rely on the cost estimates calculated by its own engineering staff rather than the figures submitted by the industry's trade association, because our review of the record does not indicate that the agency's projections are either flawed or unreasonable. See North Buckhead, 903 F.2d at 1539 (When specialists express contrary views, an agency must have discretion to rely on the reasonable opinions of its own qualified experts even if, as an original matter, a court might find contrary views more persuasive. (citation and quotation marks omitted)). The record also demonstrates that HUD's estimate of the amount of cost increases that will be passed on to consumers is based on rational economic analysis. 72 In addition, we find that HUD has justified its reliance on the public and private benefits cited in the RIA. For example, in response to the manufacturers' attack on the ratio used to calculate the uninsured losses of and federal relief payments to manufactured housing owners caused by Hurricane Andrew, HUD's explanation included the fact that even though manufactured houses have a lower value on average than other housing, manufactured houses generally suffer a higher level of damage. Moreover, although the manufacturers are correct that more recent data suggest that insurance payments for property damage did not reach the levels originally projected by HUD, there is still a net societal benefit even if the updated insurance figures are substituted into the analysis. 73 Simply put, the manufacturers have not convinced us that HUD's explanation runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise. State Farm, 463 U.S. at 43, 103 S.Ct. at 2867. The role of this Court is not to decide whether HUD or the manufacturers used the better technical data and methodologies; instead, our task is to determine whether HUD's explanation of its administrative action demonstrates that it has considered the appropriate factors required by law and that it is free from clear errors of judgment. Id. at 43, 103 S.Ct. at 2866-67. 74 Our conclusion that HUD's cost and benefit projections are not arbitrary and capricious is bolstered by two additional, but related, considerations. First, the manufacturers' projection of a net annual loss does not take into account their own concession that the wind standards needed to be amended, at least to some extent. Thus, the manufacturers' claim of a $61.3 million net loss loses some of its force, because both parties agree that the preamendment status quo is not a viable option. 75 Second, we agree with HUD that it is not confined by the Act to promulgating new wind standards that will produce a net economic gain. HUD did assert in the Final Rule and the RIA that the projected economic benefits of the amendments would outweigh the economic costs. In addition, however, HUD explained that the need to increase safety and prevent future devastation to communities, such as that caused by Hurricane Andrew, justified increasing consumer prices for manufactured housing. This explanation is consistent with the agency's statutory mandate. Congress has required HUD to consider, in addition to consumer cost, the purposes of the Act--which include reducing injuries, deaths, insurance costs, and property damage. 42 U.S.C.A. Secs. 5401, 5403(f) (West 1983). Our review of the rulemaking record as a whole convinces us that HUD, in determining that the necessity of improving the safety of manufactured housing made the attendant cost increases acceptable, used its best judgment in balancing the substantive issues. North Buckhead, 903 F.2d at 1539. We will not substitute our judgment for that of the agency. Id.