August 8, 2001

Dear Ms. Knapp:

     For the reasons described below and in accordance with Executive Order. No. 12866, section 6, we are returning to you for reconsideration a draft proposed rule from the Department of Transportation's (DOT) Federal Aviation Administration (FAA) entitled, "Certification of Pilots, Aircraft, and Repairmen, for the Operation of Light Sport Aircraft", submitted to the Office of Management and Budget (OMB) on July 6, 2001. This proposed rule would establish new certification requirements for pilots, aircraft and repairmen to operate and maintain light sport aircraft. In addition, the FAA is proposing a new category of special airworthiness certificate for light-sport aircraft that meet an industry-developed consensus airworthiness standard.

     Under Executive Order No. 12866, agencies should "propose or adopt a regulation only upon a reasoned determination that the benefits of the regulation justify its costs" (Section 1 (b) (6)). While we fully support the objectives of the draft proposed rule, we are concerned that the regulatory analysis to support the rule does not present information adequate to support such a reasoned determination. Specifically, the FAA has adopted a "baseline" with which to compare the rule which adopts (among the "baseline" assumptions) an assumption that, in the absence of the rule, FAA would propose a more stringent set of standards than in the proposal.

     While we have no objection to analyzing an alternative that is more stringent than the proposal, we believe that the cost and benefits of the proposal itself should be compared with a status quo that does not include the artificial "baseline" assumptions of increased stringency. An attachment to this memorandum describes the problems encountered with the approach that was adopted in FAA's preliminary analysis as compared with the approach we suggest.

     As part of an improved analysis of alternatives, the FAA could also consider means of improved compliance and enforcement of regulations currently in place. This may be particularly appropriate where the proposal as drafted yields negative net benefits compared with the status quo and, as some have argued there are substantial violations of current rules and potential safety benefits to be derived from improved enforcement. This is one reason we have suggested to the Department that they publish an advance notice (ANPRM) before publishing the specific proposal.

     We recognize that the proposal was based in large part on an industry-consensus document and that FAA seeks to receive public comment on the consensus product as it has been modified by the FAA. On the other hand, an ANPRM could achieve the same result while also permitting focused consideration on modest improvements to current regulations that could conceivably yield higher net benefits to society as a whole.

     Due to the concerns identified above, we are returning this rule for your reconsideration. Our staff is available for further discussion with you on these issues. We look forward to working with you to improve this important rulemaking effort.

SUMMARY OF PROBLEMS WITH THE FAA ANALYSIS

     The FAA analysis of the Sport's Pilots rule presents the following analytical problem:

     In Appendix A to its regulatory evaluation, entitled "Net Cost Saving Benefit Methodology", FAA presents "status quo" costs, including costs of obtaining a private pilot certificate. FAA argues that in the absence of the proposed rule, FAA would require that recreational pilots meet this more stringent requirement. This leads FAA to estimate cost-savings benefits of approximately $41 million ($37 million discounted) , which measure the difference between costs that would be incurred under the status quo ($46 million) and the rule that FAA wishes to propose ($5 million). FAA adopts elements of an alternative which is more stringent than the status quo, rationalizing this as reflecting what would be required through regulation in the future if their proposal was not adopted.

     We believe that this approach can lead reviewers and the general public to seriously misunderstand FAA's proposal. It would be much clearer to first compare the "actual status quo" with $31 million in discounted compliance costs and $5 million in monetized safety benefits. This yields negative net benefits of - $26 million.

     The consequences of the more stringent alternative could then be factored in which may or may not increase the negative net benefits, even though the more stringent proposal would enjoy "cost savings" relative to the FAA proposal.

     Further analysis could also lead FAA to consider less stringent alternatives that would improve societal benefits. A further analysis is given in our staff comment and evaluation of the proposal as well as in supplemental comment on alternatives which might be considered.