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SCOTUS Rejects EPA Refusal to Consider Costs in Power Plant Rules — Remand for Further Analysis

Posted in Judicial Process, Judicial Review & Remedies, Regulatory Process

USSC SealA deeply divided United States Supreme Court (SCOTUS), in Michigan v. EPA, today held that the Environmental Protection Agency (EPA) “strayed well beyond the bounds of reasonable interpretation in concluding that cost is not a factor relevant to the appropriateness of regulating power plants.” SCOTUS reversed the decision of the United States Court of Appeals for the District of Columbia Circuit, and remanded for further proceedings that could require substantial additional EPA time and effort.

A Simplified Background: The factual reality that coal-fired electric generating plants create the most significant air pollution while creating the most ubiquitous and necessary commodity (electricity) naturally creates a complex and controversial political, economic, and environmental conflict. Congress set up a specific scheme for regulating power plants or electric generating units (EGU), slightly but importantly different from the rest of the Clean Air Act (CAA), partly because other regulations applied to EGUs. The relevant provision of the CAA provides: “The Administrator shall regulate [EGUs] under this section, if the Administrator finds such regulation is appropriate and necessary after considering the results of the study required by this subparagraph.” EPA determined in 2012, in the shorthand “Utility MATS” rule, that it would not consider the cost of compliance in deciding whether regulation is “appropriate and necessary,” but would only consider cost in issuing pollutant-specific standards.

Stripping out all of the preliminaries and the technical terminology, including shifting Administration policy with each Presidency, the United States Court of Appeals for the District of Columbia Circuit denied a number of petitions for review in White Stallion Energy Center v. EPA. The court held, in relevant part, that EPA had explained why it concluded that costs were not part of the “appropriate and necessary” determination. The divided D.C. Circuit panel took the position that EPA reasonably based its exclusion of costs on Congressional delegation to determine the factors entering into its decision, and, in part, on the statutory structure for other decisions to consider costs, but not explicitly including here. The D.C. Circuit thus held that EPA reasonably concluded not to consider costs in making its “appropriate and necessary” determination, and could permissibly postpone cost calculations to the rules setting limits on specific pollutant emissions.

SCOTUS granted certiorari and consolidated three petitions and required the parties to brief a specific question: “Whether the [EPA] unreasonably refused to consider costs in determining whether it is appropriate to regulate hazardous air pollutants emitted by electric utilities.”

Costs as A Relevant Factor: In reversing the D.C. Circuit, SCOTUS noted both the standard and its view of the EPA’s action:

We review [EPA’s] interpretation under the standard set out in Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., …. Chevron directs courts to accept an agency’s reasonable resolution of an ambiguity in a statute that the agency administers. …. Even under this deferential standard, however, “agencies must operate within the bounds of reasonable interpretation.” …. EPA strayed far beyond those bounds when it read [the CAA] to mean that it could ignore cost when deciding whether to regulate power plants.

The SCOTUS majority found the operative statutory phrase to include expansiveness:

One does not need to open up a dictionary in order to realize the capaciousness of this phrase. In particular, “appropriate” is “the classic broad and all-encompassing term that naturally and traditionally includes consideration of all the relevant factors.” [citing the D.C. Circuit dissent]. Although this term leaves agencies with flexibility, an agency may not “entirely fai[l] to consider an important aspect of the problem” when deciding whether regulation is appropriate. [citing the traditional framework of State Farm].

Read naturally in the present context, the phrase “appropriate and necessary” requires at least some attention to cost. One would not say that it is even rational, never mind “appropriate,” to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits. In addition, “cost” includes more than the expense of complying with regulations; any disadvantage could be termed a cost. EPA’s interpretation precludes the Agency from considering any type of cost – including, for instance, harms that regulation might do to human health or the environment. The Government concedes that if the Agency were to find that emissions from power plants do damage to human health, but that the technologies needed to eliminate these emissions do even more damage to human health, it would still deem regulation appropriate. See Tr. of Oral Arg. 70. No regulation is “appropriate” if it does significantly more harm than good.

SCOTUS did note that EPA complied with Executive Order 12,866 (informally) by developing a benefit / cost analysis, and the tradition of that process is well established:

Agencies have long treated cost as a centrally relevant factor when deciding whether to regulate. Consideration of cost reflects the understanding that reasonable regulation ordinarily requires paying attention to the advantages and the disadvantages of agency decisions. It also reflects the reality that “too much wasteful expenditure devoted to one problem may well mean considerably fewer resources available to deal effectively with other (perhaps more serious) problems.” …. Against the backdrop of this established administrative practice, it is unreasonable to read an instruction to an administrative agency to determine whether “regulation is appropriate and necessary” as an invitation to ignore cost.

This does not mean – and courts have otherwise been clear – that Executive Order 12,866 is judicially enforceable – it is not. The benefit / cost analysis was completed, but the costs ignored, and, as SCOTUS pointed out, a court may uphold agency action only on the grounds on which the agency acted.

SCOTUS and the D.C. Circuit expended considerable energy on the statutory context of the critical “appropriate and necessary” phrase. In the end, however, SCOTUS rejects this general phrase as a limitation. Thus, the State Farm standard is applicable here because Congress did not foreclose the standard or specify a different standard.

At bottom, EPA failed to consider a relevant factor in eschewing consideration of cost, and under State Farm, that failure is arbitrary and capricious under the Administrative Procedure Act (APA).

Future Proceedings & Impact: SCOTUS appears to have at least implicitly recognized that it could not resolve the impact that this decision:

We hold that EPA interpreted [the CAA] unreason­ably when it deemed cost irrelevant to the decision to regulate power plants. We reverse the judgment of the Court of Appeals for the D. C. Circuit and remand the cases for further proceedings consistent with this opinion.

SCOTUS left open the remedy, as it frequently must. The issue before SCOTUS was one of law, not fashioning a remedy for violation of the arbitrary and capricious standard under the APA. The D.C. Circuit may need further briefing and more facts to determine whether to vacate the rule or whether it may take the extraordinary step of remand without vacatur.

Numerous sources reported an EPA spokesperson responded to the decision by saying: “this rule was issued more than three years ago, investments have been made and most plants are already well on their way to compliance.” If factually true, as EPA asserts, then the baseline for considering benefits and costs has shifted, and EPA will need to justify a new baseline and new data because the record data is at least three years stale. The truth of relative compliance may be subject to dispute, and the parties should have their say on the subject.

EPA, on remand from the courts, must at least rationally explain a new decision after considering costs and that requires a new preamble, which could itself impose a terminal delay on the Administration’s policy embodied in this rule. On the other hand, vacatur, as disruptive as that may be, may be appropriate to ensure EPA’s thorough consideration because remand without vacatur may not engage EPA to consider costs seriously. Remedy should be subject to further argument.

Michigan v. EPA has broader implications than EPA and the Utility MACT rule: as cost is a relevant factor under State Farm, all agencies will need to consider costs unless Congress has precluded that consideration. Failure to consider costs will render a final rule arbitrary and capricious. As SCOTUS put it the context of this case:

The Agency must consider cost – including, most importantly, cost of compliance – before deciding whether regulation is appropriate and necessary. We need not and do not hold that the law unambiguously required the Agency, when making this preliminary estimate, to conduct a formal cost-benefit analysis in which each advantage and disadvantage is assigned a monetary value. It will be up to the Agency to decide (as always, within the limits of reasonable interpretation) how to account for cost.