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The Act Regulates the Regulators
In July, the N.C. General Assembly overrode the Governor’s veto of Senate Bill 781, popularly known as the “Regulatory Reform Act”, and enacted several important amendments to Chapter 150B of the North Carolina General Statutes (the Administrative Procedure Act, or “APA”). The APA dictates what must be promulgated as a rule, the procedure for adopting rules, and how a person can challenge an agency’s application of a rule. The amendments significantly curtail the discretion of agencies in promulgating and enforcing administrative rules and significantly change contested case procedure so that Administrative Law Judges will make the final decision in contested cases rather than the agency whose action is the subject of the contested case. These amendments will be particularly important in the area of environmental regulation that is so dependent on adopting and enforcing many complex rules. In this regard it is noteworthy that the amendments specifically prohibit environmental agencies from adopting rules more stringent than federal counterparts except for certain limited reasons.

Rule-Making Changes
Several important Regulatory Reform Act amendments are directed at the process by which agencies adopt rules.

Changes to Declaratory Rulings
The Regulatory Reform Act also amended the declaratory ruling procedure set forth in the APA at G.S. § 150B-4. For the first time, a person who might be affected by a statute or rule can request an agency to issue a declaratory ruling to resolve a conflict or inconsistency within the agency regarding an interpretation of a General Statute or rule adopted by the agency. The amendments speed up the declaratory ruling process and make it harder for an agency to refuse to issue a requested declaratory ruling.

Contested Case Procedure
The Regulatory Reform Act made an important change in how decisions are made when a person challenges an agency’s action by filing a contested case. A contested case is heard by an Administrative Law Judge (“ALJ”) who is not a part of the agency being challenged. Currently, the ALJ makes a decision that is not final, but rather is a recommendation, which then is sent back for a final decision by the agency being challenged. Beginning with cases filed on January 1, 2012, the ALJ’s decision will be final, subject to appeal to court by the agency or the person challenging the agency’s action. This change will make contested cases shorter and less expensive.

Judicial Review
The standard of review established by case law has now been codified in G.S. §150B-51(c). The whole record test applies to error asserted for reasons set forth in G.S. §150B-51(b)(1)-(4) while with regard to errors asserted pursuant to G.S. §150B-51(b)(5) and (6) the de novo standard applies.

Because judicial review will be of the final decision made by the ALJ, not the agency, it will be crucial for agencies to put on evidence during the contested case regarding their expertise so that the ALJ will give that expertise “due regard”. On judicial review, the ALJ’s findings should be upheld if there is any substantial evidence to support them. Parties appealing an ALJ’s decision may focus on asserted errors of law so as to avail themselves of the de novo standard of review.

The General Assembly sent an unmistakable message that agencies are being reined in. If an agency wants to be able to enforce a policy or guideline, it must adopt it as a rule, and there will be stricter procedures for adopting a rule. It likely will be easier to challenge the application of a rule through the declaratory ruling process and through a contested case proceeding. Agencies will need to place their expertise on the record in order for it to be given “due regard”. Finally, decisions regarding the application of an agency’s rules in a contested case will be made by an ALJ, not the agency, and the ALJ’s decision will be given favorable treatment by the courts if it is appealed.

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