BUSINESS SOFTENS POSITION\Smaller cuts sought in regulatory powers.

Byline: John H. Cushman Jr. The New York Times

Leading business groups are beginning to advise allies in Congress to scale back their ambitious proposals if they hope to pass stalled legislation restricting federal regulatory powers.

Legislation was passed by the House last year as part of the Contract with America, but it died in the Senate when Democrats condemned it as an attempt to roll back a generation of environmental progress. Sen. Bob Dole, the bill's principal advocate in the Senate, and other Republican leaders have promised to try to revive it.

Many backers of restrictions on regulatory agencies concede that the only bill that seems likely to be passed would be a far cry from the radical regulatory overhaul that the Republicans once proposed, with intense support from business groups.

Throughout last year, that coalition, with the support of a few Democrats,

pushed a bill that, without amending any environmental statutes, would have changed how all of them are implemented. The measure would have required elaborate cost-benefit studies of major rules and opened significant new opportunities for industry to challenge regulations in court.

But now, some business leaders say they might even settle for merely writing into law an order President Clinton issued in 1993 telling regulatory agencies, including the Environmental Protection Agency, to pay more attention to how much their regulations cost businesses.

The tactical retreat comes as Democratic opposition to changes in environmental laws is intensifying, the White House is claiming environmental protection as a central election issue, and one poll after another suggests that the public thinks the Republicans tried to take regulatory changes too far.

"We have certainly trimmed our sails," said Jerry Jasinowski, the president of the National Association of Manufacturers and the main spokesman for the corporate coalition lobbying for regulatory changes. He said the group was urging "more modest changes that could garner bipartisan support."

Industry leaders say their efforts last year were aimed at removing unnecessary and burdensome regulation. But they add, with dismay, that the debate over regulation had left them painted as polluters intent on undoing environmental protections.

Like the Republican congressional leaders, some of them have been anguishing recently over how to recast their environmental messages.

Until new proposals are made public, it is impossible to judge whether industry genuinely wants a compromise or is making a public-relations foray meant to improve its image and its chances of success. Congress is in recess, so no legislative action is expected right away.

One approach that is being widely discussed would be to adopt the terms of the executive order that Clinton issued in 1993.

The order instructed agencies to balance costs and benefits when writing rules to carry out laws like the Clean Air Act and the Clean Water Act, but it did not provide industry with any grounds for legal challenges.

"That executive order was pretty good," said Fred Webber, the head of the Chemical Manufacturers Association, in a news conference last week.

That kind of talk is an abrupt change from last year, when industry groups fought hard against softer alternatives, like a bipartisan bill offered by Democratic Sen. John Glenn of Ohio and Republican Sen. John Chafee of Rhode Island.

Now corporate lobbyists are asking themselves how much they realistically can expect to achieve in an election year.

A meeting Dec. 12 at the American Petroleum Institute, for example, led off with a review of what happened last year, according to notes taken by one participant.

"Industry lost the battle and regulatory reform has become a political football," said the minutes, taken by an American Petroleum Institute consultant, Arnold Moore.

"It may not be addressed again until 1997, if ever," his notes said. "Some attendees concluded that there must be a change in how we think and talk about regulatory reform and the environment."

Moore's notes fell into the hands of an environmental group, the Natural Resources Defense Council, which provided them to The New York Times.

Greg Wetstone, the environmental group's legislative director, described the notes as proof that the industry was discussing "not how to make their proposals less destructive, but how to mislead the American public with better packaging."

The meeting was attended by Charles DiBona, the head of the oil industry trade association; five of its staff members; and supporters from groups like Resources for the Future, a resource organization; the Competitive Enterprise Institute, a pro-business group; and the Center for Risk Analysis at Harvard University, an academic program financed by industry.

Moore's notes do not disclose who said what, but they describe soul-searching over the failure of big business to push through a bill that was among its highest priorities.

"There was a perception that the special interests wrote the bill," the notes said, "and the public was very unhappy about that."

"While industry may not have been seeking a general rollback of environmental regulation, some Republican congressmen were, and some want to abolish EPA," the notes added.

The notes said: "It would be great progress if the administration should offer the 1993 executive order as regulatory reform legislation."

But administration officials said it all would depend on exactly how the legislation was written. The administration wants to retain the flexibility it is allowed under current law and avoid opening federal regulations to endless litigation.

Endless litigation is exactly what some environmentalists believe will happen if the executive order becomes law, said Gary Bass, the executive director of OMB Watch, an advocacy group that monitors regulatory affairs.

On the other hand, some advocates of rolling back regulations say they oppose watering down the original Republican bills.

"Something that is not enforceable in the courts and does not impose real accountability on agencies does not accomplish much," said Jonathan Adler, a spokesman for the Competitive Enterprise Institute. "Clinton's executive order is a perfect example."

But he acknowledged that "most industry folks want a bill."

"I get the impression," he added, "that there are a lot of lobbyists in this town who want to say, 'We got a bill; I earned my keep."'