High Court Appears Split on EPA Decision Not to Consider Cost of Mercury Regulation

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By Patrick Ambrosio

March 25 — Supreme Court justices appeared to have differing views on whether the Environmental Protection Agency adequately considered the costs of regulating emissions of mercury and other hazardous air pollutants from power plants.

The court heard oral arguments March 25 on whether the EPA unreasonably decided not to consider the cost of regulation when the agency determined it was “appropriate and necessary” to regulate those emissions, a finding that ultimately led to the promulgation of the 2012 mercury and air toxics standards (MATS).

State governments and industry groups that petitioned the court to review the finding argued that an arbitrary decision not to consider cost led to a regulation with disproportionately high annual compliance costs of $9.6 billion. The EPA argued that Section 112(n)(1)(A) of the Clean Air Act, which instructed the EPA to assess air toxics emissions from power plants and determine whether to regulate those emissions, does not explicitly require the agency to consider cost.

James Rubin, counsel in the global Energy, Transport and Infrastructure sector at Dentons US LLP, told Bloomberg BNA that it was “hard to read” what decision the court eventually will reach. Rubin said that while it is possible that a majority of the justices might support the EPA's argument that it deferred consideration of cost until the second step in the regulatory process, it is “equally likely” that the agency could lose a 5-4 decision.

Jeff Holmstead, a partner at Bracewell & Giuliani LLP and former EPA assistant administrator for air and radiation under President George W. Bush, agreed that it was tough to assess what the court may eventually decide after a review of the oral argument transcript. Holmstead told Bloomberg BNA that “more than any other recent EPA case,” it is difficult to predict the outcome of Michigan v. EPA. He noted that people had a “pretty good sense” of where the court was leaning after oral arguments in the last few EPA-related cases.

Holmstead said it appears that there are four justices troubled by the EPA's insistence that it didn't need to consider costs and three justices who are “very much inclined” to defer to the EPA's decision. Justice Anthony Kennedy appears to be the swing vote in the case, but a majority also could attempt to come up with a very narrowly tailored solution that Justice Stephen Breyer might sign onto, Holmstead said.

D.C. Circuit Decision Reviewed 

The Supreme Court is reviewing a 2014 decision by the U.S. Court of Appeals for the District of Columbia Circuit, which upheld the MATS rule after concluding that the EPA's decision making was reasonable and the agency deserves deference (White Stallion Energy Ctr. LLC v. EPA, 748 F.3d 1222, 2014 BL 103957 (D.C. Cir. 2014)).

While the Supreme Court only agreed to review the narrow issue of whether the EPA unreasonably refused to consider cost in making the “appropriate and necessary” finding, attorneys familiar with the litigation told Bloomberg BNA that a broad decision against the EPA could have far-reaching effects on the agency's regulation of power plants and the deference the agency could expect to receive on the issue of whether a cost-benefit analysis is needed to promulgate environmental rules.

2001 Decision Called Analogous 

Justice Elena Kagan appeared inclined to defer to the EPA's interpretation of the “appropriate and necessary” language, noting that Congress explicitly required cost consideration in other sections of the Clean Air Act.

“If Congress wanted to require something, and clearly, Congress required this in other places, Congress knows how to require consideration of costs,” Kagan said. “To get from silence to this notion of a requirement seems to be a pretty big jump.”

Kagan said the petitioners' argument that cost consideration is required despite statutory silence contradicts with the “most closely analogous” decision, a 2001 ruling that the EPA is prohibited from considering cost when setting national ambient air quality standards for ozone and other common air pollutants (Whitman v. Am. Trucking Ass'ns, 531 U.S. 457, 51 ERC 2089 (U.S. 2001)).

Justices Sonia Sotomayor and Ruth Bader Ginsburg also both appeared skeptical of petitioner arguments against the EPA. Sotomayor questioned what was irrational or not plausible about EPA's reading of Section 112(n)(1)(A). She noted that all the Supreme Court has to do is find that the EPA made a plausible interpretation of the statute to rule in the agency's favor.

Ginsburg said the word appropriately is commonly used to indicate that an expert agency will “do what it finds fit” based on its expertise, signaling that the agency may be due deference on its decision making. Ginsberg questioned whether the Supreme Court has ever held that the EPA is required to consider costs even though there was no instruction in the law to consider costs.

Michigan Solicitor General Aaron Lindstrom, who argued for the state petitioners, said the issue has never come to the Supreme Court in a case where Congress has given broad discretion to an agency, which in turn decided to ignore “an important part of the problem.”

Scalia Critical of EPA 

Justice Antonin Scalia was critical of the EPA's decision to ignore cost. He described an “outrageously expensive” agency action where the cost vastly exceeds the benefit as a “classic arbitrary and capricious” act.

“I would think that's a violation of the Administrative Procedure Act, even without the word ‘appropriate',” Scalia said.

Late in the arguments, Scalia described the EPA's interpretation of the phrase “appropriate and necessary” as “a silly way to read” the statutory language.

Chief Justice John Roberts questioned why the EPA “deliberately tied its hands” by determining it would not consider cost, noting that it is “unusual” for an agency to voluntarily restrict its own authority.

“Agencies usually like to maintain for themselves as much discretion as they can,” Roberts said.

Rubin said that Roberts appeared to be more critical of the EPA than the petitioners, but said the chief justice “didn't telegraph” his view of the case through his questions.

Kennedy's Intentions Unclear 

Kennedy, often described by observers as a swing vote in close decisions, had relatively few questions during oral arguments, but did question whether the EPA considered costs at all in its rulemaking process.

Solicitor General Donald Verrilli Jr., who argued on behalf of the EPA, said that the question before the court is whether EPA has to conduct a cost-benefit analysis when it decides to list power plants as a source of hazardous air pollutants that must be regulated. The logic of the statute is that the agency doesn't have to, Verrilli said.

Kennedy interrupted Verrilli, stating that once the EPA makes that listing decision, “at that point, the game is over,”

Later on, Kennedy indicated that the EPA didn't take the “second step” in the process to divide power plants into different categories, a step that an attorney arguing on behalf of power plants that support the MATS rule argued implicitly includes a cost consideration.

Paul Smith, chairman of the appellate and Supreme Court practice at Jenner & Block LLP, said that the EPA did subcategorize power plants in the MATS rulemaking, with oil-fired plants separated into four categories and coal-fired power plants also separated into different subcategories. Smith argued on behalf of Calpine Corp., Exelon Corp. and other industry respondents.

Hypothetical Scenario Discussed 

Breyer seemed to be concerned that the decision to ignore cost at the listing phase could hypothetically lead to a regulation that the majority of the nation's power plants could not comply with.

Breyer was one of several justices that asked questions on the Clean Air Act requirement that the EPA must set standards for existing sources of hazardous air pollutants that require at least the level of performance already achieved by the average of the top-performing 12 percent of similar sources. Several justices, also including Breyer, Kennedy and Scalia, questioned whether the EPA had any ability to consider cost at that phase in the rulemaking process, given the minimum standards that must be set, commonly referred to as the “MACT floor.”

“Can the EPA take that into account, or do they have to just blindly say, if it's the top 12, that's for everybody no matter what the cost?” Breyer said. “In which case they can't take it into account ever except for the word ‘appropriate.' ”

Verrilli said the minimum MACT floor requirements depend on how the EPA categorizes an industry. In Breyer's hypothetical situation, the EPA would have the authority to establish separate source categories so power plants from vastly different segments of the industry were not placed together.

Record Questioned by Roberts 

Roberts questioned where in the administrative record the EPA explicitly said the agency considered cost in dividing power plants into different subcategories, noting that “implicit usually doesn't work” for an administrative law issue.

“It's a very important principle of administrative law that we will only uphold a rule based on the arguments that were considered and addressed by the agency,” Roberts said.

Smith of Jenner & Block referred the court to the EPA's proposed rulemaking on MATS, which he said laid out the process for categorizing power plants in “exquisite detail.”

Sanjay Narayan, managing attorney with the Sierra Club, told Bloomberg BNA that there is “no question” that the subcategorization process includes a consideration of cost. The Sierra Club is one of several environmental and public health groups that filed a brief in support of the EPA.

Sean Donahue, an attorney representing the Environmental Defense Fund, told reporters during a March 25 media call that subcategorization is just one tool that the EPA used to address cost concerns. He said by the end of the argument, the court was “pretty clear” on how the EPA considered cost in the MATS rulemaking process.

Co-Benefits Criticized 

William Brownell, a partner at Hunton & Williams LLP who argued on behalf of the Utility Air Regulatory Group, highlighted that in the EPA's cost-benefit analysis that was prepared alongside the MATS rule, only between $4 million to $6 million in benefits are associated with hazardous air pollutants. The rest of those benefits are co-benefits from the reduction of fine particulate matter and other pollutants, Brownell said.

Roberts questioned the legitimacy of counting benefits from reductions of pollutants that are regulated under other sections of the Clean Air Act, described the process as an “end-run” around the statutory language. He said it “raises the red flag” that a small percentage of the as much as $90 billion in estimated benefits that EPA attributed to the MATS rule.

Rubin of Dentons said a court decision on the use of co-benefits could have a significant effect on the EPA's ability to regulate because the EPA uses co-benefits in many of its regulations. He said the “toughest loss” for the EPA would be a decision that instructs the EPA to do a cost-benefit analysis on regulating power plant emissions, while also limiting how the EPA should do that analysis.

Holmstead said it is difficult to project if the court will address co-benefits because it will depend on how the majority opinion shapes up. A 6-3 decision against the EPA that included Breyer in the majority would likely be a more narrowly tailored opinion, but a 5-4 decision against the agency could be broader and address the co-benefits issue, Holmstead said.

The EPA raised the co-benefits issue in its brief to the Supreme Court, even though the court only granted review of the narrow question on the “appropriate and necessary finding,” Holmstead said.

“They kind of put that in play,” he said.

Decision Expected in June 

Donahue and Richard Revesz, director of the Institute for Policy Integrity, both told reporters to expect a decision late in the Supreme Court's term. Revesz predicted that the court would not issue its decision until June.

As of March 25, the court had yet to issue a decision in a case that was argued in 2015. So far, all of the decisions this term have been in cases that were argued in October, November or December, according to a website that tracks decisions.

To contact the reporter on this story: Patrick Ambrosio in Washington at pambrosio@bna.com

To contact the editor responsible for this story: Larry Pearl at lpearl@bna.com