When must a regulatory agency use formal rulemaking procedures?

A regulatory agency must use formal rulemaking procedures when creating substantive rules. Substantive rules are those that have a significant impact on individuals or entities' rights and responsibilities, providing clear requirements or prohibitions that stem from the legislative authority of the agency.

The use of formal rulemaking is typically mandated by the Administrative Procedure Act (APA) when the agency is involved in rulemaking that must adhere to specific procedures, such as conducting a formal hearing where evidence is presented and stakeholders can participate fully in the process. This ensures transparency and offers the opportunity for public comment, which is critical when rules may significantly affect regulated parties.

In contrast, procedural rules, which outline the processes and practices of the agency, do not require formal rulemaking, as they generally do not affect substantive rights. Regulations can be created through various methods and may not always require the formal procedure unless they pertain to substantive issues. Thus, the correct answer emphasizes the importance of formal procedures when the agency's rulemaking has significant legal effects.