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Focus on Regulation

Supreme Court Remands EPA Mercury and Air Toxics Standards (“MATS”) for Failing to Consider Costs

On June 29, 2015, the United States Supreme Court ruled that the Environmental Protection Agency (“EPA”) erred by failing to consider costs when deciding whether it was “appropriate and necessary” to regulate emissions of mercury and other hazardous air pollutants from power plants. See Michigan v. EPA, U.S., No. 14-46, slip op. (June 29, 2015). The Supreme Court’s decision overturned a 2014 ruling by the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”), which held that EPA’s decision not to consider costs in the initial stages of the Mercury and Air Toxics Standards (“MATS”) rulemaking process was reasonable. See White Stallion Energy Ctr. LLC, v. EPA, No. 12-1100, slip op. (D.C. Cir. Apr. 15, 2014). The petitioners in the case were a collation of 21 states led by Michigan, the National Mining Association, and the Utility Air Regulatory Group.

Section 112 of the Clean Air Act (“CAA”) commands EPA to regulate hazardous air pollutants from several industrial categories, including power plants. However, Section 112(n)(1)(A)—the provision at issue in the case—directs EPA to perform a study of the hazards to public health reasonably anticipated to occur as a result of emissions from power plants, and to regulate such units under Section 112 only if EPA finds such regulation is “appropriate and necessary” after considering the results of the study. See 42 U.S.C. § 7412(n)(1)(A). Pursuant to this mandate, EPA conducted a public health study—without considering costs—that concluded that it was “appropriate and necessary” to regulate power plants’ emissions of mercury and other hazardous air pollutants. Costs were considered in the standard-setting phase of the rulemaking and as part of the internal Executive Branch review of the rule overseen by the Office of Management and Budget (“OMB”), but not in the initial decision to regulate.

Justice Scalia, writing for the majority, held that even considering the significant level of deference afforded to federal agencies in interpreting ambiguous laws, EPA “strayed far beyond those bounds” when it read Section 112(n)(1) of the Clean Air Act to mean that it could ignore costs when initially deciding whether to regulate power plants. According to Scalia, “[o]ne 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.’” Michigan v. EPA, No. 14-46, slip op. at 7. Scalia was joined in the 5-4 majority by Chief Justice Roberts and justices Kennedy, Thomas and Alito.

Justice Kagan wrote a dissenting opinion on behalf of the other four members of the court, highlighting the fact that although EPA’s initial decision to regulate hazardous air pollutants from power plants did not take into consideration costs, “EPA later took costs into account again and again and . . . so on.” Michigan v. EPA, No. 14-46, slip op. at 2 (Kagan, J., dissenting). Justice Kagan maintained that “[t]he Agency acted well within its authority in declining to consider costs at the opening bell of the regulatory process given that it would do so in every round thereafter—and that the emissions limits finally issued would depend crucially on those accountings.” Id. at 3.

The impact of the Supreme Court’s decision on the regulated community remains unclear, as the Supreme Court remanded the decision back to the D.C. Circuit for further proceedings. There are two principal options that the D.C. Circuit will consider: remand and vacatur. A remand would allow the MATS rule to remain in effect while EPA addresses the deficiencies outlined by the Supreme Court. A vacatur, in contrast, would nullify the rule completely. EPA and environmental groups have already signaled their intent to argue for remand. The position of the utility industry is difficult to gauge because of the potential impact of a MATS vacatur on the imminent litigation over the legality of EPA’s proposed Clean Power Plan, though it may seek vacatur.

Whether MATS remains in effect will have a significant impact on the operational and capital investment decisions of several power plants. The D.C. Circuit’s decision is not expected for at least ten months, though industry petitioners may request expedited consideration given the legal quagmire the Supreme Court’s ruling has created.