senses. the first is when we're talking about investing in workers, it's just with investing in capital goods or infrastructure, the interest is you invest in worker to accumulate more hours, you invest in workers to get more out of them. and that this is the point of the sort of dynamic view you have to take of these things, that it's not a comparative statics thing. you have to think about that. which goes to the bad and bad equilibrium question about the justin. this is the justin raises, transitioning from one to the another. in the u.s. in in 1990s, it is possible to move from one productivity to another and back. the second point about productivity which goes to something that jay con and damon just said in regard to immigration is that we know this is again -- it's like with trade, immigration.

it's with jobs. the issue is balancing the adjustment costs of moving people in markets to the longer run growth benefits of having more efficient markets. and that doesn't mean always that more is always better. but it means that preventing competition is always worse. so you have to figure out how to get around this. and that's the struggle where all of us in good faith are trying to figure out where the right point is on this issue. the final thing, before we turn to lunch and then to mark bertolini's speech, is that we are in a world and i don't want to come down on the public because i don't know enough. but we're in a world where the reality is yuanou on union nigh zags

is at an all-time low. and so in that context -- for those of us who care deeply about the distribution of wages, one thing you can talk about is giving more power back to union. another thing you can talk about is well that doesn't seem to be happening at the moment. do we have another avenue. and there again is where the productivity omgseity comes in because that's how you bride a corporation in a sense into doing the right thing. thank you all for joining us this morning. we'll reconvene in 15 minutes at 12:15 for an address by mark bertolini. lunch is available for those of you in reality. those of you on the web and c-span have to go feed yourselves. and just another round of thank you to our colleagues, justin,

damon, michael and jacob who did a great job today. thank you. [ applause ] ladies and gentlemen welcome back to your previously scheduled programs. it is my pleasure to continue from our economics panel more

into our practical world. we have as a special treat today, mark bertolini, the chairman and ceo of etna who is going to talk about the role of corporate america and reestablishing the middle class. that's about as targeted and blunt a title you can have which i find typical of mark. many of you have become familiar of him recently as he got immense coverage in the "the new york times" and elsewhere for his leadership. and i think it is fair to say the word leadership. and taking aetna forward amongst other companies in voluntarily raising the wages of workers in its company. something so far at least none of the other major health insurers in the u.s. have announced. we have gotten to know mark over the last few years. he's been a member of the board

of the peterson institute. we always knew he was an interesting provocative real world person. he didn't quite know he was going to do this. he came to us a little ahead of when he was working on this and asked us to think through the economics of not for aetna. because he had already talked to his managers and shareholders and that's not our expertise. but to think through in a bunch of companies were to follow the example, who would they be, how many p how much of an impact would they have and what are the policy encouragements that might go with that. but i want to stress that mark's view has been repeatedly this is about what corporate america can do, which i think certainly doesn't end the conversation there but certainly is a part of the conversation that has to be said. and we're very grateful to have mark with us to do that. he's a distinguished career at

aetna. he was just mentioning at lurch that even though he doesn't believe in the earnings per share accounting, he's done a good job. he's held positions a cigna, select care, he's on the director of the verizon communications mutual life insurance company, a couple of leading charities. and as i mentioned, he's a member of our board. and aetna supports us but in this case we have something to learn from aetna. with that in mind i invite mark to the stage. thank you very much. [ applause ] >> thank you for inviting me to speak today. good afternoon, everybody. a little bit about who i am not. i am not an economist. so i'll offer those apologies up front. i am also not your typical ceo.

i am probably one of the quickly vanishing examples of living the american dream. i paid my own way through college working for three different unions the steelworker, sicu and the aiw. i came from a union family. my dad and mother both worked part time so we didn't have insurance most of the time. my mother was a nurse. it took me eight years to get through undergrad because i was sirius about it at wayne university and i was fortunate enough to get a scholarship to cornell where i intended on going back to work in the auto industry in the unions but was enticed to start an hmo with four friends of mine. here i am in front of you to talk a little bit about why we did what we did at aetna. but more importantly why we think corporations and leadership in corporations have

sort of lost their way. there is a big story in all of this that we can have a real impact. and when i took this job as ceo at aetna four years ago, i said to the board i had three sort of goals in mind. i'm the 14th chairman of a 164-year-old company. so i have an obligation to make sure that we have a commercial asset that continues into the future hopefully for another 164 years. the second was that i'm a very strong supporter of health reform in the united states. it's a shame that we have people that are uninsured in this country. and even though they may have access to health care, it's quite frankly poor access. and i wanted to make that work. i devoted my organization and my time to making health care work. we have been behind the scenes as a company and we'll soon be the largest company on the federal exchanges in the united

states in supporting the affordable care act. and then finally the last one, which is just a small goal but i thought it would be worth tackling is reestablish the integrity of corporate leadership in the eyes of the american public. and that has been a little more daunting than it thought it would be. people have all sorts of suppositions about who i am and how i behave. i don't summer. i learned that was a verb when i became a ceo. in the hamptons. i hang out with my buddies on motorcycles and cruise around. i'm a pretty straightforward person. what i want to start with is our mission as a company. the single biggest threat to the financial security of every human being on the planet will be their health status in the future. 75% of the next $10 trillion worth of debt in the united states will come from medicare and medicaid. so when you look at the impact of health care costs around the

world, and every country we're involved with and we paid for health care in every country in the world as a company. there is a problem that threatens every economy. i tell our folks if we can create a healthier world with healthier individuals healthier communities where i think health care ought to be based and then healthier nations we'd have a better world to live in a more friendly place to live in and a more productive place. and our view of health is really that is healthy individual is productive, a productive individual is economically viable and an economically viable person is happy. that's what we mane by healthier world. we've been talking about this number all along. i'm on a couple of boards. we look at household income. it's been flat for the last few years if you take a look at it.

wages are not supporting life styles of the people that do worker for us in our company at the lower levels of our organization. that's 7,000 employees now that are below 300% of the federal pofrt level in their household. we just don't believe that the income and equality is sustainable. two christmases ago a year ago this last christmas, i read a book and got a copy for all of the people on the executive team. i said here's some christmas reading for you because this is a point of view and an alternative. who are we as an organization as executives. what are we going do as a company to find a way to make this different versus letting it happen? do we want to be friends as a company? as a country? and how do we make it different and what do we need to do.

that began the dialogue around or organization about whether or not we were taking care of our people appropriately, whether or not we were investing in our employees. so when we look at the amount of corporate cash sitting around the world it's $3.8 trillion. i kind of find it hard to say. $3.8 trillion in cash sitting on shore or offshore. cash is plentiful. and i'll make the beginning of an argument around business education. we've lost our way in the way we educate our business leaders because we're normally taught the husband scarce resources and to put at risk plentiful resources. and for some business educations we are told that the scarce resources always capital so we should husband capital. we're going a great job of husbanding capital right now.

$3.8 trillion in cash. they closed their gates and then reopened thep them when it was safe. we're sitting on huge stash of cash. and thek÷ always assumed are people. but there's always plenty of people to go around. and i will make the argument that i think that's flipped. when i talked to my board of directors at the strategy we need to pursue, our single biggest risk is our human talent in the organization to make that happen. we have plentiful cash we borrowed $2.5 trillion to do our latest acquisition at 1.9% after tax. you almost can't screw up an acquisition that badly to not make a return on that kind of cash. so i've got a few -- these are

for those of you that were educated in business schools, these are the numbers we pay attention to. and we're told that these are if numbers we get measured by and this is how we get rewarded is that we maximize return on equity return on invest in capital, that we have to hit our quarterly earnings per share number and that the pe is really sort of a result of dividing the stock price by earnings per share. i would argue that the most important number on this stage is pe, a third, human capital. let me make this argument. we would rather invest in technology and new equipment because we can capitalize and depreciate it than invest in our workforce. because it's all expense. we have been educated as

business leaders that we create spread sheets that have numbers on them that is the truth. once the numbers are in the cells, it's truth. and we manage our businesses to those variances. in reality, the numbers in those spreadsheets cells are all lies from the get-go because they're going change as we go through our business. az and that what we need to understand are what are the underlying assumptions within each of those spread sheet cells, what are the variances around them. and when we array automatic of those variances on top of one another, what are the risks associated with the effort that we're about to undertake. and is it a worth -- a risk worth taking. that's what incense innovation. not what is true. not what we prove. but what we believe is a risk worth taking as a big in order to make the business work.

aetna's total shareholder return over the last four years is over 275%. our earnings per share have grown at 13.5% over that time. so what is the difference? it's the price earnings multiple. what is the prince earnings l multiple? it's the street's belief as to whether or not we can create a sustainable valuable product that our customers will continue to buy over time. and i argue that investing in the pe has given us a greater return. as a matter of fact if you look at the guidance to the street it has been well below the 15%. we've guided to about 8% or 9%. we've generated 12.5% to 13.5% but yet our shareholder return is up over 275% over that time

frame. it's because we deliver a consistently valuable sustainable product to our customers. it's about growing the top line by keeping our customers. who does that? well our $1.2 billion cost structure, $6 billion of it is people. human capital. that number at the bottom which should really be at the top. so the traditional measures of success really should be different. and when we look at our employee value proposition, we looked at wages, we looked at benefits and employee engagement, we looked at turnover costs. and you can see those aren't some of the traditional costs that we could do to put into a spread sheet to come up with the truth to say whether or not spending $26.5 million a year is worth an investment to reduce

$120 million worth of turnover costs, which is what our turnover costs are every year in a $6 billion people budget, it's $120 million a year in loss of productiveityproductivity, training, rehiring of staff. duplicate staffing in order to cover productivity curves. and our employee engagement like most employers have been dropping every year for the last five years. if you look at employee engagement across most corporations, those scores have been going down. so we realized a new economic model was necessary. and we started this four years ago and we started first with investing in the health of our employees and we started with wellness programs. we started with subsidizing their insurance coverage based on their income inside the company. so we created six different levels of stratify occasion wages inside our organization

where people at the bottom 45,000 dollars a year didn't pay anything out of pocket for their premiums, i pay 62% at the top. we looked at wages which we found we had about 5700 employees who were making around 12.5 to $13 an hour and we looked a the our health benefits which were becoming increasingly unaffordable for our employees as we increased the deductible, the out of pocket, reduced the trend every year by the virtue of the benefits that we offer not really thinking about whether or not those employees could afford. we invest in wellness, let's get them to stop smoking, let's get them to start kpaer sizing, keep the wages where we think the market clears and make sure the health benefit cost to us as an employer are reduced. why? because it's an expense. it's in a spread sheet and we can actually control because all of those employees work for us.

we can touch them every day. well what we came to find out -- i sort of asked this question and i encourage you in your organization to ask this same question. who are the people at the lowest levels of compensation in your organization? do you know what they're like? how they live their lives? asking that question was a much more formidable problem than i thought it was going to be. it took us over a year to come up with the actual profile. and i'll talk about those in a minute. but what we did was we started to invest first in our wellness programs and we started with eating properly exercising properly creating game theory and we nervous in mindfulness and yoga. i'll give you an example. i'm a big yoga proponent. of the top quinn tile of stress in our organization measured by heart rate variability and court sol levels those employees were

spending $2500 a year more than health care. we eve now put 13,000 employees through the program. those employees take a 12-week online mindful course or a 12-week yoga course and we've seen 69 minutes a month of higher productivity. seen their health care costs drop and we saw our trend in health care go down the trend go down, okay it wasn't a reduction in trend. our health care costs went down by 7.5%. just by investing in their stress levels. we then looked at the wages and we found that this employee population was 81% women in our organization, most of them single mothers who had a portion of their children in medicaid because they couldn't afford our

dependent coverage and they were on food stamps a significant percentage. i said to the team, how is it possible a fortune 400 company, executives get paid very well, how can we sit here and let people be on medicaid and on food stamps and what do we need to do to change that dynamic. so we went through the struggle of the terrorism of the spread sheet. let's put all of the numbers on a page and let's do a calculation. what can we really come up with. and so the first bidding was, let's go from $12.50 an hour to $13.25 an hour. we went through this a couple of times and i said why don't we try 16 dollars and see what happens. you would have thought we were giving the company away at one point because that was a very big number for a lot of people, about $10 billion. and then we look at the impact

of wages on benefits. if you increase people's wages, they lose their benefits. or those wage increases go to benefits. so we said what can we do to actually manage the highest level of increase in personal disposable income among this population. so 5700 employees, the average increase is 11%. everybody gets at least $16 an hour. for some it's as much as 33% in actual income. the increase is actually effective today as our annual increase. so everybody got their raise this morning. and their bonus in 401(k) contributions will actually be higher because it's based off of their base wage. the second part is that we will now offer enhanced benefit program for our employees where they'll get the richest medical plan for the least expensive amount. all they have to do is submit an application to a third party who

will verify that they're under 300% of the federal poverty level as a family and we'll subsidize their health benefits. and so for a lot of these employees, the savings could reach up to $4,000 a year. and for them that's a significant amount of money. now there is a quid pro quo. we will take care of them if they take care of themselves. so we have a number of screening programs that we would like for them to go through. if they engage in their disease management programs engage in getting healthier, we'll make that investment in them and eliminate their out of pocket costs as long as they're taking care of themselves. the goal is to bolster engagement. so i went down to jacksonville, florida, and i wish i had a tape of it for you. i stood in front of our largest group of employees that would be affected by this. called them on my way down to the site. it was one of the most emotional

events i've ever been at. employees actually crying in the audience. people who were clapping because we had so much challenge their personal lives in being able to put food on the table and make distinctions between whether i put gas in the car, put my kids in school or put food on the table. it was amazing. we have yet to measure the engagement scores which which we'll do at the end of this year. but this is the program. so benefits, lowest -- the richest medical plan for the least expensive medical costs and $16 an hour as the minimum wage. so our wage and benefit improvement will cost us $26.5 million a year, that's the dpul run rate in 2016 if everybody takes advantage of the program. and what we're finding is that for retail customers, which is where our industry is headed to back to earlier comments about whether we should have a single

payer system. we will eventually get there. the united states has it own unique way of finding its way. we'll have a bunch of individuals walking around with their own money and a sigh pend from their employer or a sigh pend from the government and they'll be buying health care retail. when they buy health care retail 73% of them will make the decision on how much it costs in the first year. and if we honor our promise to them in making it simple, easy to access and having people on the e end of the phone that take care of them 80% will be based on that relationship with our employees in the second year to renew. for us from an economic standpoint, it's best to invest in these employees for $26 million a year nrd to get a retention of the customer and grow the top line which will drive more in managing or pe, sustainable product that is

consistently purchased by our customers over time than anything else. when we put the $26 million on the page we had to go through all of the spread sheet. back to the spread sheet example. in each cell of the spreadsheet we put a number and then we put a credibility next to it. what is the risk of reducing turnover costs, reducing rework, reducing productivity ramps, reducing the amount of investment we need to make to get people up those productivity ramps. then we said how about rework moving up in the organization to people who are disenfranchised because they're doing somebody else's work, customer retention, customer satisfaction. our industry currently today has a net promoter score that's higher than congress but lower than cable companies and airlines. not a great place to be. so what can we do to improve the net promoter scores in the way that people feel about our relationship with our customers. if we can get to this point with

credibility, trust and a holistic matters with and they stay with us as an organization then we've done a lot to improve and make the $26 million a worthwhile investment. we put those all on the spreadsheet and say what do we need to believe in the way of risk factors. and risk that allows us as the leadership team to take this risk and make this investment. so our view is that company can invest in their employees. we need some changes in economic policy and tax policy. because if we invest in our employees versus a machine our machines go out for five years get depreciated and we then replenish them through the depreciation account. how do we think about investing in our people, what are the economic policies that we need which will ultimately invest in our communities and in the country and around the world. the way the model works is that

health care should be local and people should will taking care of each other in their communities. think of uber for health care. we get to a retail world, we'll be able to invest in those communities, have a healthier economic community where the health system becomes an economic engine in improving the productivity op individuals, increaseing their economic viability and making them happy.úxx so these are the investments aetna has made. we've called on a number of employers to engage in the same dialogue. we have a franchise kit that we now hand to folk to say here is how you encrease your wages and increase the benefits for your employees. i would say those ceos are finding the same trouble in finding the data about their lowest compensated employees that we are. i think there's going to be a

ground swell of people who with going to follow along behind this. i was at a recent session where the ceo of walmart pointed me to in the audience saying mr. bertolini, you've pushed me to do this. i can't get to 16 but i would like to move up on the wage scale for my employees. i believe there are a number of employers who will come out in the next six months. i hope we can start from the private sector side a dialogue and improve the middle class as a result. so with that, adam, i will take your questions. [ applause ]

>> it makes so much sense when you say it. i mean this is the trap any of us talking about things get into is you see the little light go on and you say, yeah, the accounting system is biassed against investing in human capital. why didn't i think of that. can't we do that. i guess the real question is that we're coming off a ten-year period in which accounting gains along with corporate ceos have not had the best reputation. so you've chosen to focus on this because it reflects the kind of mind-set that you think underlies a lot of other corporate's decisions. can you say a bit more about as someone who has worked in finance, as someone who has worked in a fortune 100 company mo about how you legitimate something like that. is it a legislative thing? is it the public -- what's that thing damon is on, the public

accounting oversight board. is it just teaching differently in business schools? >> i think there's four factors. first of all i think leadership needs to start asking different questions about how we're spending our money and where we're investing our money. and it's a difficult dialogue because we have been so trained to -- here's the spread sheet her's the truth, here's the quarterly guidance we need to hit. guidance doesn't always need to be the highest number you can achieve. guidance needs to be legitimate improvement for the shareholders that they're willing to invest in. it really needs to come at the very top -- i ask the very question. i don't want the truth. i need to know what we need to believe. if we believe it, we'll find it get it, make it work. that's one. the second is you have to deal wo your shareholder base and your board. incredibly i have a wonderful board who embraced this wholeheartedly. it was not a decision of theirs

but when i talked to them they supported it 100%. the shareholder base, a different one. the shareholders, i've talked to all of them they love it. they see the $26 million expense say that's not too bad in an $11 billion budget. how are you going to cover it? i say, don't worry. when we return the company on a day in and day out basis. but you have to manage your shareholder base. so there are a number of shareholders in the shareholder base that we've had in the past that i suggested they should be better invested in something else o than what we have to offer them. that's a difficult conversation but i've hads that before when one of our larger investors said i want a higher dividend. i said you're not going to get one because we need to invest in the company and the affordable care act. her response is what if i don't like that. i said well get out of the stock. that was painful for three months while she old off their

26 million shares, but that in the long run, if you're looking at the long run, it's not over whether the stock price moves up over the next three months. i'm a shareholder. i want the long run to work. i'll be a shareholder for a long time even after i'm done with this job. the board and the governance that's out there in the community. the third is what can we do in washington to get the right kind of economic policy and support policy to support human investments in capital. that's a slog. i worked with maya and fixed the debt. quite frankly our frustration was nothing will happen in washington so we might as well get something done at the corporate level. instead of pointing at washington saying you guys are the problem, if you could only do it we could release the $3.8 trillion in cash an invest in the economy.

i said, why don't we sort of help everybody in our organization share in the economic recovery and let's make this move. we've asked a lot of other ceos. i belong to a group of of harvard that's really focused on how can corporations do good and do well. what are the things we can do that will make a difference in our communities and with our workforce. started with five of us. there's now over 40. last year we had all of the deans from if major business schools in the back row going whab's going on here? who are these people? actually, harvard wouldn't have me as a student when i applied. my hair was too long and i wore jeans and a t-shirt and birkenstocks when i went to business school. i think the last piece is your own leadership team, your own employees employees, how do you engage them in a different way.

you have to have a real dialogue. i have my own blog i'm on twitter. i engage with my employees all the time. we have a social media platform and we have real conversations. i'm approachable. i don't hide behind security. i don't have a blacked out car driving me around hiding from everybody. i said to our pr team, you can't protect me. all you can do is prepare me because i'm going to go out there. we need to do this. i think those four things really need to work together. but it starts with leadership. it ends really with leadership and being approachable to our employees. in the middle we need some help from our shareholders, our boards and ultimately we do need help in washington. >> let me focus on -- before i open up the questions, let me follow up on two pieces of that. i'm not going to flatter you by saying how cool your leadership is because sit cool. let me focus on what in the sense the hard one, which is the shareholders. we talked in the previous panel about the quarterly earnings.

talked about that at lurch. talked about it here. the work we're doing for the foundation, part of it is on the way stuff we're talking today. part of it is doing long term foundation. i was at long term value summit that was convened in new york and i think you were invited to that. what things kept running unagainst was in the u.s. there's a narrow definition of fiduciary responsibility. if i'm voting shares i have to vote shares maybe not quarterly but certainly on an annual return basis. i can't have a broad deaf nation of shareholder value. now you may or may not think that's fair, but that's certainly something i hear a lot in the investor community. >> yeah. >> is that a real constraint and if so how should we be dealing with that? >> it's interesting, if you talk to the sale side you get a very

different story. the people who are long term holders with when you have a conversation with them saying here's pour thinking over a longer time, we actually get some of our cell sites to -- by side to call the sale side saying you guys are thinking about this wrong. we only give annual guidance. wu we still get beat up when their view of what our quarterly results should have been are off a little bit. and i think it's a continuing process. but i think we do need to have a longer run view. and i think larry fink at black rock would say the same thing. that's where you're going to make the right investments. why should an asset which by the way is never human capital at day 366 be incredibly more valuable than it was on day 365. why should the capital gains tax be 100% on day one and go down to zero in year eight so that we

make longer term investments. and why can't human capital be part of the investment cycle including training. we've under invested in education in this country because it's an expense in the municipalities, the government and in corporations. we say if we've got to cut expenses to make ends meet then this is an easy one. you know because there are plenty of people out there and we'll always find somebody smarter. we've hit the wall on that. we don't have the talent necessary to move our organizations and country forward. and not because they're bad people. we just haven't invested in them in a way that's necessary. >> well my last question then before opening it is on exactly that point, about training. part of what we were talking about today and part of what you were talking about with your numbers, like the $23 million or $26 million is an emphasis on the workers you got, treat them better treat them differently. they'll respond. but you're also mentioning the

fact that the works you have got or have available may not be the ones that you want in a sense. you need to get more out of them. you've done this initiative on wages. where do you see if you have an initiative on training or education investment? where do you think that goes in the private sector? >> we have to increase tuition reimbursement. thank god i grew up when i did. i went to wayne state eight years. the credit hours were a lot cheaper then. today i couldn't afford to do that. i would never get out of the hole i was in. we've looked at tuition reimbursement as something we need to invest in in our own employees. give them the time to learn and find more room for them to get educated on things that matter. i'm on the skills for america's future which is out of the white house which is really how do we match up community colleges to the workforce needs of employers in the local community. they don't match at all. >> yeah.

>> and so -- even at harvard where we need actuaries and underwriters, java programmers and people who work in all of the new computer languages. we may even have a few systems that's still run that way. but i think that that -- you know, we need all of that education to happen. and yet we have kids going to community college getting degrees that aren't all that helpful. i think we've got to enkaurj the dialogue between the business community and the schools about what we need so we can put people to work so they can charge a legitimate division to get value for what they've educated their students with. but i don't think that match is there today. and for us it's a very difficult and intractable problem. we have to re-educate most of the people that come to worker for us because they don't have the skills necessary in written

communication. sentence structure and diagramming sentences. there should be a run on the store of those books for people so they can actually learn how to communicate in writing, communicate verbally. it's a big problem for us. we've shortcut everything. >> you know a ceo is down to earth when she's still coding his own four tran. i'm going to open it up for questions. jessica has a moving microphone up front. the gentleman at the back first and then damon here. >> i'm eric moore from "the wall street journal." nice to hear about wayne state from a room like this. i'm from detroit. >> great school. >> one of the first slides you showed was product tuffty and wage growth. do you see any correlation between the productivity line flattening in recent years since 2007 or so, against the longer term of slower growth and wages? >> i think the flattening of the

productivity curve is directly related to engagement. employee engagement. i think people aren't present at work anymore. and when you spend time talking to employees about what it takes them to get them engaged in their work you have a larger number of people in the workforce that actually come to work not to work. and you know, it's because we've treated them in a way that i just don't think is fair. and i've used that term before. we haven't treated people fairly. we have to find a way to reengage them and that takes a dialogue and leadership from the very top. ceos who can get away with undercover boss probably couldn't be ceos. they should be engaged with their employees. that's the only way you get them to buy into what you want them to do to help you achieve what you're trying to do for your customers and for your country. and you've got to make it a bigger mission than if you do this i'll pay you this. so you know we have 22,000 of

our employees that work from home full time. higher productivity, very low turnover, no carbon footprint because they don't thrive to work. they're in their communities, with their kids and they have 24 hours a day to chew at 8 hours worth of work. so i think all of those kinds of programs that engage our employees in fundamentally different ways are important. i think what we're seeing with the productivity curve is people not wanting to do a lot of work. we've lost engagement of our workforce. >> david? >> first i want to say what a pleasure it was to hear you talk. i really, really enjoyed it. >> thank you. >> this is david? >> and secondly i want to ask you a question kind of coming off of something adam said because he said -- my question is to ask you to reflect on both business culture and political culture. adam said that there's this issue of fiduciary duty and i get to show off as a lawyer in a

room of economic is. the fiduciary duty in this country at any level is long term. anyone who is telling you they can't do x and y is telling you they don't want to. and -- but the belief is wide spread. and this is a business culture question. but it's also tied to a political culture question, because you spoke of what you view as common sense measures in both accounting and tax that would help facilitate investment in human capital. these are measures that there has been wide agreement on i think, in some way. the details have never been hammered out. but accounting for investments as human capital as a depreciable investment bot0 terms of gaap accounting and tax accounting and changing the capital gain structure so it's not a cliff. that's something that there's wide spread consensus among the

folks that you think would disagree and yet we can't get it done. so i would ask you to reflect a moment on both the business culture that seems to be in our way in some sense and then the political culture. >> so i'll go back to the business culture and we'll lead to the political culture. in the business culture we have what i call the high school physics experiment problem where we actually run the experiment to get the results we need in order for the experiment to be a success so we can get an a ena move on. we don't do the science. and in business you've got a spread sheet with a bunch of people running a bunch of numbers, people look at the assumption that supports the conclusion they want to sell you. i spend most of my time as a forensic scientists in inmy organization to try to see where i'm beinged -- that's going to get bleeped. how do we stop the terrorism of the spreadsheet where people

search for the right assumption and number in order to support their conclusion versus using the science in the best kmesst interest of the company and its customers. we've gotten lazy. we don't ask hard questions. we have no personal courage in saying is this really something we can do. what will we stand up for over the longer run. and then that just bleeds right over into the political climate. because if the leadership of businesses aren't willing to do that and ask those tough questions and have the personal courage to come up with what should be the right answer for everybody longer term, right then the political community is going the say, if you aren't doing it why should we do it. and then with point at them going if you aren't going to do it, then we won't do it. and the only way you break the logjam is to have your own personal courage to stand up and do it. when i look for executives in my company, i look for people with personal courage. am i willing to put my interests

secondary to the interest of the enterprise and its customers and ultimately is the shareholders. if we take care of the customers, that means we're going to take care of our employees, that will keep the customers and that will give us the pe that we want which is a growth company because we provide a consistently valuable and sustainable product over time. that's the secret. it's kind of crazy, but that's the whole secret. this issue is around whether or not people have the personal courage. i've had many of conversation with the people in washington saying you know what you're the master of the universe, i get it. what you say grows. but in any world i don't get reelected if i do this. then we have people who call people names because they point at them and say because your point of view is different than mine, i'm going to point you out as a bad person. not argue the point. just say you're a bad person and therefore nobody should listen to what you're saying because you're an idiot and i don't want anybody to listen to what you're

saying because that means we have to have a dialogue about what's right in the longer run. we've lost that dialogue the instability of our dialogue is built around who's right, who's wrong an the polarization points of view that i think are just irresponsible. >> identify yourself, please. >> fred berg ston here at the institute. mark, you made several reference to the affordable care act but you didn't say much about it. i know you have worked hugely to make it work, make it better. what's your assessment at this point? how is it working? what more needs to be done? how to make it most effective? >> i think it started out -- the whole program was built around a level of mistrust between the industry and the government because everybody thought that there was some sort of game to be had on this. and i have to tell you, the prescription drug program, which, you know, the republicans

kicked off and the democrats hates was a really good public private partnership. i had to demonstrate that the technology worked a year before we went live in order to be a part of the program. we had the mistrust that for it to work. and that got off to a bad start. which i think put a pox on the program that was not fair because we do need to get people access to insurance. the other part is because it's such a third-rail issue, nobody's touched it since it was passed. medicare gets touched every year. like it or not. congress, interestingly enough, runs medicare. it gets touched every year. yet, we can't touch the affordable care act because if we touch it we make one change to it, then everything gets opened up and we have a dog fight over the whole thing. so we need to fix it. there are a lot of things that could be done to fix it that could make it a lot better and give more access to people.

but right now, because it's stuck in limbo, we can't do anything with it other than try and make what we have work, which i think people are doing a pretty good job at, given what we've got to work with. so there are a list of things. i think whoever runs for president next is going to have to, you know regardless of party, is going to have to make promises to the american people it's going to get better. so that list of things is pretty common, quite frankly between both sides. more power to the states, more flexibility around benefits, probably are the biggest pieces. >> please. jessica, to nancy. >> hi, i'm nancy donaldson with the ilo. i'm just interested -- you know the socially responsible investing sector is now including sovereign funds over a trillion dollars representing

over a trillion dollars in investment. i'd be interested to know whether you -- if this critical mass builds of your fellow ceos and companies and the harvard group you mentioned are in a discussion with that community. if they get further into the definition around governance i think it could help push it faster. >> well, i think what we need to do is we need to have more. so a trillion is not a lot, unfortunately, if you think about it. we do engage with the sovereign wealth funds on a regular basis, and we're engaged in a lot of other places. when we go to europe to meet with investigatorors they love it because they can't stand the dialogue they get when they come here to the united states. they get embarrassed by the other investors because they're told, stop talking about the

strategy stuff, we need to know what's going to happen next quarter to the commercial medical benefit ratio. so they like it when we go over there. i was just over in the u.k. and met with a number of investors to have that very conversation. it was refreshing for them that we were having that kind of dialogue. so i think we need to find the venues to do it. i think we need to get our policies -- so, you know, we used to offer shares to all of our employees. we wanted everybody to engage in growing with the company. we can't do that anymore because iss won't let us issue enough shares. so fewer and fewer people get chairs every year. so we've got this -- we actually had policies in the interest of good governance, quote/unquote, that work against sharing the wealth. my salary hasn't increased for six years, yet my wealth has increased because i take it all in shares and i'm growing with the company as a result. everybody should have that opportunity. we do have employees that can buy shares. but they don't get them. we can't give them to them

because we can't issue enough shares as a company to make it happen. >> let me pose another related question to you. you know we've tried to do our bit on thinking about which sectors, which kinds of companies can follow your lead in this area. you've spoken about it in general, moral terms. we talked earlier about mcdonald's or walmart or things like that. how much do you see what etna has done as you're a consumer-facing company in an inherently domestically oriented sector versus other industries or other companies or how much is just general, you can do this? >> generally -- so i will say general, and for this reason. and it's not $16 an hour and it's not the benefit change.

the real opportunity here is having the zsh-- i can ask a number of ceos, and i have, do you know who your lowest-compensated employees are? they don't. it's about taking a journey to understand who these people are and how -- i mean, they're the people meeting your customers every day. how are they living their lives? do you feel good about how they're living their lives? it's in that search in looking for that information and arraying it that you start to say, what's fair? and having that dialogue with your own team. i can tell you our team they were all ready for it. i said, what are we doing with the social contract with our employees? how are we engaging them in different ways? because we can't do all the work, that's for darn sure n running a $58 billion company. so i think everybody has to do the homework. it's really about doing the homework and having the courage

to do the homework and the energy to fight through all the layers in the organization that will prevent you from screwing up the place. we have people in our organizations that do their level best to keep the ceo from screwing the place up. so you got to fight through all those layers in the company to find that information and be informed and say, okay, looking at this, does this seem right? is it right? it's a question of right. it's not a question of fact. there is no truth. $16 an hour, maybe 12 somewhere or 20 elsewhere, but what's the right thing for us to do in the way we're leading our organization and engaging our employees to be part of our success. >> i should know this, but i don't. so you are mostly -- you're a u.s. corporation and international corporation, and you have some international employees too. i don't know what the split is. one interesting question in this sort of international institute

and comparative, is there a difference from how you approached all this dealing with u.s. employees or non-u.s. employees? maybe you don't have -- i mean maybe the base adjustment process has been primarily a u.s. phenomenon. it would be interesting to know whether there are some differences about how you have been doing this aspect of your business around the world. >> the embarrassing fact is that we treated our international employees with wages better than we treated our domestic employees. because we were growing and investing in those markets, we had to get the very best people. we were changing wages more than once a year. there was no number that we put on it. like 2%, 3%, 4%. we just said, what do we need to do in southern china? what do we need to do in the middle east to get the best people? in retrospect, you look back at

it, and i never had an argument with the team because we're building out around the world. how do we find the right people? i was a bit embarrassed by the fact i could have that dialogue with them, but internally, it was a spread sheet number when we put the operating budget together. what should the merit increase be? so we treated our international employees probably better than we did our domestic. >> james sterling the urban institute. i i wonder you might reflect from the business perspective between the breaks between the larger employers and the smaller employers. then simultaneously between the full-time and part-time employee. i'd just like your reflections. >> our program's for all our employees. we didn't break it between full

time and part time. i would say we've not yet been able to tackle the issue of smaller suppliers that work with us. we've encouraged everybody to take a look at it, but everybody has their own sort of issues, particularly the smaller suppliers. i think the smaller employer market has a much bigger challenge in dealing with these because of the ability to pass prices through. but that's a next level for us to look at as a company. how do we think of a supplier base and being able to help them do what they should do for their employees because their inputs are very important to the end result for our customers. that's a next level, next generation for us to look at. >> i was wondering if you could elaborate a little bit on how to spread the message and not what you as a ceo can do but how the public, whether we're just interested individuals, research

institutions, guided investors or unions or whoever it is, how you can promote the kind of corporate change you've seen. what are the questions that should be asked of your peers and other organizations in terms of transparency? you mentioned which i thought was interesting, asking the question what's your lowest renumerated employee, and how does that person live? are there more of those types of questions that should be basically placed by the public? and is there a role for media here? >> we obviously have a role for the peterson institute. >> that is one of the reasons we're holding this, not because of some ground swell in the community that we needed to do it. i reached out to adam before we went live with this and said, okay, this is really for our employees bhuut it's going to get out into the public domain.

how can you help me think through the attacks from the right and the left as a result of making this investment? which we were able to minimize. for all intensive purposes even the u.s. chamber of commerce supported us in our approach. so we were able to minimize that by actually doing some proactive outreach. i think the other part is, you know, the ceos hang out together all the time. so there are a lot of conversations at dinner going how did you do it why did you do it? we have an information package we can send out to my fellow ceos to look. i've had some ceos that have said, you know, i don't know who they are and i'm embarrassed to say. i'm embarrassed i didn't think about this first. so it's raised a level of awareness among ceos about what's happening because it's often we get the distilled spread sheet number that rolls all the way up and says, you know, here's the range of eps based on these assumptions, what do you think? looks pretty good. but in there is a number that

says, you know, what we're going to give the employees a 1.5% merit increase. it's wrong but you never get to that level of detail. so it's the getting ceos to understand that there's an intent to the commander that people throughout the organization need to understand in order for them to do their jobs better and well. it's not poorly intended. it's actually well intended. they're trying to do the right thing by the company. but what the command erp needs to say is that these people need to be taken care of. we can't continue to do what we've been doing to them. when you send that message the 1.5% doesn't sneak into the spread sheet or theb-w operating plan. and after the last time it did, i said to my team, here's what we're going to do. we're going to move it back up to 3.5 and the rest is going to come out of the executive incentive pool. if we find it throughout the year, i'll put it back in the executive incentive pool but we're not doing this to the front-line employees. but it sneaks into the spreadsheet. if the ceo doesn't know to ask

they won't find it. it'll roll up into a number. if they don't say, by the warks here's what we need to do as a company, to have the courage and send that message then there are a lot of other things we can do to solve for that problem. so we need to be looking at it. $26 million, that's kind of a number we can solve for. if we do i mean, more engaged employees, higher retention of our customers, a sustainable top line, a growing bottom line. we all win in that equation. our customers do first and our shareholders do next. we're shareholders. that's where we ought to win. >> okay. i think that may be the rousing note on which to end it. it's been terrific to have mark with us today. it's been terrific to have this dialogue between the active leadership and the intellectual

background, which mark has kindly encouraged and put in the time to let us have. obviously these are issues where etna and mark are going to be continuing to set an example and push and they're going to be issues we here are going to be continuing to research and push. maybe there is a higher equilibrium we can all get to, which is all an economist can ever hope for. you can hope for share growth, and we can hope for equilibrium. this meeting's adjourned. [ applause ] >> with congress out this week, we're featuring american history tv in primetime. tonight a seminar on the closing of the civil war in 1865. at 8:00, the battles of sailor's creek. that's followed by a look at the battle, surrender, and legacies of the battle of appomattox. and c-span's congressional

freshman profiles continue tonight with texas republican will hurd. he's the first african-american republican to represent the state since reconstruction. and he comes to congress after serving abroad with the cia. here's a preview of that interview. >> i was 22 years old. i'm driving my toyota 4-runner from san antonio to washington, d.c. i've stopped at a gas station. there's a tv on and the uss cole had just been blown up by al qaeda. i remember thinking, i wonder if i'm going to ever -- i'm getting ready to start in the cia. i wonder if i'm going to know anything that's going on there. after we go through our initial orientation, i was the desk officer for yemen. so i was the guy back at headquarters in langley. i'm supporting the men and women in our station, which is the cia headquarters in yemen. so that was my first job. one of the biggest challenges

while i was there was fighting the bureaucracy. when i was in afghanistan i managed all our undercover operations. i felt like there were rules and regulations that we were having to use to do our jobs that were preventing us from protecting ourselves and doing the job that we were trained to do. so fighting the buy rockreaucracy in kabul, fighting it back in langley was an incredible challenge. in the end, we won because i had the right experience and background and enough support to get that done. but it was a great experience because, guess what? that's what i'm doing here. most of my responsibility as a representative from this area is to fight the bureaucracy for those folks who need the bureaucracy fought. it's that simple. scr >> watch that interview with congressman eehurd tonight at 9:00 eastern on c-span.

with live coverage of the u.s. house on c-span and the senate on c-span2, here on c-span3, we complement that coverage by showing you the most relevant congressional hearings and public affairs events. on weekends c-span3 is home to american history tv with programs that tell our nation's story, including six unique series. the civil war's 150th anniversary, visiting battlefields and key events. american artifacts, touring museums and historic sites to discover what artifacts reveal about america's past. history bookshelf, with the best-known american history writers. the presidency looking at the policies and legacies of our nation's commanders in chief. lectures in history with top college professors delving into america's past. and our new series, reel america, featuring archival government and educational films from the 1930s through the '70s. c-span3, created by the cable tv industry and funded by your local cable or satellite provider. watch us in hd, like us on facebook, and follow us on

twitter. next, the supreme court hears three consolidated cases on epa regulations for mercury emissions. the court is considering whether the epa was required to take costs into account when it first decided to regulate hazardous air pollutants from power plants or whether health risks are the only consideration under the clean air act. this is an hour and a half. case 1446 michigan versus the environmental protection agency and the consolidated cases. mr. lindstrom? >> mr. chief justice, may it please the court, the epa's view whether or not they can regulate, the text sets out two distinct terms and directs the epa whether or not it is appropriate to regulation and

whether it is necessary to regulate. epa found it's necessary to regulate because of the existence of public health harms and to regulate for the reasons of public health harms. >> i'm not sure that is quite what epa said. my understanding of what epa said is that it is necessary because of public health harms and it is appropriate because there are technologies that can remedy those public health harms. so on the one hand, it said that the phrase went to the nature of the harms. the phrase necessary went to the nature of the harms. the phrase appropriate went to the existence of technologies. >> when they relied on the availability controls, they did that after having said we must find it is appropriate if the health hazard exists. so they already determined that the health hazard is a necessary and efficient --

>> can you give us a citation to their opinion? the language speaks for itself, i assume. what are you referring to? >> for example if you look, this is in our replied brief -- >> replied brief? >> yes, your honor. i think that points you to the final rule, volume one of the u.r. petition appendix. let me find the volume. if you turn to the u.r. petition appendix volume 1 -- >> good lord. >> this is the text of the final rule. page 206. i misspoke the first time, page

206 says we must find it appropriate to regulate egus under clear air act if we determine a single half poses a threat to environmental and public health. then there is nothing left to be done. you already said that we have to do it. the availability of controls is not doing any additional work. >> is the government going to say that if the predicate for regulation exists, i.e. their emissions -- that it is appropriate to regulate. that's what government will say. appropriate is a capacious term. and it will be that the government says it is appropriate to regulation or if there is --

>> there is a capacious term, but i think that cuts against the government. one of the things encompassed in the term "appropriate" is that it looks at all of the circumstances, and whether or not you will regulate cost is a relevant circumstance. the fact that they said we must find it is appropriate to regulate means that this other -- >> well i thought -- >> they didn't look at the availability of technologies? is that what you're saying? they thought the availability of technologies was itself ir -- irrelevant. they said regardless of whether or not controls are availability, if a health hazard exists, we have to regulate. >> i'm sorry, i thought they said only if it was necessary. congress was motivated in most listing these sources because it didn't know whether the technology that would be put in

place to control acid rain would reduce, perhaps sufficiently. i had a different understanding of appropriate and necessary. appropriate if there were, but necessary only if those haps were not sufficiently controlled by the other technology. >> the necessary, both of them looked at whether or not there would be an ongoing hard. necessary and appropriate turned on utility study. it examined what hazards would remain after the other regulations -- >> it could have been low enough so that no standards were necessary. >> well they determine how severe, the severity of a health hazard.

the severity went into determining the health effects at all. so they looked at the health effects. once there was enough health effects that there was a public health hazard, they said we must regulate. it is necessary to regulate which is exactly the same as what they said -- >> can you step back for a minute, general lindstrom. it seems like the quest for particular meanings attached to all of these adjectives. if we step back, that language is used all over the u.s. code and indeed in our constitution. as i understand what courts have done with that kind of language they have not insisted there be separate defined meanings for each of those words. when john marshall was doing this, he starts off with the word necessary and he says this is a phrase and we have to understand what the phrase as a whole means.

and where shouldn't we similarly say that catching them in a redundancy, or super fluidity, it's just not right because it's a complete phrase. >> there's two responses to that. first of all f you look at what this court did in prince verse the united states t recognizes something might be necessary and not necessarily proper. the commandeering of state legislature might be necessary. >> exactly. we have separated out the two words and said something could be necessary and not proper. and what marshall said was that necessary doesn't mean absolutely indispensable, it just means useful. that's quite different from saying that proper has no role to play. it can be necessary that is useful, to the federal government and yet not proper. >> so why do you get to pick what it means? i mean i thought in our agency

we repeatedly say if a term is ak ambiguous and there's no legal definition of appropriate, it's context chul contextual, yes, but if you're saying a word that's not self-defined, you have to look in context, and it's ambiguous. >> i don't think it's ambiguous in context. you can use the word appropriate in such a way that everyone understands what you're meaning. if i said we're going to take a group of people and we're going to go some place, and i want you to behave in an appropriate manner and i told you we were going to the library everyone would know -- >> but i look at this statute and see them doing the first part, the part at issue and the very next provision says in four years instead of three do a mercury study that includes costs. i'm looking at it. i can safely say one study doesn't use the word cost, the other does. the first one doesn't

necessarily intend costs to be looked at. what is irrational or not plausible about that reading? all we have to find is a plausible reading to uphold the epa's interpretation. >> it's irrational because they're taking the key statutory word and treating it as surplus. the language i should have pointed you to earlier is on page four of our reply brief. they're reading a word out of the statute, and it doesn't extend to far as to say we can violate an ordinary rule. >> the word appropriate is often a signal that discretion is -- you have an expert agency. so the word appropriate, i think, is commonly used to indicate that the expert agency

will do what it finds fit based on it's expertise. so you're saying that appropriate necessarily embodies a cost calculation, and yet this is a statute that uses costs, directs epa to consider costs multiple, multiple times. is there in case in all of our decisions where we said even though there was no instruction to consider costs, epa is required to consider costs. is there any such decision? >> i don't think -- no, i don't think this issue has arisen the same way where congress has given them broad discretion to an agency and the agency has said we're going to ignore what's an important part of the problem. that is why this is a problem 't( under the state farm doctrine.

agencies are supposed to not ignore an essential part of the problem as they engage in reasonable decision making. >> but i think what justice ginsburg is getting at is sometimes we have looked at silence and we said give than silence, cost considerations are precluded. so that's the example in whitman. sometimes we say it still allows agency discretion, they can do what they want with it. but it is so far from our most closely analogous case which is whitman, to say not only is cost consideration not precluded, it's required when there's silence as to that subject. if congress wanted to require something, and clearly congress required this in other places, congress knows how to require consideration of costs. to get from silence to the notion of a requirement seems to be a pretty big jump. >> and i don't think is silent when it tells the agency to look

at all of the circumstances. the question is should we regulate under this section. costs are part of the relevant materials -- >> i'm not even sure i agree with the premise when congress says nothing about cost. agency is entitled to disregard costs. i would think it's classic arbitrary capricious agency action for an agency to command something that is outrageously expensive and at which the expense vastly exceeds whatever public benefit can be achieved. i would think that's a violation of the administrative procedure act. even without the word appropriate. >> i think that's where there's overlap between what the state -- >> sorry. the study at issue that congress commanded was simply a study. the administrator shall perform

a study of the hazards to public health reasonably anticipated to occur as a result of emissions by electric utility steam generating units. so the study that was directed to be made was only of public health hazards. and then it says the administrator shall regulate these entities after -- under this section if finds regulation is appropriate and necessary after considering the results of the study. so if the study is directed only at public health hazards doesn't talk about -- doesn't talk at all about costs just public health hazards why in the world would one assume that congress was thinking about costs? why didn't it do as it did with mercury? make sure the study tells us how

much control is going to cost. and it didn't do that. it just said tell us if there are public health hazards. >> your honor it didn't limit the considerations that epa was supposed to look at. it says to consider the study -- >> it says only the study. it says the administrator shall regulate if the administrator finds such regulation is appropriate and necessary after considering the results of the study. after considering the results of the study. the only thing that the study requires is an evaluation of hazards to public health. >> first of all -- >> i'm not sure how you get to them having to do another step when the only step that's a prerequisite to registration is studying public health hazards. >> first of all, even epa doesn't think it's limited solely to the things that were

studied in that utility study. they rely on environmental harms to justify -- >> does it say after considering only the results of the study? >> no, your honor. >> it doesn't say that, does it? >> no your honor. that's correct. >> they have to consider results of the study. it doesn't say they can't consider everything else. and the word appropriate seems to suggest they may consider other stuff. >> correct. so there's a study they're supposed to look at, but that's not the end of the analysis. they're supposed to do something else. that second step is to figure out whether it's also appropriate and necessary to regulate. so it didn't stop at just the study. again, epa agrees. they can look beyond the results of the study. they look at environmental harms, which is not mentioned here. >> it seems to me that a very salient feature of the statutes that we have to interpret maybe the most salient feature is that congress chose to treat power plants differently from other sources. it could have treated them the same way.

if it had not done that, the listing decision would not have taken into account costs. it would have been based on emissions, if it was an area source it would have been on effect of health alone. so what, if anything, can we infer from that. from the fact that congress pointedly decided to treat power plants differently. >> i think we can tell they're trying to do something different here than i did it elsewhere, and that includes -- >> they're trying to create a different regime, but the reason is clear. they thought the acid rain program might have a real exact on what electric utilities were doing. they said wait and see and we'll see how the acid rain program works and if we still have a problem to solve. that's the reason why they put the electric utilities in a different category, correct? >> and it was an economically based approach.

>> but the acid rain program didn't do what congress thought if might have done, and it was left with this issue of continuing harm from the electric utilities, and then once that happened it seems to me that it's natural to take a look at the rest of the statute and to say, let's regulate in a similar way to the way all other industries are being regulated. >> but if they'd wanted to do it in the same way there would have been no need to use the phrase necessary and appropriate. they could have just simply gone to the ten-ton threshold emissions that apply to major sources and the risk-based analysis that goes to area sources. the fact they used different criteria here in n-1 as opposed to criteria lifted in 7412c -- >> they could have, but they might have thought, let's take a look at the acid rain program, let's look at the problem that still remains, if any and let's

give the discretion to the agency at that point because it will be years down the road in a different set of circumstances. >> but the discretion includes looking at the entire problem. i mean again, the language in the circumstances requires looking at the material circumstances. this ties into the state farm test. you have to look at all of the relevant circumstances if you're going to engage in reasonable decision making. you can't ignore an important part of the problem. >> if the reason for the separate treatment was the belief that the acid rain program would be sufficient at some point in time to bring emissions from power plants below the level that would result in their being listed if they were other sources, why would it be necessary to enact this separate provision asking whether it's necessary and appropriate to regulate them? i don't see how that can be the explanation. >> yes your honor. they could have just had a three-year delay if that's all they were trying to do as opposed to then go through the ordinary system. >> no, because they didn't know. they thought it might. they thought it might not.

they were going to wait and see. it depended how the industry responded to the regulatory requirements of the acid ran program. >> that still doesn't explain, your honor, why they chose to use different criteria as opposed to reiterating the criteria that are under the ordinary thing that applies to every source. they're still trying to treat electric utilities different. if you're addressing emissions from electric utilities in a program that's specifically targeting electric utilities as they did in the acid rain program, and that was entirely based on cost effectiveness, it makes little sense to look at what's remaining after you've already done that and then say in this area of diminishing marginal utility we're going to say costs are irrelevant. that's backwards. costs would be especially relevant when you're in the area of what's left over. >> when the statute refers to the emission standards of the best performing plants, there the government say that implicitly is a cost

consideration? >> i expect -- >> is that their position? and if so how do you answer? >> i'd expect they will. the way i would answer is to say that looks at plants across the range of how they are. so plants in 2005 may have been built in such a way that makes it -- imposing those same control measures on a different plant is managersomething that would be a lot more expensive. >> mandated base from which the government must operate, and it seems to me like there's an implicit cost consideration there. would you still say that's insufficient because? >> yes, it's insufficient because it's not. i'm explaining why it doesn't necessarily take costs into effect. the fact that some utilities were able to impose things doesn't mean it would be cost

effective for other ones to do it. >> why isn't that taken care of by -- you have to take into account costs somewhere. so the other side says there's room for that. suppose that 25% of all electricity generators are near waterfalls. this is easy for them, okay. but 75%, it's impossible and they'll all go out of business and we'll have no electricity. imagine that were so. could the epa under their current theory take account of that? well i guess the answer you want to say is no but they say yes, they can. what about this 12% rule? a little bit earlier in the statute, it says the administrator may distinguish among classes, types and sizes of sources. so if you really had this situation, you could say, look 75% of the generators in the united states have this really old technology, and they'll all go out of business. and epa could say, fine, that's a different class.

okay. i mean if that were really true. so don't they have through that provision and the 12% and the next one the ability to take into account at least serious cost problems? >> well, assuming they have the ability to take into account -- >> do they yes or no? >> no. i think -- >> no they don't. why not? >> the reason that costs are not directly relevant to the first one is what i was explaining about the 12%. in other words, as you -- the example you gave shows that some might be able to have the lower cost effective approach just because they're near a waterfall. so relying on the fact that 12% were able to meet this -- >> fine. but i want an answer to this. my point was if in the imaginary situation that i've imagined 20% of the generators for whatever reason can meet this pretty easy.

the next 80% will require the entire gross national product to meet. suppose that were the situation. you i guess could go to epa and say create of that second group a separate class, a separate type. for that's the reason it's so expensive. and therefore the 12% doesn't apply to them. because they're in a separate class. now, my question is can you legally make that argument? and they will take it into account. and that's what i want a yes or no answer to. >> and i think the answer might be yes in the future. but now we can't do it because -- >> did you make the argument here now? >> my point is -- >> you're saying yes in the future. let's now go to this case and say did you make this argument? >> i don't believe can either side has made that argument. >> has the agency made this argument? >> we're going to take costs into account. we're going to use this provision that justice breyer

discovered and that's what we're going to do. is that how the agency issued its rule? >> they did not. >> i never heard of this argument. >> wait. >> because i still want to know a fact. did anyone on your side of the issue ask the agency to take costs into account brutally, roughly, crudely, or did they all say, we want a cost-benefit analysis? i would like your characterization on that point. reading what they said it's about cost benefit analysis, that paragraph. that gave me the idea that maybe everyone interested in cost asked for a cost-benefit analysis. >> i think the answer is we asked them to consider cost. we thought a cost-benefit analysis is the ordinary way

decision-making happens, not through some vague sense of what the costs are but through doing an analysis. and they have said, their entire position here is that we don't need to do that because costs are invite. that's not something we have to consider under the -- >> as i understand what happened, listing and standards are the only thing that you can generally appeal from. it's only a final agency action when the standards are issued. and i thought it was at the issuance of the standards that the government sometimes breaks up the sources and the amount of emissions that each type of source that justice breyer's talking about can have. so i think the listing is just of a broad category because we've had plenty of cases in this court where we've looked at

the agency saying this type of source meets these standards, that type of source meets another standard. isn't that the way it works? >> they did both at the exact same time here, same time they made the necessary and appropriate finding they also promulgated the emission standards and that shows us it isn't a typical listing standard. >> once they're listed they are subject to standards, aren't they? it's not up to the agency to calibrate the standards. once they're listed minimum standards apply, right? and the agency can have discretion as to whether to lift the standards further, but the mims apply, right? >> that's epa's position is we must regulate. if i could reserve my time for rebuttal. >> thank you, mr. lidstrom. mr. brownell? >> mr. chief justice, may it please the court. i would like to make three

points to supplement my colleague's argument first regarding the nature of power plant regulation under the clean air act. second the language of subsection 1a and third the broader clean air act context. to begin, power plants are the most regulated category after the clean air act and the 1990 ]

about $840 million. all these other programs for power plants would impose compliance costs epa estimated in 2011 of 10.4 billion. this single regulation on air toxics imposes annual costs of 9.6 billion. and what does one get for it? there are three standards edition here. and i think this is important to understand some of the questions that have been asked. there's a regulation for mercury. there's a regulation for non-mercury metals. and there's a regulation for acid gases. most of the costs 450er, the majority about 5 billion annually, are associated with the acid gas regulation which the agency has concluded presents no public health risk, #é

it asked whether it is appropriate to impose further regulation of a specific type. whether it's appropriate to impose regulation under this section on the most aggressively regulated industry under the clean air act. now, what the statutory -- >> can i take you back to justice breyer's first question? and the first question was about the way these categories work and how the categories enable the epa to mitigate certain dramatic or onerous costs on certain segments of the industry. that's not an unknown provision

of any kind. and indeed it seems to me that the provision very much cuts against your argument because epa in some ways can't even figure out the costs until it makes those categorization decision that the aggregate costs obviously depend on how epa categorizes and subcategorizes. so you would have the epa make the cost calculation before it really can, given the structure of the statute. >> your honor, the cost does factor into a variety of determinations that are made as part of the regulatory process. when epa issued its notice of regulatory finding in december of 2010 it said this is non-final. epa confirmed again, and this is at page 555-a of the u.r. petitioner's appendix, that there is no final m-1a determination or listing and we are going to take comment on that as part of the rulemaking

to examine section 7412-d emission standards. as part of that the agency addresses issues related to level of control subcategory h, subcategorization, and at the end of the rulemaking comes out with a regulation that has certain characteristics and consequences. and here this regulation -- what m-1a says is in light of the study address whether such regulation under the section is appropriate and necessary for power plants. now, it may be necessary to regulate something like mercury if there's a public health risk, and that's the only air pollutant for which epa has calculated a quantifiable public health risk. but that may not be the appropriate regulatory regime if as epa has explained here their view of the statute is not to focus on whether such regulation

is appropriate but whether list of power plants under subsection c is appropriate just like every other -- >> can i ask whether that listing is -- and the minimum standards that that imposes are subject to the categorization device that justice breyer was asking about. could the agency say, well, you know, we're going to divide these into categories and since it's too expensive for certain -- 80% of power plants that don't have waterfalls nearby we're going to exempt them from these minimum standards. can it do that? >> no, your honor. not at the listing stage but once the source category is listed at the standard-setting stage, they could consider subcategorization. >> reduce it below the minimums? >> not below the minimums. your honor is perfectly right. >> the minimums depend on the categories and the subcategories.

you can categorize in a way that the minimums will be up here or you can categorize in such a way that the minimums will be down there. >> and during the rulemaking subcategorization, epa ultimately subcategorized the power industry with respect to one limited set of sources. lignite sources with respect to the mercury standard. but otherwise, epa's position is once listed it triggers an obligation to issue emission standards under the -- >> an obligation as to some standard. but again, the minimum standard can vary dramatically, depending upon how the categories and subcategories are set up. and because the minimum standard can vary dramatically, so too will costs vary dramatically. so you're having the epa consider costs before the epa can know what the costs are. >> your honor, if i can respond to that before the other question at the other end of the

bench, epa does know what the costs are through the rulemaking process in which it undertakes notice and comment with respect to both the m-1a determination and the emissionlq9 ñ section 7607 d-1c of the clean air act lists subsection n as one of the provisions that requires notice and comment rulemaking und your the special clean air act procedures. and this is why the agency explained that there's no final m-1a until the end of the process, until notice and comment, and we've taken and determined what the costs are. >> and this is then confirming what justice breyer said. the point that you had an opportunity and apparently took advantage of it to tell the epa that it should subcategorize this source. and it decided to subcategorize just one piece of it. so what you're really saying to us is it's not the listing, it's the way they've set up their

emissions standards that i disagree with because they could have decided that there were subcategories that didn't require standard at all. i'm presuming that they could have said anybody by the water doesn't have to do more because they're already part of the 12%, we're going to do cost by everybody else that's not by the water. >> conceptually, your honor, i imagine they could have subcategorized away the entire industry. but that's not what they did in this rulemaking. and with respect to certain of the regulations -- >> no, theyñdidn't do it, but you're asking us -- this is uybf almost -- this is a challenge to a regulation that's only piecem[!jy because you're arguing that they should have considered cost, bute1 they obviously did before they issued the standards. you can't look at the standards

and the emissions and the listing in a case like this in isolation. >> justice sotomayor, if i could try the answer to the question once again. subsection m-1a question is if wx after considering results of the study, and i know the study looks at alternative control strategies for any emissions that may warrant regulation. the agency determines such regulation is appropriate and necessary. so the focus of the determination is not on listing and whatever may flow from that but the regulation that the agency decides to apply to address the remaining public health hazard that is identified from this source category. >> mr. brownell, did epa say we are not going to take costs into account at the listing stage because we will take costs into account through this subcategorization possibility

that's being discussed? >> no, they did not, your honor, as i recall the record of the proceeding this discussion of subcategorization has come up in the briefing. >> why didn't they write -- you see what's brothering -- these questions are difficult because they're so hypothetical. it isn't true that 50% of the industry will use up 50 -- all the gross domestic product, et cetera. but they wrote this thing in a way that sounds as if even though that had been true they wouldn't have taken that into account. so what they say is the epa does not prove it is appropriate to consider cross-wind in determining whether e.g.u. is -- you see the problem for me. but esg is telling us don't worry. maybe they should have written knowing what we know and what is undisputed so far we don't think that the cost problem is big enough for to us warrant a cost-benefit analysis or other consideration. okay.

then they've taken it into account. so there's no problem. if it's reasonable. that's why i'm looking to see ym it's really the sg. but is there really a different way that they could eliminate this horrible scenario if it existed, which it didn't. you understand what i'm driving at? i'm trying to get your best answer on that. >> and i want to emphasize that this is not an argument about whether or not to regulate jf mercury where there's been an identified public health risk. it's whether the regulatory regime that has been defined here under section 7412, which u the government says is the listing that applies to all other source categories, and theok d-3 minimum control technology standards that apply to all other source categories, is the right way to do it.

regardless of how you subcategorize, it's going to p, have tremendous impacts as a result of acid gas regulation and -- for a pollutant that presents no public health risk. >> we can't uphold an agency rule on a ground that they didn't adopt below, correct? >> that's correct. >> under chennerly. so is your understanding correct that this is not an argument, a basis for decision that they adopted below? >> that's correct, your honor. my understanding of the basis for the decision below is that costs are irrelevant in a determination under m-1a, whether or not -- whether to regulate this source category under the typical subsection 7412 regime that applies to other sources. >> exactly right, mr. brownell. the agency at that point in time was only answering the very first question..n the very threshold issue. and at that point the agency said costs were irrelevant. but costs become relevant later in the analysis. and in a variety of ways through

the 12 1/2%, through the 12%. through the categorization and subcategorization. through the determination whether to raise standards even higher. so costs, costs, costs later. but as to this particular thing the agency said yes, here we don't consider costs. we could but we don't want to because there'sba1"áj potential for costs to come in afterwards. >> and your honor, it's costs, lp costs, costs.ó[ under the statutory criteria that congress provided for setting d-3 control technology standards and then having to find those standards at the end of the process. the agency finalizes its m-1a determination in light of the costs and impacts and other factors that are mentioned. >> do you think that whenever the term "appropriate" is used in a regulatory context in the clean air act that it demands a cost-benefit analysis? >> your honor, when you say in any context that's so broad i don't think that i can say that

it would require cost-benefit in any context, but in the specific context here where the focus is on whether such regulation is !&- appropriate or necessary, that regulation has certain characteristics and consequences that we've talked about this morning including the fact that it imposes on a pollutant that presents no public health risk $5 million a year. >> before you finish because your time is up, can you clarifyubé,x for me why this is at this stage something we should be concerned about because there is this regulatory impact assessment that i said that the benefits vastly exceed the costs. and that's an impact analysis nb that has gone through the process and they concluded the epa appropriately calculated the

costs. >> the co-benefits, all of those benefits are co-benefits. only 4 to 6 million dollars are associated with has the air pollutants. those co-benefits that are in co-benefits. only $45]?í million to $6 million are associated with hazardous air pollutants. co-benefits in the regulatory impact analysis were not considered as part of regulatory determination for good reason. because they're important questions regarding their legal importance and relevance under the proper standard. what i mean, your honor is that pm-2.5 is the pollutant, fine particles, associated with these co-benefits. that's extensively regulated. those air quality standards were only recently revised to be tightnd. in the context of that proceeding the agency found that the low levels of exposure for these co-benefits did not produce effects or risks worth egg regulatory significance

because they are too uncertain. >> thank you, counsel.regulatory significance because they are too uncertain. >> thank you, counsel. >> thank you, mr. chief justice. >> mr. chief justice. may it please the court. epa's interpretation of section 7412 n1a should be affirmed for three basic reasons. first, it is the most natural and certainly permissible reading of the statutory text which directs epa to focus on health concerns and doesn't mention costed. second, it harmonizes the structure and design because it applies the same regulatory logic to power plarpts that congress directed epa to apply to regulate hazardous air pollution from every other type of source and that is decide whether to list for based on health and environmental hazards alone and consider costs in setting the emission standards. third, as a matter of common sense and sound governmentñi practice, it was certainly appropriate for epa to list power plants for regulation based solely on+(q! and

environmental hazards because that reflects the appro r(t&háhp &hc% congress chose not only in ta my412 in this regulatory program but in all of the major regulatory programs under the clean air act. >> can i go to your first point? you concede don't you, that epa could have interpreted this statutory language to allow them to consider costs? >> i think epa read -- the best interpretation was it didn't provide for the consideration of costs at the listing stage. >> if you adopted a regulation that said appropriate and necessary allows us to consider costs, you think that would be appropriate. >> isw6 think the phrase appropriate and necessary doesn'td the epa from considering costs. but but under chevron the epa has to explain the justification for its reading of the statute. which it did. >> since you're dealing with a termq -- i think as capacious"re

and appropriate, since you could have allowed them=>9m%iq%=9 sass a cost that's appropriate, you are saying the agency dplib rat dlib ran -- said we'll issue a rule that will allow us to -- >>b?no. i think what the agency did is decide it was appropriate to approach the question of whether to regulate power plants in the same manner that congress found it was not only appropriate butqwe mandated to -- >> rindzi understand your argument that they could have done that. but i think it is unusual for an agency to say when they want to do something that that's the only thing we could do. agencies usually like to maintain for themselves as much discretion as they can. it strikes me as unusual, maybe the agency could go ahead and not consider costs. but to say that we're prohibited from considering costs under the phrase "appropriate," it strikes me as very unusual. >> i don't think so mr. chief justice. it said -- did&n> say we're

prohibitedjf from considering of the coulds.sts. it said we won't consider costs in the listing stage about whether power plants should be lists for regulation -- >> i thought the rule was the phrase "appropriate and necessary" did not allow them to consider costs. >> appropriate and necessary goes to the question of whether power plants should be lists for regulation under section d which would then kick in the regulatory mechanism by which standards were set and costs are considered as a standard. >> i have0l he same question as the chief justice. let me jusñ ask one more time. could this agency reasonably have considered costs at stage one? >> i don't think the statutory text unambiguously forbids them from considering costs. but they determine that the best reading of the statutory text is that power plants because after the study was conducted that congress required, the epa determined that power plants are no differently situated than any other source of hazardous air pollutants regulated under sectionçó 7412 --

>> if i may -- >> sure. >> for every other source of hazardous air pollutants what congressman dated as appropriate was that you do not consider costs when you decide whether to regulate. you only consider health and environmental effects. then you do consider costs under section 7412d when you set the emissions standards. >> how is that consistent with this statutory scheme?: if your argument is that epa's only reason for doing this is that it wants to treat power plarnts the;bhñ same as other sources. we know that that's what #&ngress didn't want or it would not have enacted a separate provision for power plants. >> i1ríñ agree, justice alito that congress proposed different treatment for power plarnts. but that doesn't answer the question. that just asks the question. the questionp>i is what different treatment did congress

prescribe. a cost/benefit analysis that doesn't apply to any other source of pollutants. that's not what the statute says and the history ñreflects. what the text of the statute states allfoud power plants there was uncertainly about whether power plants emitted hazardous pollutants at a level that would cause problem. whether the acid rain regulations would solve the< problem and whether there were alternative control strategies available. >> epa -- what congress told epa to do was study those three things. those go to health considerations. then once epa made a judgment about that, it was to whether to list power plants for regulation as -- whether it was appropriate and necessary to list them for regulation. >> this is what i don't understand about your position.q congress' decision to treat power plants differently, it seems to me reflects the fact that congress wanted at least to hold open the possibility that power plants would not be listed even if they are emissions

exceeded the levels that would result in listing for other sources. i don't see another reason why they would treat them differently differently. >> i can just continue. you may disagree with that. but that seems to me that that's a necessary inference from this statutory scheme. if that is the case, what factor might congress have thought would justify allowing power plants to emit more than would be permitteded if they were other sources? now petitioners have an explanations, which is costs. they say power plants have to bear a lot of costs that other sources don't have to bear, in particular i title 4 program. their emissions might exceed the otherwise permissible limit because they have participated in the cap in trade program so they have contributed to the reduction in emissions in that way, in a way that wouldn't be reflected in their own emissions. so that is an explanexplanation.

costs is what's missing. yxjñ don't know what your explanation is. >> i know you aren't asking me to accept the premise but i can't accept the premise because both the text of na1a and and history is not what's posed. if congress really thought that it was in the text what they would have said to epa is push the pause button take the three years and study, don't subject them to the same schedule as everybody else and study the costs problem. >> if all they were concerned about was health why wouldn't they impose on power plants the same standard that's imposed on area sources? just ask epa to determine whether there is -- i forget the exact term -- but is there a significant effect on public health whatever. if so list. >> i think they came very close

to that. first of all, they told epa to make its judgment after considering the results of the study. they told epa to studyxd things that went to health hazards. that comes very close it seems to me. reason it used the appropriate and necessary language rather than the language your honor suggests is because i think congress when it was legislating here in 1990 understood there might well be uncertainty at the end of the analysis that congress directed epa to undertake. there might be uncertainty about the projected effects of the acid rain regulations. because i do think -- >> i think that's what the legislative history said. >> i do want to clear up a misconception about that, i think. which is that the way this acid rain regulations unfolded, they were put in place in 1990 as the same time as 7412 but they were to unfold over a ten-year period. five years until the first stage, and then five more yearsñi until the second stage. so epa was going to have to make a long-term projection here,

about which there could be some the think what congress was saying to epa, you may need to exercise your judgment. in fact epa did exercise their judgment, because it concluded -- >> there are two parts to this argument. one is what were they thinking if it wasn't cost? i see your answer to thatf think about that. but the second which i think your argument very much depends on, in my mind anyway is well, don't worry, because there is a way to take into account costs. so if in fact -- it is a lot of money, $9c billion. if you divide it by the population, you have $30 a person or a family of four of $120. that's a lot of"n money for people -- for some people. and you say, gee, you couldn't takew3 it into account ever. it begins to look a little irrgsal to say i'm not taking it into account at all. but you say never fear because they will take it into account when they set standards. and at tha