by Samuel B. Boxerman, Sidley Austin LLP with Ben Tannen, Sidley Austin LLP
On June 29, in Michigan v. EPA, the U.S. Supreme Court reversed and remanded EPA’s Mercury and Air Toxics Standards (“MATS”) rule to the D.C. Circuit, holding the agency should have considered costs when determining whether or not to regulate emissions of hazardous air pollutants from power plants. The MATS rule, promulgated in 2012, had set standards for emissions of toxic air pollutants such as mercury from new and existing coal and oil-fired power plants.
This decision is a significant victory for industry on the legal interpretation of Section 112 of the Clean Air Act (“CAA”). However, it raises major uncertainties with regard to the steps the D.C. Circuit and EPA will take towards emissions of mercury and other air toxics from power plants going forward, as well as with regard to anticipated litigation surrounding EPA’s soon to be promulgated “Clean Power Plan” regulations.
Under the CAA’s Hazardous Air Pollutants (“HAPs”) program, Congress established special requirements for emissions of HAPs from certain electric utility steam generating units (for ease of reference, “power plants”). Section 112(n)(1)(A) of the CAA requires EPA to 1) study the public health hazards “reasonably anticipated to occur” as a result of HAPs emissions by fossil fuel-fired power plants and 2) regulate emissions from such power plants if the agency “finds such regulation is appropriate and necessary” after considering the study’s results. For most other sources, EPA first determines whether the source is a major source (a threshold based on the quantity of HAPs emitted each year) and then imposes limits without the discretion afforded by Section 112(n).
Petitioners, a group which includes 23 states, sought review of EPA’s determination to ignore cost when deciding whether or not to regulate power plants under Section 112(n), i.e., whether or not any regulation was “appropriate and necessary.” EPA had determined that regulation was “appropriate” because it found power plant HAPs emissions created risks to human health and the environment. EPA also determined that regulation was “necessary” because the CAA’s other requirements did not eliminate such risks. EPA did not, however, consider costs at this stage of its analysis. Instead, the agency issued a “Regulatory Impact Analysis” when it issued the MATS rule which stated the rule would impose costs of $9.6 billion annually on power plants. The analysis also predicted that quantifiable direct benefits of the rule would be $4-$6 million per year; but that the ancillary benefits that would occur as a result of the rule from reducing other pollutants that are not HAPs regulated under CAA § 112, would increase the benefits of the rule to $37-$90 billion annually.
In his majority opinion, Justice Scalia stated the Court would interpret the MATS rule using the standard in Chevron USA, Inc. v. NRDC, Inc., 467 U.S. 837 (1984), i.e., that courts must “accept an agency’s reasonable resolution of an ambiguity in a statute that the agency administers.” However, emphasizing that “[f]ederal administrative agencies are required to engage in ‘reasoned decisionmaking,’” the Court found the phrase “appropriate and necessary” was “capacious” and stood in contrast to the narrow factor of emissions tonnage the agency is ordered to consider when regulating other sources. Since “[a]gencies have long treated cost as a centrally relevant factor when deciding whether to regulate,” the Court held EPA “strayed far beyond [the] bounds” of reasonableness by determining it could ignore cost when deciding whether to regulate power plants.”
In making this decision, the Court rejected the government’s argument that the CAA provision that requires EPA to set national ambient air quality standards (“NAAQS”) at levels to protect public health without regard to cost also applied to Section 112(n). The Court found the “public health” standard for setting NAAQS was much narrower and less ambiguous than Section 112(n)’s “appropriate and necessary” standard.
Overall, the Michigan decision is a victory for industry, which had fought against the MATS rule’s substantial compliance costs. Indeed, all nine Justices agreed that, in the absence of a congressional mandate to exclude costs, it is generally unreasonable for an agency to ignore costs when determining whether to issue regulations. Even the dissenters agreed that it would be unreasonable for EPA to ignore costs entirely in the Section 112 rulemaking process, but deferred to EPA’s decision to exclude costs from its initial determination because EPA considered costs at the subsequent steps in the rulemaking. The majority, however, recognized a strong presumption that Congress intended an agency to consider costs when implementing regulatory statutes, suggesting the Court may be less willing in reviewing future rulemakings to defer to EPA’s judgment regarding when and how costs should be considered.
At the same time, most utilities have already invested in controls and made retirement decisions, and so the ruling may have less of a practical effect on power generation going forward. In addition, this victory is complicated by the fact that the Court did not vacate the MATS rule; rather it remanded it to the D.C. Circuit, where its future is uncertain. EPA could also still interpret the ruling to give it considerable leeway in how it factors in costs, as while the Court held that EPA had to “consider cost” in a reasonable manner, “a formal cost-benefit analysis” will not necessarily be required.
Perhaps even more importantly, this case directly implicates future challenges to EPA’s proposed regulation of greenhouse gas emissions from power plants if the agency’s Clean Power Plan (“CPP”) is finalized. One argument against the CPP’s legality has been that EPA’s use of CAA Section 111(d), 42 U.S.C. §7411(d), to regulate existing power plants is barred if the agency is already using Section 112 to regulate those sources. Because the MATS rule was remanded to the D.C. Circuit and not vacated, the arguably preemptive effect of the MATS rule has not changed. However, the status of the MATS rule could still change depending on the remedy chosen by the D.C. Circuit to implement the Supreme Court’s decision.
 42 U.S.C. §§7412(a)(8), 7412(n).
 42 U.S.C. §7412(n)(1)(A).
 42 U.S.C. §§7412(a)(1), 7412(c)(1)-(2). There is also a program for regulating sources with lower HAPs emissions, which are known as area sources. 42 U.S.C. §§7412(a)(2), 7412(c)(3).
 Slip op. at 4.
 Id. at 3.
 Id. at 3-4.
 Id. at 4.
 Id. at 5.
 Id. at 6.
 Id. at 5, 7-8 (“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.”)
 Id. at 10.
 Id. at 14.