High Court's FERC Ruling Good for EPA, Analysts Say

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By Rebecca Wilhelm

Feb. 1 — The Federal Energy Regulatory Commission's recent victory before the U.S. Supreme Court bodes well for the Environmental Protection Agency when the justices eventually consider substantive challenges to the Clean Power Plan, legal analysts told Bloomberg BNA.

The court ruled 6-2 that the Federal Power Act unambiguously extends FERC authority to regulate demand response rates in the wholesale energy market (FERC v. Elec. Power Supply Ass'n, 2015 BL 18590 (U.S. 2015); 15 ECR, 1/25/16).

Jody Freeman, a professor at Harvard Law School, told Bloomberg BNA that she was surprised both by the margin of victory and that the court so emphatically upheld FERC's demand response rule.

“The interesting thing is that an agency took an old law that was written decades ago and which couldn't possibly have anticipated the modern grid, and the agency had to adapt that law to deal with modern policy,” and the court resoundingly upheld those actions, Freeman said.

The EPA's Clean Power Plan (RIN 2060-AR33), issued under Section 111(d) of the Clean Air Act, sets a carbon dioxide limit for the power sector in each state, which would be implemented by state regulators through emissions reductions at fossil fuel-fired power plants, switching baseload generation from coal to natural gas and investments in renewable energy and energy efficiency.

An analogy can be drawn between FERC under the Federal Power Act and the EPA under the Clean Air Act, Freeman said (192 ECR, 10/5/15).

‘A Good Omen for the EPA.'

The EPA, like FERC, “is trying to manage modern problems with an older statute and interpret the law in a way that is consistent with its authority but also appropriate for the contemporary problems it faces,” Freeman said.

Even though demand response and the power plan raise different legal issues under different laws, “the government can take some comfort in the fact that the court did uphold [FERC]'s view of its authority,” she said.

Victor B. Flatt, a professor at the University of North Carolina at Chapel Hill School of Law, told Bloomberg BNA he agrees that the FERC decision “is a good omen for the EPA.”

“This indicates that they're willing to say that this is the state of the world, what the EPA is doing is logical and it's supported by the law and we're going to allow it,” Flatt said.

While the power plan presents a more complicated case, the court demonstrated it “understands how the modern grid works,” Freeman said.

“You have to understand how air pollution regulation affects energy markets and the energy system,” she said. “I think there's some comfort in the fact that the court appears to understand the complexity.”

However, Seth T. Lucia, an attorney at Bracewell in Washington, D.C., told Bloomberg BNA it is difficult to discern how the court's support of demand response might extend to support of the power plan.

“These are very different regulatory schemes established by different statutes,” Lucia said.

‘Different Origin Stories.'

The FERC opinion underscores that demand response and the power plan “have different origin stories,” Lucia said. “The court goes out of its way to talk about how in the case of demand response it was promoted by market participants, later endorsed by Congress and then implemented by FERC.”

In contrast, the House, under Democratic control in 2009, passed a cap-and-trade bill co-authored by then-Reps. Henry Waxman (D-Calif.) and Edward Markey (D-Mass.), but the legislation died in the Senate in 2010. Emissions trading is one of the key compliance tools for states as they implement the power plan.

The power plan and demand response actually have similar origins, Flatt said.

“If you were to ask a bunch of electric facilities, they would do what the EPA has proposed,” Flatt said. “The answer really came from the market. In that sense I think it's similar.”

But that is not legally relevant, Freeman said.

“It may help cosmetically to say that this isn't a power grab in the sense that the challengers thought it was, to point out that this innovation of demand response wasn't invented by the federal government,” she said. “There's a legal question whether FERC has the authority to regulate this subject matter. And that doesn't turn on who invented demand response.”

The court took “a good close look at the statute without regard to the fact that demand response activity originated through market participants,” Lucia said.

“I thought it was interesting that both the majority and the dissent thought the Federal Power Act was clear enough on its face but reached completely opposite conclusions,” he said.

‘The Definition of Ambiguous.'

Courts take a two-step approach in reviewing challenges to agency actions. If the statute clearly speaks to the issue, the inquiry stops there. But if the statute is silent or ambiguous, the court determines whether the agency's interpretation is a permissible statutory construction. If so, the court defers to the agency (Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 21 ERC 1049 (1984)).

In FERC's case, both the majority and the dissent found that the Federal Power Act directly answered the question, and that step two of the Chevron analysis wasn't applicable.

Justice Elena Kagan delivered the opinion, joined by Chief Justice John G. Roberts Jr. and Justices Anthony Kennedy, Ruth Bader Ginsburg, Stephen Breyer and Sonia Sotomayor. Justice Antonin Scalia wrote a dissenting opinion, which Justice Clarence Thomas joined. Justice Samuel Alito recused himself from the case.

“It seems odd to say how could something be unambiguous if six of our justices say it definitely means something and two say it definitely means something else,” Flatt said. “That seems to me the definition of ambiguous.”

‘The Purpose of the Law Matters.'

Craig N. Oren, a professor at Rutgers Law School, told Bloomberg BNA that the court might have wanted to prevent FERC from later reinterpreting its regulatory authority.

“The court chose to treat this as a step-one question,” Oren said. “The majority may have been thinking it wants to make clear how it interprets Chevron. The court may also have been thinking it did not want the agency to later change its legal interpretation, that the court thought the question was so important that it should have a fixed answer.”

While FERC's victory is “good news” for the EPA, the court's opinion indicates “that it's not easy to get to the second step of Chevron,” Oren said. “This case makes it slightly more likely that the court will say the Clean Air Act speaks to the question” when it reviews the power plan, he said.

But the government should be encouraged that the court took the purpose of the Federal Power Act into account when it decided that FERC has the authority to regulate demand response, Freeman said.

“The bottom line is the Kagan opinion shows a kind of pragmatic approach to legal interpretation where the purpose of the law matters,” she said. “That's also going to be helpful to the government when it argues that what EPA is doing is in line with a necessary purpose of the Clean Air Act.”

To contact the reporter on this story: Rebecca Wilhelm in Washington at rwilhelm1@bna.com

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