Environmental Regulation…By The Courts

Environmental Regulation … by the Courts

Major environmental regulations, particularly under the federal Clean Air Act, are frequently controversial, strongly opposed by those who believe the regulations have gone too far and also by those who assert they have not gone far enough. In the absence of bipartisan legislative action, the ultimate fate of these regulations inevitably falls to the federal courts, with judges reluctantly, but sometimes emphatically, taking on a key regulatory role. While this “regulation by adjudication” is certainly not a new phenomenon (it is indeed an established part of administrative law), it has become a particular hallmark of environmental regulations under the Obama Administration and its efforts to regulate greenhouse gases (GHGs) under the Clean Air Act.

Anatomy of a Regulatory Challenge

On February 25, 2015, a panel of judges from the US Circuit Court of Appeals for DC heard oral argument in a case challenging a major rule regarding the interstate transport of air pollution, EME Homer City Generation v. EPA.  The regulation at issue, known as the Transport Rule, had already experienced a considerable judicial history based on prior regulatory attempts by EPA.  The current case had been pending since 2011, involved a judicial stay and invalidation by the DC Circuit, a reversal by the Supreme Court in 2014, and was now back before the original DC Circuit panel on remand. The parties, long dug in on their respective positions, now await the Court’s latest ruling, while EPA seeks to implement the rule as currently formulated. States and power plants plan for compliance, uncertain if the regulation will ultimately survive, and if so, in what form.

While the journey of the Transport Rule has been a bit unusual in some respects (e.g. many challenged rules are not stayed and few reach the Supreme Court), it provides a good example of the interplay typical among regulators, the regulated sectors, advocacy groups and the judiciary in major environmental regulations, particularly under the Clean Air Act.

— EPA, frequently pressured by environmental groups and impacted states, issues a final rule that will likely affect a major industrial sector (e.g. power), raising the cost of compliance and potentially the cost of the sector’s product (e.g. power).

— Regulated states, industry trade groups and companies challenge the rule in court while waging public campaigns, supported by Congressional efforts, to roll back the regulations.

— Environmental groups, states and others intervene in court to support EPA and fight back with their own campaigns.

Ultimately, it falls upon federal judges, usually from the DC Circuit for rules of national significance and application, to wade through highly complex submissions, economic modeling projections and scientific positions to determine the validity of the rule—did EPA have authority to regulate, and if it did, did it articulate a reasonable basis on a full consideration of the relevant factors, or was its action arbitrary, capricious, an abuse of discretion or not in accordance with law. The judges’ word is the final act, unless the court sends the rule back to EPA for revision, and the cycle starts again.

This pattern is by no means unique to the Obama Administration. Indeed, under President George W. Bush, major EPA regulations were ultimately decided by the Courts, but in most cases, the main challengers were environmental advocacy groups and some states, while industry trade groups and companies either supported EPA or fought for less costly and intrusive regulations.

To Defer or not to Defer. That is the Question

By and large, federal judges do not wish to be regulators nor to exercise the technical, scientific and policy judgments for which expert regulators are arguably better suited. Hence, judges tend to recognize the deference owed to EPA and other agencies on such matters, especially where the underlying statutory direction is unclear or ambiguous.  Judges, however, will first look to whether the Agency had specific legislative authorization to regulate, whether that direction was clear or open to interpretation, and whether the agency acted in accordance with that direction. But even when the direction is unclear and the agency is accorded deference, courts do set limits, requiring the agency to articulate a reasoned basis for its decisions.

These judicial determinations, to some extent, invite some substantive questioning by the court and can result in judicial interpretations of statutory provisions neither side expected and which can impact the structure of future regulations. Thus, for example, the DC Circuit originally vacated the Transport Rule, identifying specific statutory limits which were not clearly evident in the statute and which the Supreme Court declined to adopt.

How the make up of the court matters

Moreover, the political make-up of the reviewing court can have a substantial impact on how the court will consider a challenge. Certain circuit courts with a majority of judges appointed by Democrats are frequently perceived as liberal and “pro-environmental,” such as the Ninth Circuit, while others in the past have been more conservative and considered more “business friendly.” The all-important DC Circuit has historically been considered the latter, but President Obama’s ability to name a number of new justices there has shifted that Court’s balance, such that it is quite possible for a panel of at least two more liberally-inclined judges to hear a given case. The Supreme Court, on the other hand, remains a conservative majority, and this will likely remain for the foreseeable future. Hence, EPA and other agencies must regulate with some consideration as to how a more conservative Supreme Court may view a regulatory challenge.

The Supreme Court and Climate Change 

The Supreme Court has indeed loomed large in the Obama Administration’s most bold and far reaching regulatory effort in the environmental field—GHG regulations under the Clean Air Act. The Supreme Court has taken the issue on three times already. The first came in 2007, upon review of a decision by the Bush Administration not to regulate GHGs from motor vehicles. The Massachusetts v. EPA decision authorized EPA to regulate GHGs under the Clean Air Act and set the Obama Administration on course to make a finding that GHGs endanger public health, develop GHG standards for cars and light trucks and then, through the Tailoring Rule, regulate the construction of major sources of GHG’s through a pre-construction permitting system. Challenges to all these regulated actions were upheld by the DC Circuit.  The Court then, in a separate matter in 2011, ruled in American Electric Power v. Connecticut  that EPA had authority to regulate GHGs under the Clean Air Act’s new source performance standards (NSPS), section 111.

Most recently, in June 2014, the Court in Utility Air Regulatory Group v. EPA reviewed the Tailoring Rule, leaving EPA’s endangerment finding and motor vehicle regulations on the books. However, in a mixed opinion that left both sides claiming victory, the Court held that EPA overstepped its authority when it determined that its mobile source regulations of GHGs necessarily required it to regulate GHGs from stationary sources and authorized it to change statutory thresholds to do so. In the end, EPA’s authority to regulate GHGs under the NSPS was upheld as was its ability to regulate GHGs from major sources of other pollutants already regulated under the Clean Air Act (termed “anyway sources”). But the majority opinion per Justice Scalia set forth in clear language an express warning to EPA that it must adhere closely to its statutory authority, and not create whole new regulatory programs out of limited grants of authority. The Court’s majority found EPA’s interpretation of its authority in the Tailoring Rule to be unreasonable “because it would bring about an enormous and transformative expansion in EPA’s regulator authority without clear congressional authorization. When an agency claims to discover in a long-extant statute an unheralded power to regulate ‘a significant portion of the American economy,’ we typically greet its announcement with a measure of skepticism.”

Many see this as an ominous warning to EPA as it sets out to develop NSPS standards for GHG emissions from existing power plants under the Clear Power Plan.

Regulatory Uncertainty

One result of “regulation by adjudication” is significant uncertainty for the regulated community—a regulated entity does not know what may ultimately be required of it until the final court rules. A good example of this is the current litigation over EPA’s Mercury and Air Toxics Standards (MATS). That rule, finalized by the Obama Administration in early 2012 following the DC Circuit’s invalidation of a differently-oriented Bush administration rule, required many existing coal-fired plants to make key operating and investment decisions:  to retrofit with costly control equipment, retire older units or re-fire with less polluting fuel sources. While the initial compliance date is April 2015, plants had to begin make these decisions several years in advance due to the nature of capital investments, power bidding and pricing and other market factors. Challenges to the MATS rule were brought both by states, industry and trade groups as well as environmental groups, and the DC Circuit in 2014 upheld the rule, giving the agency substantial deference in its regulatory interpretations and technical determinations. To the surprise of many, however, the Supreme Court took review on one specific but key issue—whether EPA was authorized to decide to regulate power plants for air toxic emissions without considering costs.  The Court will hear the case this March 25, 2015 only a few weeks before the initial compliance date.  Thus, the regulated industry has had to operate under the assumption the rule will remain valid, but the Court could very well decide a different fate, which could impact how the power sector has and will structure itself.

Such uncertainty is likely to exist for the Clean Power Plan as well. Assuming the final rule is published in “mid-summer” 2015, as EPA has promised, it will be challenged in early fall 2015, and a final ruling from the DC Circuit may not come until 2017. Again, assuming a ruling would reach the Supreme Court, as has happened with other major and controversial Obama EPA rules, the ultimate fate of the rule may not be known until fairly close to the date compliance requirements are to begin in 2020, at least as set forth in the current proposal. States may then need to consider whether to submit plans to EPA for approval well before a final judicial decision. States which choose to comply will do so uncertain as to whether the Clean Power Plan will continue in force, while those that oppose will run the risk that they will be subject to federal plans if the rule survives.

The Future

President Obama has made it abundantly clear he plans to continue major regulatory actions by EPA to address climate change and other key environmental issues, especially in view of Congress’ inability or unwillingness to do so. Those actions have and will continued to be challenged in and decided by courts which operate on their own schedules, without respect to statutory or regulatory timelines. Indeed, perhaps the most significant and far reaching regulatory proposal of the Administration, the Clean Power Plan, will not be fully adjudicated until well into the next Administration, which will then face difficult decisions on implementation, re-proposal or something in between, depending on how the courts come out. The uncertainty created by this type of “regulation by adjudication” is not new and is not particularly helpful to the regulated community which desires certainty for long-range planning and investment. But it is an inevitable result of the regulatory process and administrative review, especially when agencies take on challenges that may be better suited to bipartisan legislative action. Ultimately, the lack of such action in Congress is arguably the main reason for the pervasiveness of “regulation by adjudication” in the current Administration.

James Rubin serves as counsel for Dentons’ Environment and Natural Resources practice