On June 29, 2015, the Supreme Court issued its latest opinion in an environmental rule challenge, this to the Mercury and Air Toxics Standard, or MATS.  Michigan et al. v. EPA¸ Slip Opinion, No. 14-46, U.S. (June 29, 2015).  The Court held that EPA had not reasonably considered cost in the “capacious” “appropriate and necessary” standard when determining to regulate power plant mercury emissions.  The Court reversed the D.C. Circuit’s decision in White Stallion Energy Center, LLC v. EPA, 748 F. 3d 1222 (2014) (per curiam) and remanded the proceeding, stating that EPA must factor cost into its “appropriate and necessary” determination.  The Court passed no judgment on whether EPA can meet that burden.  The D.C. Circuit will issue a remand order that will provide further guidance to the regulated community, including a schedule for EPA to re-issue its “appropriate and necessary” justification, possibly including a stay or vacature of the existing rule.

The petitioners, which included over 20 states and numerous other organizations, asked the Court to review whether EPA should have considered cost in initially deciding whether to regulate air toxics from power plants.  EPA had concluded that it did not need to consider cost in deciding whether regulation was “appropriate and necessary” for power plants because that term does not explicitly reference cost and because the agency would take cost into consideration later in the process when determining “how much to regulate them.”  Michigan, slip op. at 11.

At the heart of the issue was Congress’ acknowledgement in 1990 that the Clean Air Act Amendments would subject power plants to numerous controls to reduce sulfur dioxide, nitrogen oxides, and particulates.  Congress acknowledged that these might reduce hazardous air pollutants as well, and that no one knew at the time whether additional controls would be required to protect human health from air toxics emitted by power plants.  To determine that, EPA was required to conduct a study.  Section 112 of the Act requires EPA to regulate power plants if “regulation is appropriate and necessary after considering the results of the study.” 42 USC 7412(n)(1)(A).

EPA’s study concluded in 2000 that regulation of coal and oil fired power plants was “appropriate and necessary.”  EPA reaffirmed this finding in 2012, noting that mercury and other hazardous air pollutants were “appropriate” to regulate because they posed a risk to human health and the environment and that controls were available to reduce the pollutants.   EPA found that it was “necessary” to regulate because other requirements did not eliminate the risks.  Id. at 3.  EPA concluded that costs would be considered only in determining which source subcategories of power plants could be reasonably regulated.  Id.  In setting its final standards, EPA looked at the best performing 12% of units, without regard for how those units had reached their low emission rates.

At issue in the case was EPA’s admission that it did not consider costs at all in the “appropriate and necessary” determination.  Importantly, the Regulatory Impact Analysis (RIA) identified the direct benefits of the rule as a mere $4 to $6 million per year, with ancillary benefits of $37 to $90 billion per year.  The costs were estimated at $9.6 billion per year.  Id. at 4.  EPA considered none of this in arriving at its “appropriate and necessary” decision.   

The Court, in a 5-4 decision written by Justice Scalia, first reiterated that EPA’s decision must be within its lawful authority to regulate and “the process by which it reaches [the decision to regulate] must be logical and rational.” Id. at 5.

The Court analyzed EPA’s action through the Chevron deference standard, determining that “EPA strayed far beyond those bounds when it read §7412(n)(1) to mean that it could ignore cost when deciding whether to regulate power plants.”  Id. at 6.  Highlighting the unbalanced costs versus benefits noted in the RIA, the Court said that “No regulation is ‘appropriate’ if it does significantly more harm than good.”  Id. at 7.  The Court went on to note that “[c]onsideration of cost reflects the understanding that reasonable regulation ordinarily requires paying attention to the advantages and the disadvantages of agency decisions.”  Id.  Ultimately, the Court held that “Chevron allows agencies to choose among competing reasonable interpretations of a statute; it does not license interpretive gerrymanders under which an agency keeps parts of statutory context it likes while throwing away parts it does not.”  Id. at  9.

The Court went on to reject EPA’s contention that it need not factor cost into its initial determination to regulate because it must take cost into consideration when later determining how much to regulate.  Specifically, the Court colorfully remarked that:  “By EPA’s logic, someone could decide whether it is ‘appropriate’ to buy a Ferrari without thinking about cost, because he plans to think about cost later when deciding whether to upgrade the sound system.” Id. at 11.

Because power plants were required to comply with the Mercury and Air Toxics Standards (MATS) on April 16, 2015, absent an extension, this decision practically may not change decisions to retire units at which the addition of controls was already deemed too expensive to continue operations.  However, the Court’s strong language cautioning EPA to use “reasoned decision making” and not “gerrymander” statutory requirements should give EPA pause as it is set to promulgate greenhouse gas reduction measures for power plants in its Clean Power Plan this summer.  Numerous comments filed in the so-called Clean Power Plan rulemaking docket have charged EPA with overstepping its statutory boundaries, and the Court seems to be signaling its disfavor of such action.

If you have questions about how this case applies to your operations, please call us to discuss your individual situation.